Defense Contracting Integrity
Opportunities Exist to Improve DOD's Oversight of Contractor Ethics Programs Gao ID: GAO-09-591 September 22, 2009Until recently, ethics programs and practices of defense contractors were self-policed. Given the significant sums spent to acquire goods and services, the Federal Acquisition Regulation (FAR) was amended twice starting in December 2007 to first mandate and later amplify contractor ethics program rules. Before FAR changes were finalized in December 2008, Congress required GAO to report in 2009 on the ethics programs of major defense contractors. This report (1) describes the extent that contractors had ethics programs before the finalization of the FAR rules that included practices consistent with standards now required by the FAR and (2) assesses the impact the new FAR rules have on Department of Defense (DOD) oversight of contractor ethics programs. To do this work, in September 2008 GAO surveyed all 57 contractors--those receiving more than $500 million in 2006 DOD contract awards--and interviewed DOD contractor oversight agency officials on the impact of the new FAR rules on oversight.
All 57 contractors responded to GAO's survey, and 55 reported having ethics programs that include many of the practices consistent with standards now required for compliance with the FAR. The ethics practices information GAO obtained was from before the FAR rules were finalized and thus was not designed to test contractor compliance with the rules that came later. In response to the new FAR rules, DOD has made two key oversight improvements by revising its contract audit guidance to cover the new ethics requirements and establishing the Contractor Disclosure Program to implement the mandatory disclosure requirement. However, opportunities exist to improve DOD's oversight in two other key areas. For example, in verifying implementation of contractor ethics programs during contract administration, the impact of the FAR rules on oversight at this point is negligible. GAO found that DOD had no plans to change contract administration offices' oversight because authority for oversight is not explicit nor is organizational responsibility clear. Also, with regard to contractors' hotline poster displays, the new FAR rules could reduce DOD's awareness of potential violations. The rules exempt contractors with ethics programs that include their own hotlines from the requirement to display DOD hotline posters. If contractor employees report violations to company hotlines instead of DOD hotlines, the employees do not receive the same protections from whistleblower laws. Whistleblower protections for employees unaware of the DOD hotline could be jeopardized.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-09-591, Defense Contracting Integrity: Opportunities Exist to Improve DOD's Oversight of Contractor Ethics Programs
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
September 2009:
Defense Contracting Integrity:
Opportunities Exist to Improve DOD's Oversight of Contractor Ethics
Programs:
GAO-09-591:
GAO Highlights:
Highlights of GAO-09-591, a report to congressional committees.
Why GAO Did This Study:
Until recently, ethics programs and practices of defense contractors
were self-policed. Given the significant sums spent to acquire goods
and services, the Federal Acquisition Regulation (FAR) was amended
twice starting in December 2007 to first mandate and later amplify
contractor ethics program rules. Before FAR changes were finalized in
December 2008, Congress required GAO to report in 2009 on the ethics
programs of major defense contractors. This report (1) describes the
extent that contractors had ethics programs before the finalization of
the FAR rules that included practices consistent with standards now
required by the FAR and (2) assesses the impact the new FAR rules have
on Department of Defense (DOD) oversight of contractor ethics programs.
To do this work, in September 2008 GAO surveyed all 57 contractors”
those receiving more than $500 million in 2006 DOD contract awards”and
interviewed DOD contractor oversight agency officials on the impact of
the new FAR rules on oversight.
What GAO Found:
All 57 contractors responded to GAO‘s survey, and 55 reported having
ethics programs that include many of the practices consistent with
standards now required for compliance with the FAR. The ethics
practices information GAO obtained was from before the FAR rules were
finalized and thus was not designed to test contractor compliance with
the rules that came later.
Table: Contractor Responses on Ethics Practices Now Required by the
FAR:
FAR standard: Code of business ethics and conduct;
Contractors reporting these practices:
* 55 have written codes;
* 54 provide copies to employees.
FAR standard: Ethics awareness and compliance program;
Contractors reporting these practices:
* 55 have ongoing programs;
* 51 require ethics training for employees and managers working on DOD
contracts;
* 55 use other mechanisms to communicate employee ethics awareness and
compliance.
FAR standard: Internal control system: High level of management
oversight; Contractors reporting these practices:
* 52 have an office or individual charged with implementing the ethics
program
* 25 report quarterly top management oversight of ethics program
managers
FAR standard: Internal control system: Periodic reviews, audits, or
both;
Contractors reporting these practices:
* 52 have internal reviews or audits to test ethics program;
* 47 periodically assess risks of improper or criminal conduct;
Internal control system: Mechanisms for reporting misconduct;
* 55 have internal reporting mechanisms, such as hotlines;
* 54 have a policy for employees to report anonymously or
confidentially.
FAR standard: Internal control system: Disciplinary systems;
Contractors reporting these practices:
* 52 have codes that provide examples of disciplinary consequences,
such as counseling and termination.
