Defense Procurement

After the defense contractor E-Systems, Inc., pleaded guilty in 1990 to federal violations involving Army contracts, the Army entered into a three-year administrative settlement agreement with the company. Among other things, the agreement required E-Systems to report all hotline allegations to the Army's Procurement Fraud Division. This report answers the following questions: Did federal law, regulations, or the agreement require E-Systems to disclose suspected violations of procurement law? How many, and what types of hotline complaints were lodged against E-Systems' Greenville Division? Did E-Systems employees, contrary to federal law, alter or reinvestigate hotline complaints and investigation results to avoid disclosing information to the federal government; and what were the details behind three cases brought to the attention of Congress? Why didn't the Army debar E-Systems from doing business with the government, given the serious accusations contained in a May 1994 Army "show cause" letter? What were the government's losses as a result of E-Systems' actions in the three previously mentioned hotline cases?

GAO found that: (1) the contractor's two administrative agreements and its own business ethics standards required it to report suspected procurement law violations to the Army's fraud division; (2) the contractor did not fully detail allegations in its Army reports under its settlement agreement or report 39 pre-agreement cases or 16 cases that occurred between the two agreements; (3) all of the 202 hotline complaints from August 1990 through August 1993 were reported to the Army; (4) 41 percent of the cases involved alleged federal contract violations and the rest involved management and employee relations issues; (5) from July 1994 through November 1994, the contractor reported three hotline cases, one of which involved procurement law violations; (6) in three specific cases, the contractor did not report its findings or all relevant information to the Army; (7) there was no evidence that the contractor altered internal investigation reports or reinvestigated hotline complaints to avoid disclosure to the government; (8) although the Defense Logistics Agency found that the contractor violated the agreement, it did not debar the firm because there was insufficient evidence to prove that it intentionally withheld information from the government; (9) the contractor's second administrative settlement agreement requires it to provide the Army with more details of allegations and resolutions than did the first agreement; and (10) the government sustained a potential loss of about $228,000 in one case involving time mischarging and an unknown amount in a case involving parts scrapping.