Breakout Session #1301 Raymond S.E. Pushkar, Partner McKenna Long & Aldridge LLP Washington, D.C.

2. Government Audit and Investigative Powers Breakout Session #1301 Raymond S.E. Pushkar, PartnerMcKenna Long & Aldridge LLPWashington, D.C. April 14, 2008 11:00 am – 12:00 pm

3. Government Agency Audit and Investigative Powers / Managing the Audit Presentation byRaymond S.E. PushkarSr. PartnerMcKenna Long & Aldridge LLPWashington, D.C.Before the2008 NCMA World CongressCincinnati, Ohio

4. Sources of Federal Government’s Audit and Investigative Powers • FAR provides for inclusion of special audit provisions in certain government contracts and subcontracts • Inspector General Act of 1978 • General Accounting Office Act of 1980

5. Sources of Federal Government’s Audit and Investigative Powers (Cont'd) • Authority for Audits and Investigations • Powers Arising from the FAR and Implementing Contract Audit Clauses • Negotiated Contracts Clause • CO has power to: • Evaluate accuracy, completeness, and currency of cost or pricing data

6. Sources of Federal Government’s Audit and Investigative Powers (Cont'd) • Examine and audit all of contractor’s records, including computations and projections related to the proposal, pricing, or performance of the contract • FAR 52.215-2(c); Statutory Basis, 10 USC 2306a(f) (DOD agencies); and 41 USC 254(d) (Civilian agencies)

7. Sources of Federal Government’s Audit and Investigative Powers (Cont'd) • Cost Contracts • All flexibly priced contracts must contain an “examination of records” clause (FAR 52.215-2(b)) • CO has power to examine or audit books, records, documents, and other evidence and accounting procedures and practices sufficient to reflect properly all costs claimed to have been incurred or anticipated to be incurred in performing the contract

8. Sources of Federal Government’s Audit and Investigative Powers (Cont'd) • Statutory basis: 10 USC § 2313(a) (DOD agencies); and 41 USC § 254(b) (Civilian Agencies) • In 1986 Congress gave DCAA the power to subpoena contractor records

9. Powers Arising from Other Statutory Enactments • The Inspector General Act of 1978 • The Inspector General Act of 1978, 5 USC app. §§ 1-12 (1988 & Supp. IV 1992), established an Office of Inspector General in 21 executive agencies • When DHS was created, Inspector General was established there

10. Powers Arising from Other Statutory Enactments (Cont'd) • Recently, FY 08 Defense Authorization Act mandated a “commission” to review contracting support in Iraq and Afghanistan; part of that includes increased jurisdiction of the Special Inspector General for Iraq Reconstruction (SIGIR) and newly created Special Inspector General for Afghanistan Reconstruction (SIGAR)

11. Powers Arising from Other Statutory Enactments (Cont'd) • Inspectors General power is to conduct audits and investigations relating to “programs and operations” of their agencies

12. Powers Arising from Other Statutory Enactments (Cont'd) • Statutory mission is to prevent and detect fraud and abuse • Statute gives the Inspectors General broad subpoena powers to require the production of all information and other data and documentary evidence

13. Powers Arising from Other Statutory Enactments (Cont'd) • Inspectors General also have power to subpoena documents from entities which have no direct connection with an agency, but which hold records of or concerning a company which is involved with the agency

14. Powers Arising from Other Statutory Enactments (Cont'd) • The General Accounting Office Act of 1980 • Provides the Comptroller General with access to all records pertaining to expenditures by an executive agency (31 USC 716(a)(1988)) • Has the power to investigate books and records of private companies that deal with an executive agency

15. Powers Arising from Other Statutory Enactments (Cont'd) • GAO has authority to subpoena records from sources outside the US Government if the Comptroller General has access to those records by agreement or by law

16. Scope of the Federal Government’s Audit and Investigative Powers • The “Audit” Clauses • Government’s right to audit sealed-bid, firm fixed-price contracts fairly limited • Government’s audit power to audit cost-type and all negotiated fixed-price contracts is broader, but not all-encompassing

