Internal Control Procedures, Policies, Ethics Training and Audits for Government Contractors

More and More federal government contractors are facing either suspension and debarment actions for ethics violations in government contracting or criminal liability for what can be arguable a failure to conduct self-policing or create the proper internal control procedures, contractor ethics and compliance audits. The objectives of internal control are to prevent hazards or default action during performance of the contract.

As a government contractor, you should be aware that are required to have certain internal policies and controls in place at all times. Government contracting laws and policies create harsh results for contractors that fail to self-investigate and develop the required safeguards.

Internal Control Definition

According to Wikipedia,  Internal control, as defined by accounting and auditing, is a process for assuring of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. A broad concept, internal control involves everything that controls risks to an organization.

Failure to adhere to this requirement when you have a government contract can lead to suspension or debarment. Having frequent ethics training for government contractors can also impact the outcome of government investigation because it shows that you are making a good faith effort to train your people to avoid making serious mistakes. In some situations, part of your internal control procedures requires you to disclose information to the government.

Government contract performance is more than just merely getting the work done. You also have to comply with all clauses that are incorporated into the contract itself.

Internal control policy, ethics and audits for government contractors is now a common review item for agencies.

• The government does have a right to inspect for such internal control policy
• Contractors are not immune to such an inquiry.

FAR Language About Internal Policies, Ethics and Government Contractor Audits

Under FAR 3.1

• Government contractors must conduct themselves with the highest degree of integrity and honesty.
• Contractors should have a written code of business ethics and conduct. To promote compliance with such code of business ethics and conduct, contractors should have an employee business ethics and compliance training program and an internal control system that—
  • Are suitable to the size of the company and extent of its involvement in Government contracting;
  • Facilitate timely discovery and disclosure of improper conduct in connection with Government contracts; and
  • Ensure corrective measures are promptly instituted and carried out.

FAR 3.1003  also states that: A contractor may be suspended and/or debarred for knowing failure by a principal to timely disclose to the Government, in connection with the award, performance, or closeout of a Government contract performed by the contractor or a subcontract awarded there under, credible evidence of a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code or a violation of the civil False Claims Act.

Knowing failure to timely disclose credible evidence of any of the above violations remains a cause for suspension and/or debarment until 3 years after final payment on a contract (see 9.406-2(b)(1)(vi) and 9.407-2(a)(8)).

(3) The Payment clauses at FAR 52.212-4(i)(5), 52.232-25(d), 52.232-26(c), and 52.232-27(l) require that, if the contractor becomes aware that the Government has overpaid on a contract financing or invoice payment, the contractor shall remit the over-payment amount to the Government.

A contractor may be suspended and/or debarred for knowing failure by a principal to timely disclose credible evidence of a significant overpayment, other than overpayments resulting from contract financing payments as defined in 32.001(see 9.406-2(b)(1)(vi) and 9.407-2(a)(8)).

(b) Notification of possible contractor violation. If the contracting officer is notified of possible contractor violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 U.S.C.; or a violation of the civil False Claims Act, the contracting officer shall—

(1) Coordinate the matter with the agency Office of the Inspector General

These are all cites to improve upon your requirement to have these internal audit policy and internal control procedures in place.

As a government contractor, your internal control policy should include finance, operations, and administration.  For performance-based contracts, the government holds you to compliance with your own quality control procedures. Therefore, you always keep them updated and realistic when you conduct ethics training for government contractors. Have a government contracts compliance attorney to help you get up to speed on these mandatory requirements. 

What Type of Internal Policies Do You Need?

You should at least have procedures, plans, and policies in place that minimize the risk of adverse actions in government investigations or audits. Your internal control system should be designed to prevent fraud, minimize performance errors, authenticate the accuracy and reliability of accounting data, and promote efficient company operations.

Procurement Integrity Act and Ethics Violations in Government Contracting

The Procurement Integrity Act (PIA) was passed by Congress in 1988 to minimize potential ethics violations in government contracting. The Act aims to protect the integrity of the procurement system and from even the appearance of impropriety. Issues related to the Procurement Integrity Act commonly arise during the solicitation process where source selection information is released and other contractors’ information may be at risk.

The PIA also aims to prevent the procurement process by avoiding conflicts of interest and improper disclosure of bid and proposal information. Such disclosure not only creates an advantage for bidders but also puts the victim contractor at great risk because it impedes its ability to bid on an equal playing field. The Procurement Integrity Act also puts limitations and regulates when employees leave the government’s employ and move into the commercial/private sector.

Notifying the Contracting Officer 

When you have reason to believe that there are ethics violations or integrity issues, you should immediately notify the contracting officer. Facts and details are critical. Hunches or unsupported allegations do not require action. When the contracting officer decides that there is no ethics violation or no harm to the upcoming procurement, he or she must forward the information plus any supporting documentation to “an individual designated in accordance with agency procedures.”

Contractor Ethics Policies in Federal Government Contracting

As a government contractor, you should have an underlying ethics program in place that minimizes your exposure to default, suspension, and debarment, or even exposure to criminal liability. Why is this? Many criminal actions against government contractors stem from internal actions or someone who may have intentionally violated the rules internally.

The federal law enforcement agencies, including the IG office, may conduct a government investigation and conclude that the contractor is ultimately liable. If you do not have the requisite contractor internal control system in place or a viable contractor ethics program, it can be looked as though the company contributed to the problem. This does not help when criminal liability is in the works.

Government contractors must implement a Code of Business Ethics and Conduct. This shows federal law enforcement or a Suspension and Debarment Official ( SDO) that the company is a responsible contractor and there may be only one problem to fix – the internal person that committed the violation. This point also highlights the importance of having ethics training for government contractors.

With regard to internal control procedures, the Federal Acquisition Regulation to amplify now requires that you have a contractor Code of Business Ethics and Conduct, an internal control system. You must also disclose certain violations of criminal law, violations of the civil False Claims Act, or significant overpayments to the government by regulations. The statute defines a covered contract to mean ‘‘any contract in an amount greater than $5,000,000 and more than 120 days in duration.’’  Federal contractors must develop an Internal Control System within 90 days after contract award unless the Contracting Officer establishes a longer time period (See FAR 52.203 – 13(c)). The internal control system is not required for small businesses or commercial item contracts.

When Do You Need a Mandatory Disclosure Policy? 

When it comes to ethics violations in government contracting, contractors are required to implement a mandatory disclosure requirement as set forth in an amendment to the existing Contractor Code of Business Ethics and Conduct clause located at FAR 52.203-13.

Under FAR 3.1004, this clause must be included in all contracts that are expected to exceed $5 million and have a performance period of 120 days or more. Under the new laws you have to:

“..timely disclose, in writing, to the agency [OIG], with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed–(A) A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or (B) A violation of the civil False Claims Act (31 U.S.C. 3729-3733). FAR 52.203-13(b)(3)(i) (as amended by final rule).”

This internal code of ethics requires you to have a control policy mandates flow down of the provision to subcontracts that meet the same size and duration thresholds, but provides that subcontractor disclosures must be made directly to the government, instead of to the prime contractor.

Government Contract Compliance Auditing

Part of developing internal policies and controls is to secure professionals that understand the government contracting regulations and that can help you to develop a more robust contract compliance auditing program. When taxpayers spend millions of dollars in government contract awards, they want to make sure that the contract complies with the terms and conditions.  For example, understanding the flow down clauses and limitations on subcontracting can be important to new contractors.

Speak to an Attorney & Get a Free Initial Consultation

For help with contractor internal policies, internal control procedures, or need help with ethics training for government contractors, call our government contract compliance lawyers at 1-866-601-5518.