FAR standard: Timely disclosure:
Contractors reporting these practices:
* Before FAR rule, 34 had a formal policy for voluntary disclosure to
DOD of contract-related violations
* After FAR rule, 4 contractors GAO visited changed disclosure policy
to comply with new mandatory disclosure requirement.
Source: GAO analysis of contractor survey.
[End of table]
In response to the new FAR rules, DOD has made two key oversight
improvements by revising its contract audit guidance to cover the new
ethics requirements and establishing the Contractor Disclosure Program
to implement the mandatory disclosure requirement. However,
opportunities exist to improve DOD‘s oversight in two other key areas.
For example, in verifying implementation of contractor ethics programs
during contract administration, the impact of the FAR rules on
oversight at this point is negligible. GAO found that DOD had no plans
to change contract administration offices‘ oversight because authority
for oversight is not explicit nor is organizational responsibility
clear. Also, with regard to contractors‘ hotline poster displays, the
new FAR rules could reduce DOD‘s awareness of potential violations. The
rules exempt contractors with ethics programs that include their own
hotlines from the requirement to display DOD hotline posters. If
contractor employees report violations to company hotlines instead of
DOD hotlines, the employees do not receive the same protections from
whistleblower laws. Whistleblower protections for employees unaware of
the DOD hotline could be jeopardized.
What GAO Recommends:
GAO recommends four actions aimed at improving oversight of ethics
programs during contract administration and DOD hotline poster
requirements for contractors to ensure that whistleblower protections
are communicated. DOD concurs with GAO‘s recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-09-591] or key
components. For more information, contact John Needham at (202) 512-
4841 or needhamjk1@gao.gov. To view the e-supplement online, click
[hyperlink, http://www.gao.gov/products/GAO-09-646SP].
[End of section]
Contents:
Letter:
Background:
Contractors Report Using a Range of Ethics Program Practices Now
Required by the FAR:
New FAR Rules May Improve DOD Oversight of Contractor Ethics Programs
in Some Areas but Not Others:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: Required Federal Acquisition Regulation Components for
Contractor Ethics Programs:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: DOD Organizations Responsible for Oversight and Management of
DOD Contracting Activities in Which Contractor Ethics Programs May Be
Examined:
Table 2: Contractor Responses on Ethics Practices Now Required by the
FAR:
Table 3: Highlights of GAO Contractor Survey and FAR Public Comments
regarding Benefits to Contractors and Challenges They Face in
Implementing FAR Ethics Rules:
Table 4: Contractor Responses on Practices Now Required by the FAR for
Code of Business Ethics and Conduct:
Table 5: Contractor Responses on Business Ethics and Awareness
Practices for Communicating Information concerning Individual Roles and
Responsibilities:
Table 6: Contractor Responses on Assignment of Ethics Program
Responsibility and High-Level Oversight:
Table 7: Contractor Responses on Periodic Reviews and Audits:
Table 8: Contractor Responses on Anonymous/Confidential Reporting of
Misconduct and Contract-Related Violations:
Table 9: Contractor Responses on Ethics-Related Disciplinary Action:
Table 10: Comparison of Ethics Program Elements in Congressional
Mandate and FAR Requirements:
Table 11: Contractors Reviewed by GAO, by Value of Total Contract
Awards from DOD in Fiscal Year 2006:
Table 12: Required FAR Components for Contractor Ethics Program
Practices:
Figure:
Figure 1: DOD Hotline Posters Available for Contractor Display:
Abbreviations:
ACO: administrative contracting officer:
AT&L: Acquisition, Technology, & Logistics:
CAM: Defense Contract Audit Agency, Contract Audit Manual:
CAO: contract administration office:
DAR: Defense Acquisition Regulation:
DCAA: Defense Contract Audit Agency:
DCMA: Defense Contract Management Agency:
DFARS: Defense Federal Acquisition Regulation Supplement:
DOD: Department of Defense:
DOJ: Department of Justice:
DOD IG: Department of Defense Inspector General:
FAR: Federal Acquisition Regulation:
GAO: Government Accountability Office:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
September 22, 2009:
Congressional Committees:
In fiscal year 2008, the Department of Defense (DOD) spent more than
$387 billion for goods and services from more than 85,000 contractors.
Given the magnitude of taxpayer money at stake, it is essential that
defense contractors conduct their business operations with integrity.
In the last several years there have been a number of cases of fraud,
waste, and abuse in wartime contracting and even some high-profile
criminal and civil convictions of large defense contractors because of
procurement integrity and foreign corrupt practices violations. These
procurement fraud cases heightened concerns in Congress and the
executive branch about the adequacy of defense contractors' ethics
programs in preventing or addressing misconduct that could put billions
of dollars of contracted goods and services at risk.
