Industry Questions DCAA Approach to Determining Compliance with New Disclosure Rules

Industry representatives have expressed grave concerns over a DCAA letter to many contractors requesting detailed information on their ethics program such as a list of reported potential misconduct, open investigations and internal control audits. The letter’s requests are keyed to a new FAR clause requiring contractors to report potential misconduct by their employees who have contracts exceeding $5 million and 120 days of performance. Specifically, the clause requires contractors to adopt a business ethics program and “timely disclose” if the contractor has “credible evidence” of a violation of federal criminal law involving fraud, conflict of interest, bribery or gratuity or violation of the civil False Claims Act. Also failure to report overpayments or criminal misconduct is grounds for suspension or debarment.

The most controversial part of the new rules is the mandatory disclosure requirements where the Professional Services Council says compliance creates a dilemma for contractors. Determining what constitutes “credible evidence” is difficult and disclosure could constitute admission that credible evidence exists which complicates settlement efforts but failure to disclose can result in suspension or debarment. In addition, since the mandatory disclosures do not constitute public disclosure of information, qui tam actions can be triggered by the disclosures. Another commentator has criticized DCAA’s request for information on activities that have not yet been investigated and the letter’s definition of adequate disclosure being 5-10 days after identification. She stated that DCAA has “overstepped its bounds” where the IG should investigate mandatory disclosures while DCAA should limit itself to traditional contract audits. Several commentators have also noted that DCAA’s recent elimination of the “inadequate in part” opinion concerning deficiencies in “internal controls”, which includes contractor ethics programs, creates a high level of potential risk that even a single finding of an aspect of a contractor’s internal controls can lead to an “inadequate” finding, jeopardizing receipt of payments and even award decisions.

A Defense Department spokesman has defended the letters stating DCAA has always evaluated contractors’ ethics programs as part of the contractor’s overall internal controls and though the new letter is not a standard letter included in its normal audits it does require standard information. The spokesman also stated that DCAA’s audit function is different than the IG’s investigation function and that it needs information related to timely discovery of and corrective actions related to improper conduct even if the contractor has not determined if a violation has occurred. The spokesman helpfully says that contractors should brief DCAA on whether disclosed information is “inprocess” of being reviewed and the “Government’s interests are being protected.”

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