17. Scope of the Federal Government’s Audit and Investigative Powers (Cont'd) • Give federal agencies authority to examine records in existence • Such as existing books, records, or documents • But not to question a contractor’s officials or employees

18. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • Some case precedent • U.S. v. Westinghouse Elec. Corp. • Third Circuit confirmed authority of IG under Inspector General Act of 1978 to subpoena contractor’s internal audit reports • DCAA, before it had subpoena powers, requested IG to issue subpoena under IG Act for 4 years of internal audit reports prepared by Westinghouse for its internal management review

19. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • The case turned on the broad powers of the IG to investigate programs to detect fraud and abuse, even though the request to the IG came from the procuring agency audit arm • Following grant of subpoena powers to DCAA by Congress, 2 cases involving Newport News Shipbuilding amplified the scope of audit actions by DCAA

20. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • In Newport News I (655 F. Supp. 1408 (E.D. Va. 1987)), court denied DCAA’s petition to enforce a subpoena for contractor’s internal audit records, holding that DCAA’s subpoena authority was not as broad as the DOD IG’s authority • Fourth Circuit decisively affirmed district court and denied DCAA access to internal audit reports (837 F.2d 162 (4th Cir. 1988))

21. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • Fourth Circuit also held DCAA’s audit and subpoena rights, by statute, limited to “objective data” and “original cost information” characterized as limited to documents identifiable on the “audit trail” of costs incurred or to be incurred • In Newport News II (862 F.2d 464 (4th Cir. 1988)), DCAA subpoenaed copies of contractor’s federal tax returns, trial balances, balance sheet and income statements

22. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • Fourth Circuit held the DCAA was empowered to subpoena information of the type requested in the second instance because such information constituted “objective factual material” that would help verify costs. • Fourth Circuit held that contractor’s books and records and other documents reflect upon the accuracy of cost charges submitted to the government

23. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • IG Scope of Access • Investigation and the requested should be at least reasonably relevant to some program or operation of the agency (agency contracts fall within this definition) • Although an administrative subpoena is rarely overturned by a federal court, the opportunity does exist to challenge an IG or GAO subpoena when it is determined to be overly broad

24. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • Broad in scope but access via subpoena limited to records, and not to testimony or to compel creation of a record by a contractor • Most contractors comply with IG requests to speak with witnesses of the contractor

25. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • Contractor employees, however, and not the contractor, must decide whether they, as individual U.S. citizens, want to speak with any federal agents • They can decline, and that would be within their rights

26. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • If matter is a grand jury investigation conducted by the U.S. Department of Justice, grand juries have the power to subpoena both records and individuals • U.S. Court of Appeals, Fifth Circuit, placed important limitations on permissible scope of an IG subpoena

27. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • Considered a subpoena issued in aid of a tax compliance audit by the IG pursuant to an agreement between IG and IRS • Held IG lacked statutory authority to conduct, as part of a long-term, continuing plan, regulatory compliance investigations or audits, in this case the IRS

28. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • Quashed the subpoena because it was not issued because of suspected fraud, abuse, waste, or mismanagement, but because of tax compliance

29. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • GAO Scope of Access • If GAO audit powers come into play whenever a procuring agency has the right to audit, the GAO Act provides broad audit and subpoena powers • Cannot be used to compel testimony of any kind, nor can it require a company to create written materials in response to subpoena

30. Scope of the Federal Government’s Audit and Investigative Powers (Cont’d) • FAR 52.215-2(d) provides that the Comptroller General of the US, or an authorized representative, shall have access to and the right to examine any of contractor’s directly pertinent records involving transactions related to the contract or subcontract

31. Contractor Management of Audits • Important that responsible contractors establish a policy and a procedure for management of access by government auditors to corporate facilities, records and employees • There are essential elements of any government access management plan

32. Contractor Management of Audits (Cont’d) • Preliminary contacts with auditors • Prior to commencement of audit, companies should request that audit agency provide (preferably in writing): • Statement of audit objectives • Identification of government’s audit team

33. Contractor Management of Audits(Cont’d) • Anticipated time span for audit • Identification of support from the company which auditors may need

34. Contractor Management of Audits(Cont’d) • Entrance Conference • Entrance conference with contractor’s designated representative(s) at start of each separate audit assignment should be requested and initiated