In the past, DOD's policy under the Defense Federal Acquisition
Regulation Supplement (DFARS) encouraged contractors to have written
ethics policies and recommended practices, such as ethics training for
all employees and hotlines or other internal mechanisms for them to
report suspected misconduct.[Footnote 1] Essentially, defense
contractor ethics programs were voluntary and self-policed. Moreover,
our prior work raised concerns that DOD lacked adequate oversight of
its contractors' ethics programs, recommending that enhanced knowledge
of contractor ethics programs would enable DOD to assess whether the
public trust is protected.[Footnote 2]
Given the significant sums of federal dollars spent by agencies to
acquire goods and services, and the need to establish a clear and
consistent policy regarding contractor code of ethics and business
conduct, the Federal Acquisition Regulation (FAR) was amended twice to
address contractor ethics programs. In December 2007 and again in
December 2008, the FAR was amended first to mandate and then to amplify
governmentwide ethics program requirements for certain contractors.
[Footnote 3] Contractors' internal programs must now include an ethics
and compliance system with several practices aimed at preventing and
detecting misconduct and at promoting an organizational culture that
encourages ethical conduct and a commitment to compliance with the law.
Before FAR changes were finalized in late 2008, Congress included a
provision in the National Defense Authorization Act for Fiscal Year
2008 requiring us to report on the internal ethics programs of major
defense contractors--defined as any company that received more than
$500 million in DOD contract awards in fiscal year 2006--and the extent
to which DOD monitors or approves them.[Footnote 4] In January 2009, we
briefed your committees on the preliminary results regarding the
reporting requirements specified in the act. Taking into consideration
the new FAR contractor ethics program rules, which are very similar to
some of the reporting requirements specified in the act,[Footnote 5]
this report (1) describes the extent to which contractors had ethics
programs before the finalization of the FAR rules that included
practices consistent with standards now required by the FAR and (2)
assesses the impact the new FAR rules have on DOD oversight of
contractor ethics programs.
To select contractors for review, we used DOD's contract award data and
identified 57 major defense contractors receiving more than $500
million in fiscal year 2006 for review. To obtain information on
contractor ethics programs and practices, in September 2008 we surveyed
all 57 contractors. We also obtained corroborating documentation for
various practices--including those consistent with the FAR's standards,
such as management oversight and ethics and compliance training--and
information about the benefits to contractors and the challenges they
face in implementing the new FAR ethics rules. We analyzed responses
from all 57 contractors and reviewed the FAR Council's disposition of
public comments considered as part of the rulemaking process for
additional perspectives on benefits to contractors and challenges they
face implementing new ethics program rules.[Footnote 6] While we
reviewed the contractors' self-reported practices for consistency with
the FAR rules that came later, we did not test them for effectiveness
or compliance. We selected a nongeneralizable sample of four
contractors for site visits in order to review in detail implementation
practices for some of the ethics program policies or procedures
described in their survey responses. We chose these four contractors
because (1) they ranked among the top 15 contractors in terms of dollar
value of fiscal year 2006 DOD contract awards and (2) their survey
responses indicated that they had such policies or procedures in use.
To assess the impact the new FAR contractor ethics rules have on DOD,
we focused on defense and military organizations responsible for
oversight and investigation of contractor operations and improper
business practices.[Footnote 7] These organizations included the (1)
Defense Contract Management Agency (DCMA); (2) Defense Contract Audit
Agency (DCAA); (3) DOD Office of the Inspector General (DOD IG); (4)
Air Force, Army, and Navy offices responsible for suspension and
debarment; and (5) Office of the Under Secretary of Defense for
Acquisition, Technology and Logistics (AT&L). We interviewed senior
procurement officials; general counsel; and contract administration,
audit, and investigative service officials concerning these agencies'
roles and responsibilities for monitoring or approving contractor
ethics programs. Through interviews and information obtained from these
officials, we obtained views and reviewed supporting documentation
concerning the impact the new FAR rules have had or could have on DOD
contractor oversight activities related to monitoring contractors'
compliance with ethics program practices required by the new rules. We
did not test DOD agencies' effectiveness in implementing their
oversight activities related to monitoring contractor ethics programs.
We conducted this performance audit from May 2008 through August 2009
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. Appendix I provides
additional details on our scope and methodology, including a list of
the 57 contractors reviewed.
Background:
Defense Contractor Ethics Programs and DOD Oversight before New FAR
Rules:
Before the FAR changes in December 2007, DFARS provided that
contractors must conduct themselves with the highest degree of
integrity and honesty.[Footnote 8] Specifically, defense regulations
provided that contractors should have (1) a written code of ethical
conduct; (2) ethics training for all employees; (3) periodic reviews of
compliance with their code of ethical conduct; (4) internal audits,
external audits, or both; (5) disciplinary action for improper conduct;
(6) timely reporting to appropriate government officials of any
suspected violation of law regarding government contracts; and (7) full
cooperation with any government agencies responsible for either
investigation or corrective action.[Footnote 9] While defense
regulations provided that contractors should have such elements, they
were not mandatory. As a result, under DFARS and until the FAR rules
established mandatory ethics program requirements, DOD relied on
contractor self-governance--through which a company decided if and how
to implement and enforce ethical conduct.
