WHAT WOULD YOU DO IF A FEDERAL AGENT APPEARS AT YOUR DOOR?
by Timothy E. Heffernan
 
In this post-Enron environment, compliance and audit issues are high on the list of concerns of both contractors and the Federal Govern­ment.  Increasingly, companies engaged in construction, service or supply contracts with either the federal or a state govern­ment find themselves in the precarious position of dealing with "agents" appearing at the company's office without warning and demanding to see all records and electronic files related to a particu­lar contract.  Typically, investigators not only insist on taking computers and files with them but also seek to question management or employees about the Government con­tract, often without any explanation of the purpose of the visit.  Under such a scenario, what would you tell an agent?  Would you allow them to confis­cate your computers or files?  How would your company respond to a Govern­ment fraud investiga­tion that is obviously in high gear?
 
Liability Can Be Costly and Extend Beyond the Company
 
The Federal Government now routinely recovers over $1 billion annually in civil fraud settlements and judgments.  For comparison purposes, civil fraud recoveries in fiscal 1985 were $37 million.  The Government boasts that the recoveries are the culmination of aggressive investiga­tions and prosecutions of government contractors.  Such an attitude undoubtedly suggests that the Government's campaign against "fraud, waste and abuse" is intensifying rather than abating.
 
Typically, procurement fraud cases involve either mischarg­ing of labor costs, defective pricing or progress payments.  Thus, it is not surpris­ing that investigations of labor charging and progress payment applications remain a top priority for government auditors and investiga­tors.  A host of Govern­ment contrac­tors have paid dearly for past transgres­sions -- in many cases, well over $1 million in civil, criminal or adminis­trative penalties and recoveries.
 
Moreover, liability for mischarging or defective pricing can often reach beyond the corporate structure.  Management personnel and employees who have been involved in mischarging or defective pricing, even sometimes inadver­tent­ly, may be individually subject to civil and criminal penal­ties.  In fact, as Enron and Andersen investigations are likely to bear out, the Govern­ment routinely charges corporate officers and employees with the same fraud charges leveled against the company.
 
Employees Need to be Aware
 
Although all employees should be aware of compliance issues and potential for fraud, there are certain groups within your company that are more directly involved with closely scrutinized activities.  These groups include upper management, financial officers, contract administra­tors, legal depart­ment, negotia­tors and salesmen.  Personnel in these departments are susceptible to creating a defective pricing, mischarging or fraud situation by their actions or inaction.  All employees in these target groups should be intimately familiar with the legal and practical requirements for dealing with a Government customer.
 
Recent legislation and regulatory changes amplify the need for updating your company's compliance program.  Did you know that Congress recently passed legislation entitled "Identification of Errors Made by Executive Agencies in Payments to Contractors and Recovery of Amounts Erroneously Paid"?  Among other obligations, this legislation imposes new requirements on agencies to drastically increase the number and type of audits conducted.  Moreover, recent changes to the prompt payment clause included in all supply and construction contracts now impose a duty on contractors to notify the contracting officer "immediately" of an "overpayment" and to request instructions on disposition of the overpayment.  Thus, contractors now bear the burden of immediately recognizing overpayments.  The intent of the new requirement is to force contractors to act in advance of a government demand letter.  
The Defense Contract Audit Agency has published guides and manuals for its auditors conducting comprehensive labor, material or pricing audits to recognize potential fraud.  These guidelines discuss the most common "indicators" of fraud and advise government auditors how to recognize and pursue the indicators.  The guide­lines go so far as to emphasize that auditors should "think fraud" when conducting pre- or post- award reviews.  Consequently, your internal control program should be structured to minimize the number and occurrence of such indicators in your time distribu­tion system and your estimating and contract pricing systems.
 
 Early Detection is Critical
 
Since even the appearance of labor charging discrepancies or a defective pricing problem can result in a costly full-scale investiga­tion, you want to be able to spot any signs of a problem early and correct it before it comes to the attention of the Government.  One way to identify a potential problem is to study the "indicators" of fraud on which the Government auditors will focus.  Such a review can be effective in not only identifying mischarging or defective pricing problem areas but may assist in evaluating your own procedures.  Thus, you might even consider incorpo­rating many of these indicators into your own internal review process to assist in labor and material charging or contract pricing.
 
Besides labor and material charging or contract pricing, the Government now pursues potential fraudulent behavior in areas such as interim progress reports or certifications.  An overly aggressive progress report may be construed as fraudulent and give rise to false claims liability.  Even though the reports themselves may not request payment, the misrepresentation can have the effect of getting other invoices paid.   Likewise, submission of inconsistent certifications on Government forms can lead to liability.  Guidelines should be established to ensure that what is being certified on Government forms is crystal clear and that nothing unintentional is being certified.
 
Do You Have an Adequate Compliance Program?
 
One cost effective method of educating your employees in dealing with Government auditors and establishing or enhancing an appropri­ate response strategy to a Government investigation is a company Compliance Program Seminar.  Besides familiar­izing employees with the fraud indicators, such a seminar is useful in keeping abreast with the latest changes and amendments to statutes and regulations related to compliance matters.  
 
Moreover, depending on your company's needs, a compliance seminar can easily be expanded to include contractual concerns as well.  For instance, how to respond to a cure notice or show cause letter in such a manner as to prevent waivers or accommo­dations of rights or remedies that might better be asserted; how to examine delays or losses on contracts to determine actual causes and whether recover­ies may be obtained or settled for more favorable delivery or other terms and condi­tions; how to prepare monthly project schedule updates to protect your right to recover for owner-caused delays; how to establish counters to claims made by others; and how to recognize pre-award issues which may or do result in the loss of a contract.
 
In today's climate, every company engaged in a contract or subcontract with the Federal Government is well advised to initiate and maintain a comprehen­sive compli­ance program.  The same holds true for contractors, subcontractors and suppliers contracting with state and local government agencies. Assuring that appropriate steps are taken to avoid a government investigation and being adequately prepared for an investigation in the event one does befall your company is an essential part of doing business today and in the future.  
 
About the author: Timothy Heffernan is a partner with Watt, Tieder, Hoffar & Fitzgerald in McLean, Virginia.  He can be reached at (703) 749-1055.