35. Contractor Management of Audits(Cont’d) • Items to be discussed at entrance conference should include: • Purpose of audit • Overall plan for its performance • Types of books, records, and operational data with which auditors will be concerned

36. Contractor Management of Audits(Cont’d) • During entrance conference, general parameters of audit should be developed, including • Procedures for copying and furnishing of documents (copies of documents should be made for the auditors and kept separately for future reference) • Prerequisites for access to company facilities and employees

37. Contractor Management of Audits(Cont’d) • Designation of auditors’ work space • Procedures for identification and disclosure of any discrepancies, inaccuracies, or problems uncovered during court of audit, if possible

38. Contractor Management of Audits(Cont’d) • Preparation for and Conduct of Audit • The company should • Identify and, to the extent possible, segregate documents and records which may be required during audit • Remove any documents that may be privileged and identify and stamp any documents that contain proprietary or other business confidential information

39. Contractor Management of Audits(Cont’d) • During course of audit, government auditors should be escorted at all times that they are not in their designated work area • Companies should keep a record of all documents made available to the auditors and develop a procedure for memorializing any communications with the auditors

40. Contractor Management of Audits(Cont’d) • New or unique documents should not be created for the purpose of the audit or at the request of the government • Government does not have the right under the current language of standard contract audit clauses to compel employees to answer questions or to be interviewed

41. Contractor Management of Audits(Cont’d) • Ultimate determination to speak with any auditor (with or without counsel) is that of the individual • Procedures for such questioning should be developed and should include, if possible, a preliminary review by the company of the questions to be asked and the right of the company to have management personnel (counsel) present at the interview

42. Contractor Management of Audits(Cont’d) • Exit Conference • Purpose of exit conference is to identify any specific issues that may arise and be included in the audit report and to provide the company with an opportunity to state its position concerning those issues

43. Recent Developments Affecting Investigations of Contractor Conduct • FAR Part 3.10 – Ethics and Business Conduct • FAR 3.1002, General Policy • General Policy applicable to all contractors is that contractors: • “Should have” written codes of business ethics • Should have employee “training” on ethics and compliance

44. Recent Developments Affecting Investigations of Contractor Conduct(Cont’d) • Should have, suitable to size of company: • Internal control systems for timely discovery of improper conduct • Corrective measures in a timely fashion

45. Recent Developments Affecting Investigations of Contractor Conduct (Cont’d) • Contract Clause Specified at 3.1004 – FAR 52.203-13 • Applies to contractors receiving awards in excess of $5 million and have performance periods of 120 days or more • Flow-down to subcontractors required with same benchmarks

46. Recent Developments Affecting Investigations of Contractor Conduct (Cont’d) • Commercial Items Part 12 Acquisitions and contracts performed entirely outside the U.S. are exempt • Contractor must • Display Hotline posters • Work with agency on this – provided for in FAR Clause 52.203-14

47. Recent Developments Affecting Investigations of Contractor Conduct (Cont’d) • Have written Code of Ethics and Business Conduct • Establish employee ethics/compliance training programs • Have internal control systems to facilitate timely discovery and disclosure within the contractor or improper conduct regarding government contracts and to facilitate corrective actions • Cooperate fully with government agencies investigating

48. Recent Developments Affecting Investigations of Contractor Conduct (Cont’d) • Proposed Changes to the Above (FAR Case No. 2007-006 – “Contractor Compliance Program & Integrity Reporting”) (November 2007) • Justice Department behind changes and proposal goes further than above

49. Recent Developments Affecting Investigations of Contractor Conduct (Cont’d) • Contractor or subcontractor required to notify agency Inspector General and Contracting Officer in writing when contractor has “reasonable grounds” to believe employee has committed a violation of federal criminal law • Applies to contractors or subcontractors over $5 million with performance period of 120 days or more

50. Recent Developments Affecting Investigations of Contractor Conduct (Cont’d) • Contractors can be suspended or disbarred for “knowing failure” to timely disclose possible crime or overpayment • Issues Raised by Proposed Rule • What standards should companies use to determine whether “reasonable grounds” exist for mandatory disclosure?