Oversight and management of DOD contracting activities is shared among
various organizations. Collectively, these organizations help detect
instances of fraud, waste, and abuse; try to prevent them from
happening; or are involved in correcting policies and procedures when
they occur.[Footnote 10] For example, the Office of the Under Secretary
of Defense for AT&L provides policy, guidance, and oversight to
acquisition functions. Other DOD organizations may examine contractors'
ethics programs under a range of authorities for contract
administration and audit services. Table 1 shows DOD organizations
involved in overseeing and managing contracting activities and their
primary responsibilities in examining contractors' ethics programs.
Table 1: DOD Organizations Responsible for Oversight and Management of
DOD Contracting Activities in Which Contractor Ethics Programs May Be
Examined:
Contract audit services and administration:
DOD organization: DCAA;
Responsibility: Contract audit services and administration: Located on-
site at contractor facilities for ongoing contract audit purposes, DCAA
audits internal control systems--including the contractor's control
environment for integrity and ethical values--every 3 to 4 years, and
reports on adequacy of controls. According to DCAA, the contractor's
control environment has a pervasive influence on its business
activities and is the foundation for all other internal control
systems, such as billing and labor. DCAA also makes investigation
referrals, usually to the DOD IG, regarding situations that reasonably
appear to entail fraud that it encounters during its contract audits.
DOD organization: DCMA;
Responsibility: Contract audit services and administration: DCMA is a
combat support agency responsible for ensuring the integrity of
contractual processes and provides a broad range of contract and
procurement management services to DOD buying organizations. As of
December 2008, DCMA reports managing 291,000 prime contracts valued at
$950 billion. Also located on-site for ongoing contract administration
purposes, as needed, DCMA monitors ethics program corrections in
response to DCAA-identified deficiencies.
Improper business practices:
DOD organization: DOD IG;
Responsibility: Contract audit services and administration: DOD IG
conducts audits and oversees matters relating to detection and
prevention of fraud, waste, and abuse, and collaborates with numerous
other DOD entities, as many activities are involved in addressing these
issues across DOD. DOD IG does not monitor contractor ethics programs
per se, but may get insight through oversight of and follow-up on
irregularities or misconduct reported through DCAA, the Defense Hotline
Program, and the DOD Contractor Disclosure Program.
DOD organization: Air Force, Army, and Navy offices of general counsel
suspension and debarment officials;
Responsibility: Contract audit services and administration: During any
administrative suspension or debarment proceeding or in reaching an
administrative settlement, the contractor's ethics program may come
under the review and approval of the agency's suspension and debarment
official. For example, under separate administrative compliance
agreements from March 2005 through October 2007, the Air Force and Army
suspension and debarment officials approved changes in and policed
compliance with ethics programs of two contractors in our study.
Sources: DOD and FAR (information); GAO (analysis and presentation).
[End of table]
Concerns over Procurement Fraud Trends Prompt FAR Contractor Ethics
Rules:
A number of cases involving fraud in wartime contracting in Iraq,
Kuwait, and Afghanistan and recent scandals involving high-profile
defense contractors have prompted significant changes in procurement
fraud investigations, enforcement initiatives, legislation, and
regulation. By 2007, in view of the trend, the FAR Council commented
that the DFARS provision that contractors should have specific elements
of an ethics program was no longer considered strong enough to increase
contractor compliance with ethical rules of conduct.[Footnote 11]
To address this problem, the FAR Council changed the regulations. After
conducting an extensive proposed rulemaking and public comment process
from February 2007 through November 2008, the FAR Council twice amended
the FAR to impose new ethics requirements on government contractors.
The initial rule--effective in December 2007--created a new FAR subpart
that requires government contractors to have written codes of business
ethics and ethics compliance training programs for contractor employees
and to post "fraud hotline" posters at contractor work sites to
encourage contractor employees to report fraudulent activity in
connection with performance and award of government contracts.[Footnote
12]
However, in December 2008 certain shortcomings in the initial
contractor ethics rules were addressed in further amendments to the
FAR.[Footnote 13] For example, public concerns over the first rule's
exemption connected to overseas contracting prompted elimination of
this exemption in the second rule, and as of December 2008, overseas
and commercial contractors are now required to maintain written codes
of business ethics and conduct. In addition, the amended FAR contractor
ethics rules now require contractors to disclose violations of criminal
law involving fraud, conflict of interest, bribery, or gratuity
violations or violations of the civil False Claims Act (31 U.S.C. 3729-
3733) in connection with award or performance of government contracts
and subcontracts. It should be noted that these requirements are
implemented by contract clause and are mandatory.[Footnote 14] The
amended rules also specifically subject contractors to suspension and
debarment from government contracting for knowingly failing to disclose
such violations and failing to disclose receipt of overpayments on
government contracts in a timely manner.
The FAR changes effective in December 2008 also enhance provisions for
sound ethics business practices by specifically requiring the
establishment of internal control systems for:
* facilitating discovery of improper conduct,
* ensuring that corrective measures are promptly carried out, and:
* otherwise promoting an organizational culture that encourages ethical
conduct and a commitment to compliance with the law.
