Problem: Having an internal control policy can save you headaches and stress as a business entity and as a government contractor. If you are a federal contractor, FAR regulations require you to have written codes of ethics.
Sometimes Congress may request an agency to review a major contractor’s internal control policy. Issues can arise such as misclassifications, the extent of your internal audits, external audits, or making improper charges to the government.
Federal contractors, whether small businesses or large, should seriously focus on overseeing their daily operations. Suspension and debarment actions are steadily increasing due to company failures to develop effective internal controls, contract code of conduct and ethics.
Solution: Sometimes having a professional team to conduct internal investigations can mitigate any adverse findings during a government audit. When the government checks your internal control policy aparatus, and risk management process, having a record of frequent quality checks on your business operations can significantly reduce adverse actions.
FAR 52.203-13 and FAR 3.10 require federal government contractors to have a code of conduct ( code of ethics) and internal compliance policies and controls in place when performing federal contracts.
This is a very serious matter simply because failure to provide them to auditors or failure to disclosure information to the government can lead to suspension and debarment.
Small businesses are facing more adverse actions: Since the introduction of the new rules for contractor policy on December 24, 2007, the amount of government audits reveal that small businesses, in particular, do not have the required contractor code of conduct and internal controls in place. As a result, there has been an increase in termination for default notices and suspension or debarment decisions.
- Contractors must have a detailed compliance plan in place.
- The business ethics plan must include internal controls.
When do the rules for contractor internal controls policy apply? If you are a large government contractor that is performing a federal contract over $5 million and for a period of over 120 days, you are required to:
- Develop a written contractor code of ethics and business conduct;
- Establish an employee ethics and compliance training program;
- Implement an ethics fraud and internal control system; and
- Place agency Office of the Inspector General Fraud Hotline notices or posters.
Code of Conduct requirements require more than just a binder: As a government contractor, you must further develop your code of ethics and compliance programs. If you are subject to an audit, you want to demonstrate an in-depth plan of action for reporting problems, fraud or any level of FAR violations.
Do small businesses have to comply with contractor code of conduct requirements? Neither 48 CFR 52.203-13 nor FAR 3.10 expressly require that small businesses comply with these requirements. However, when it comes to contractor responsibility determinations for referral to the SBA, the government can consider incidents of ethics while making a certificate of competency determination.
Contractors are also exposed to business ethics violations during past performance evaluations. Therefore, it is highly recommended that all federal contractors address these requirements.
You must have these control policies in place within 90 days of the contract award. If you have contracts for commercial items or contracts to be performed outside of the United States, then you are generally exempt from this need.
Internal control contractor policy regulations also apply to subcontracts that are for over $5 million and that have a performance period of 120 days or longer. As a prime contractor, you may be held accountable if you do not make sure that your subcontractors have these codes of ethics and policies in place.
New Rule Requirements
The new rule requires all contractors, even those that qualify as small businesses that receive contracts and subcontracts of more than $5 million (including options), with a performance period of 120 days or more to:
1. Have a written code of ethics and conduct;
2. Make the internal control policy and code available to all employees involved in the performance of the contract;
3. Exercise due diligence to prevent and detect improper conduct;
4. Promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law;
5. Timely disclose, in writing, to the agency Office of the Inspector General, with a copy to the contracting officer, whenever, in connection with the award, performance, or closeout of any government contract or subcontract, the contractor has credible evidence of a violation of federal criminal law involving fraud, conflict of interest, bribery or gratuity violations found in Title 18 of the U.S. Code; or a violation of the civil False Claims Act
6. Fully cooperate in government audits, investigations, or corrective actions on contract fraud and anti-corruption.
Mandatory Disclosure Internal Control Policy
All contractors and subcontractors are required to disclose to the agency Office of Inspector General violations of federal criminal law involving fraud, conflict of interest, bribery, or gratuities or violations of the civil False Claims Act. Have viable internal control policies and a code of ethics in place can facilitate this result and also minimize adverse actions. See information about the Certificate of Compliance With the Mandatory Disclosure Rule.
More on the Code of Conduct and Ethics Requirement
Business Code of Ethics Awareness and Compliance Program with Internal Controls System Contractors (except small businesses) must have a business ethics awareness and compliance program that includes:
- Reasonable steps to communicate the contractor’s standards and rules and other aspects of the ethics and compliance program through effective training programs and other dissemination of information proper to an individual’s roles and responsibilities
- Constantly reviewed ethics fraud and internal control system
- Training requirements apply to the contractor’s principals, employees, and, when right, to its agents and subcontractors
- Establishing a detailed internal controls system within 90 days after contract award