In publishing the December 2008 rule's amplified requirements, the FAR
Council stated that the U.S. Sentencing Commission's federal sentencing
guidelines are the source of the FAR text, which provides guidance for
contractors consistent with the guidelines on effective compliance and
ethics programs for organizations. Among other things, the sentencing
guidelines state that an ethics and compliance program should be
reasonably designed, implemented, and enforced so that it is generally
effective in preventing and detecting criminal conduct. Notably, the
sentencing guidelines also state that the failure to prevent or detect
a particular offense does not necessarily mean that the program is
generally ineffective in preventing and detecting criminal conduct.
According to the FAR Council, the final rule reflects standards across
four broad components and establishes a framework for institutional
ethics management and disclosure, but does not prescribe specific
ethical requirements. Contractors are free to establish the appropriate
ethical standards for their businesses. For a more detailed description
of the final rule's establishment of standards across four broad
components, see appendix II.
Contractors Report Using a Range of Ethics Program Practices Now
Required by the FAR:
In September 2008 and before the FAR rules were finalized, to identify
contractor ethics program practices, we surveyed all 57 contractors to
obtain information on the extent to which their programs included
practices required or proposed in the FAR or otherwise addressed in
congressional requirements for this report. As summarized in table 2,
nearly all of the 57 contractors responding to our survey report using
many of the ethics practices consistent with standards now required by
the FAR. The ethics program practices information we obtained was not
designed to test contractor compliance with the rules that came later.
Table 2: Contractor Responses on Ethics Practices Now Required by the
FAR:
FAR standard: Code of business ethics and conduct;
Contractors reporting these practices:
* 55 have written codes;
* 54 provide copies to employees.
FAR standard: Ethics awareness and compliance program;
Contractors reporting these practices:
* 55 have ongoing programs;
* 51 require ethics training for employees working on DOD contracts;
* 55 use other mechanisms to communicate employee ethics awareness and
compliance.
FAR standard: Internal control system; High level of management
oversight; Contractors reporting these practices:
* 52 have an office or individual charged with implementing the ethics
program;
* 25 report quarterly top management oversight of ethics program
managers.
FAR standard: Internal control system; Periodic reviews, audits, or
both; Contractors reporting these practices:
* 52 have internal audit functions that review ethics program
effectiveness;
* 47 periodically assess risks of improper or criminal conduct.
FAR standard: Internal control system; Internal mechanism for reporting
misconduct; Contractors reporting these practices:
* 55 have internal reporting mechanisms, such as hotlines;
* 54 have a policy for employees to report misconduct anonymously or
confidentially.
FAR standard: Internal control system; Disciplinary systems;
Contractors reporting these practices:
* 52 have codes that provide examples of disciplinary consequences, for
example, warning, counseling, and employment termination.
FAR standard: Timely disclosure;
Contractors reporting these practices:
* Before FAR rule, 34 had a policy for voluntary disclosure to DOD of
contract-related violations and misconduct;
* Post FAR rule, 4 contractors we visited for follow-up changed
disclosure policy and procedure to comply with new mandatory disclosure
requirement.
Source: GAO analysis of contractor survey.
Notes: At the time of our survey, contracts for the acquisition of
commercial items and those that would be performed entirely outside the
United States were exempt from the requirements shown in the table, and
none of the contractors were required to timely disclose credible
evidence of certain violations of federal criminal law or of the civil
False Claims Act. In addition, all small businesses are exempt from the
FAR requirements for an ethics awareness and compliance program and an
internal control system. In this table and throughout this report, we
present data on the number of affirmative responses and not data on the
number of "no" and "don't know" responses or the number of contractor
nonresponses to a question.
[End of table]
Views of contractors surveyed were mixed with regard to the benefits
and challenges they face in implementing the FAR contractor ethics
rules. Contractors responding to our survey cited several expected
benefits and challenges of the new ethics rules. Other benefits and
challenges were attributed by the FAR Council to public comments from
contractor industry and other sources when finalizing the new FAR
contractor ethics rules in 2008. Some of these benefits and challenges
are highlighted in table 3.
Table 3: Highlights of GAO Contractor Survey and FAR Public Comments
regarding Benefits to Contractors and Challenges They Face in
Implementing FAR Ethics Rules:
Contractor benefits from implementing FAR ethics rules:
* Codify good business practices for all contractors and reinforce
importance that all businesses conduct themselves in an ethical manner;
* Contribute to a company culture emphasizing business integrity;
* Provide standard and create a level playing field;
* Build employee trust and confidence;
* Reduce contractor liability and risk;
* Assist contractors subject to similar responsibilities or federal
sentencing guidelines if accused of crimes;
* Benefit the government procurement process as a whole;
* Reinforce companies' compliance standards and inhibit unethical
conduct;
* Provide basis for government partners to evaluate contractor's
responsibility and are meaningful for enforcement when something goes
wrong.
Contractor benefits from implementing FAR ethics rules:
Mandatory disclosure:
* In contrast to existing government programs and contractor
initiatives offering ample incentives to voluntarily report contract
violations, mandatory disclosure may eliminate the ability of a
contractor to claim the benefit of "timely and voluntary disclosure" to
the government if the contractor is charged with a crime;
* Failure to disclose an overpayment on a government contract may
create operational difficulties because (1) contracts are subject to
reconciliation processes with payments audited and adjusted over time
and (2) the routine nature of contract payment issues, which are daily
events, with errors on both sides, is simply unworkable;
* Challenge to interpret vague language, such as "suspected,"
"cooperation," "timely," and "reasonable grounds to believe," may tie
up government resources in meaningless legal trivia;
* If contractor employees know that everything they report will be
passed on to the government, this may result in less reporting up the
chain of the company rather than more and could decrease rather than
enhance cooperation with company ethics compliance efforts;
Other challenges:
* Expanding our awareness program to keep pace with our company growth;
* Ensuring sufficient training for significant number of employees;
* Executing the requirement for checking the existence of subcontractor
ethics awareness and internal control systems;
* Utilizing a covered subcontractor outside the United States, as we
would expect that many foreign companies may not have programs that are
as stringent as is required by the FAR, and it could be difficult in
some countries to fund a subcontractor with such a program.
Sources: GAO analysis of contractor survey and 73 Fed. Reg. 67064-93.
[End of table]
With regard to the new FAR rule's mandatory timely disclosure of
certain contract-related violations of criminal law or the False Claims
Act, several contractors responding to our survey as well as industry
concerns cited in public comments indicated that contractors would face
significant difficulty in implementing those requirements. In response
to these concerns, the FAR Council revised key aspects of the final
rule regarding timely disclosure, including to:
* more closely focus the situations that must be disclosed by limiting
violations of criminal law to certain violations involving fraud,
conflict of interest, bribery, or gratuity violations that have
occurred in connection with the award, performance, or closeout of a
contract or subcontract;
* make "credible evidence" the standard for when timely disclosure
should occur;
* add clarification that if a violation relates to more than one
government contract, the contractor may make the disclosure to the
agency officials responsible for the largest dollar value contract
affected by the violation; and:
* limit the application of suspension or debarment to undisclosed
overpayment cases in which the amount is significant.[Footnote 15]
Contractors' Ethics Program Practices:
Highlighted below is some of the aggregated analysis resulting from the
survey about contractors' ethics practices. A more complete tabulation
of survey questions together with tables indicating the levels of
response can be found in the e-supplement to this report, found on our
Web site at [hyperlink,
http://redesign-www.gao.gov/special.pubs/gao-09-646sp/index.html].
Nearly All Contractors Report Having a Code of Business Ethics and
Conduct:
One purpose of a code of conduct can be to communicate a company's
statement of ethical values and integrity as established by top
leadership. Although the FAR does not specify what topics a contractor
must include in its code of conduct, they can cover a broad range of
business ethics and conduct standards, such as conflict of interest,
relationships with vendors, and compliance with government contracting
requirements for procurement integrity, classified information, and
recruiting and employing current or former government personnel,
according to sources on government contractor ethics practices.
[Footnote 16] As shown in table 4, nearly all of the contractors
reported using such practices.
Table 4: Contractor Responses on Practices Now Required by the FAR for
Code of Business Ethics and Conduct:
FAR standard: Written code of business ethics and conduct;
Contractors reporting this practice:
* 55 report having written codes;
* 49 report that their codes include standards of business ethics and
conduct expected of employees in their work on DOD contracts.
FAR standard: Copy of the code available to employees engaged in
contract performance;
Contractors reporting this practice:
* 54 provide written or electronic copies of code to employees;
* 51 require employee acknowledgment that they understand code;
* 52 require employees to agree to uphold the ethics standards.
Source: GAO analysis of contractor survey.
Note: At the time of our survey, contracts for the acquisition of
commercial items and those that would be performed entirely outside the
United States were exempt from the requirements for the code of
business ethics and conduct.
[End of table]
Nearly All Contractors Report Having an Ethics Awareness Program,
Compliance Program, or Both:
One purpose of ongoing contractor ethics awareness and compliance
programs can be to promote conformance with the code of business ethics
and requirements. Such programs should include reasonable steps to
communicate periodically to employees about the contractor's ethics
standards and procedures via training programs and communicating
information on individuals' roles and responsibilities under the ethics
program. As shown in table 5, nearly all of the contractors reported
including steps such as requiring ethics training and periodically
communicating ethics-related information to employees working on DOD
contracts.
Table 5: Contractor Responses on Business Ethics and Awareness
Practices for Communicating Information concerning Individual Roles and
Responsibilities:
FAR standard: Have ongoing ethics awareness programs, ethics compliance
programs, or both;
Number of contractors reporting this practice: 55.
FAR standard: Training required for contractors' principals and
employees and, as appropriate, the contractors' subcontractors:
* Principals (officers, directors, executives, etc.);
Number of contractors reporting this practice: 48.
* Midlevel managers;
Number of contractors reporting this practice: 51.
* Permanently hired employees;
Number of contractors reporting this practice: 50.
* Short-term employees;
Number of contractors reporting this practice: 37.
* Independent contractors/consultants;
Number of contractors reporting this practice: 12.
* Employees working overseas;
Number of contractors reporting this practice: 41.
* Foreign employees;
Number of contractors reporting this practice: 38.
* Subcontractor employees;
Number of contractors reporting this practice: 4.
FAR standard: Periodic communication mechanisms to disseminate
information appropriate to individuals working on contracts on their
ethics roles and responsibilities:
* Orientation;
Number of contractors reporting this practice: 54.
* Staff meetings;
Number of contractors reporting this practice: 43.
* Brochures;
Number of contractors reporting this practice: 36.
* One or more other communication mechanisms (newsletter, e-mail,
posters, etc.);
Number of contractors reporting this practice: 55.
Source: GAO analysis of contractor survey.
Notes: The standards reflected in the FAR establish a framework for
institutional ethics management and are displayed above in bold. As
shown in the bulleted text above, because the FAR does not prescribe
specific ethical requirements, our survey included multiple-choice
questions about the types of (1) employees to whom contractors provided
ethics training and (2) periodic communication mechanisms used.
[End of table]
All 41 contractors that reported having overseas contract operations
indicated that they had incorporated their ethics awareness and
compliance programs overseas. However 26 contractors reported
experiencing challenges implementing ethics programs overseas,
including differences in legal and regulatory environments relating to,
for example, employee privacy, cultural and language barriers, and
technical or hostile conditions impeding computer-based training.
Internal Control Systems:
Having contractors implement internal control systems increases the
likelihood that their ethics and compliance programs are generally
effective in preventing, detecting, and addressing contract-related
fraud, waste, and abuse. Nearly all of the contractors in our survey
reported using internal control practices consistent with the FAR's
standards.
* High-level of management oversight. By assigning responsibility at a
sufficiently high level and providing adequate staffing to ensure the
effectiveness of the ethics program, a contractor can demonstrate true
interest and involvement of management.[Footnote 17] As shown in table
6, most contractors report formally assigning responsibility and staff
resources to an office or individual and several have their ethics
managers report on a regular basis to top management. Site visits with
four contractors showed that all had ongoing and active high-level
management oversight of their ethics programs.
Table 6: Contractor Responses on Assignment of Ethics Program
Responsibility and High-Level Oversight:
Practice: Formally assign responsibility to an office or individual to
implement ethics and compliance program;
Number of contractors reporting this practice: 52.
Practice: Regular reporting about business ethics awareness and
compliance to these management levels:
* Chief executive officer;
Number of contractors reporting this practice: 25 (quarterly); 7
(monthly).
* President;
Number of contractors reporting this practice: 17 (quarterly); 4
(monthly).
* Board of directors;
Number of contractors reporting this practice: 15 (quarterly); 0
(monthly).
* Board ethics committee, compliance committee, or both;
Number of contractors reporting this practice: 10 (quarterly); 0
(monthly).
Source: GAO analysis of contractor survey.
Notes: The standards reflected in the FAR establish a framework for
institutional ethics management. Because the FAR does not prescribe
specific ethical requirements for assignment of responsibility at high
levels for program responsibility or management oversight, our survey
included open-ended and multiple-choice questions about the types of
(1) individuals or offices responsible for the ethics and compliance
program and (2) periodic reporting to various management levels. At the
time of our survey, contracts for the acquisition of commercial items
and those that would be performed entirely outside the United States
were exempt from the internal control system requirements for
management oversight. Although the FAR exempts small businesses from
the internal control system requirements, nearly all contractors told
us that they are not small businesses. However, if a contractor did not
report assigning responsibility to implement an ethics and compliance
program, we did not verify whether the company might fall under the
commercial item or overseas exemptions.
[End of table]
* Periodic reviews and audits. An internal control system should be
reviewed regularly from a compliance perspective through periodic risk
assessments and audits.[Footnote 18] Most of the contractors reported a
range of practices for periodic reviews and audits, as shown in table
7. In the case of our four site visits, we confirmed that all four
contractors had internal audits or reviews of their ethics program as
recently as 2008. Examples of risk areas addressed by these
contractors' internal ethics program audits include procurement
integrity, foreign corrupt practices, and compliance with the code of
conduct and policy for employee background checks.
Table 7: Contractor Responses on Periodic Reviews and Audits:
Practice: Internal audit or review function that audits business ethics
program;
Number of contractors reporting this practice: 52.
Practice: Mechanisms to monitor effectiveness of ethics program:
* Periodic evaluation of business practices, procedures, policies, and
internal controls;
Number of contractors reporting this practice: 52.
* Periodic assessments of the risk of improper or criminal conduct;
Number of contractors reporting this practice: 47.
* Program modifications in response to risk assessment to reduce risk
of improper or criminal conduct;
Number of contractors reporting this practice: 46.
* Monitoring and auditing to detect improper or criminal conduct;
Number of contractors reporting this practice: 49.
Source: GAO analysis of contractor survey.
[End of table]
* Internal mechanism for reporting misconduct. Having and publicizing a
system such as a hotline through which employees can anonymously and
confidentially report or seek guidance facilitates detecting and
addressing unethical and illegal activity related to contracts and
helps promote a culture that encourages ethical conduct and a
commitment to compliance with the law.[Footnote 19] As shown in table
8, most of the contractors reported having such mechanisms and policies
for employees to anonymously or confidentially report suspected
misconduct and contract-related violations.
Table 8: Contractor Responses on Anonymous/Confidential Reporting of
Misconduct and Contract-Related Violations:
Practice: Policy for employees to anonymously and/or confidentially
report known or suspected conduct that violates ethics standards or
contract-related requirements;
Number of contractors reporting this practice: 54.
Practice: One or more mechanisms for reporting such known or suspected
conduct;
Number of contractors reporting this practice: 55.
Practice: One or more mechanisms for reporting such known or suspected
conduct:
* Hotline/helpline;
Number of contractors reporting this practice: 54.
* Ethics officers;
Number of contractors reporting this practice: 45.
* Ethics/compliance office telephone number;
Number of contractors reporting this practice: 49.
* E-mail;
Number of contractors reporting this practice: 53.
Source: GAO analysis of contractor survey.
[End of table]
In addition, of the 57 contractors responding to our survey, 45
reported using one or more mechanisms (for example, posters or
training) to let employees know about external mechanisms for reporting
contract-related misconduct, such as DOD IG's hotline, and 55 reported
notifying employees of their federal whistleblower protections through
one or more mechanisms, such as their ethics codes or training.
[Footnote 20]
* Disciplinary systems. A disciplinary system is part of providing
appropriate incentives to perform in accordance with the ethics and
compliance program and further demonstrates appropriate follow-through
in investigating, disciplining, and correcting ethics
violations.[Footnote 21] As shown in table 9, 53 of the 57 contractors
report including a disciplinary system in their ethics programs, with
consequences ranging from warning to termination practices. To ensure
that prompt corrective measures are carried out when violations are
substantiated, 35 of the contractors reported such practices as having
specific offices or individuals, while 12 reported having committees,
responsible for coordinating and tracking that appropriate discipline
is administered. Site visits with 4 contractors confirmed that all 4
kept extensive records for management to track and oversee disciplinary
actions by category of conduct violation, employee category, and
business unit.
Table 9: Contractor Responses on Ethics-Related Disciplinary Action:
Practice: Code of ethics states that there will be disciplinary
consequences for conduct that violates organization's business ethics
and standards;
Number of contractors reporting this practice: 53.
Practice: Code of ethics provides examples of potential disciplinary
consequences, such as warning, counseling, and employment termination;
Number of contractors reporting this practice: 52.
Source: GAO analysis of contractor survey.
[End of table]
Timely Disclosure:
Since the FAR rule mandating timely disclosure of contractors' credible
evidence of violations was not yet in effect at the time of our survey,
we asked contractors about policies for voluntarily disclosing to DOD
conduct in connection with defense contracts that may violate
applicable requirements of law or regulation. Of the 57 contractors
responding to the survey, 39 indicated that they had self-reporting
policies. Of these, 34 said that their policy was to voluntarily
disclose or self-report violations to government officials, such as DOD
IG, contracting officers, DCMA, and DCAA. Fifteen of these contractors
provided copies of their self-reporting policies. Of the 18 that
indicated that they did not have self-reporting policies, 10 said it
was their practice to self-report or voluntarily disclose, or to
encourage the practice of self-reporting, violations to government
officials. In addition, some of the contractors that had self-reporting
policies reported that the types of contract-related violations subject
to their self-disclosure policies and practices included:
* violations of law and instances of significant employee misconduct,
* instances where there may have been overbilling caused by employee
mischarging and other instances of misconduct,
* violation of the Anti-Kickback Act of 1986,
* compromise of product integrity,
* violations of federal procurement law,
* violations that added costs to the government,
* cost accounting violations, and:
* suspected fraud.
Notably, in site visits with four contractors following the November
2008 publication of the FAR's mandatory rule for timely disclosure of
certain contract-connected violations, senior ethics program managers
provided us information showing that all organizations were changing
their voluntary disclosure policies to implement this new FAR
requirement.
New FAR Rules May Improve DOD Oversight of Contractor Ethics Programs
in Some Areas but Not Others:
In response to the new FAR rules, DOD has made changes in two key areas
that could improve oversight of contractor ethics programs.
Specifically, DCAA revised its contract audit guidance to cover the new
FAR ethics requirements. In addition, DOD IG established the new
Contractor Disclosure Program to implement the new mandatory disclosure
requirement. However, additional opportunities exist to improve DOD's
oversight in two other key areas. For example, in a third area DOD has
not assigned responsibility for verifying implementation of contractor
ethics programs during contract administration. The impact of the FAR
rules on oversight at this point is negligible because the authority
for oversight is not explicit nor is organizational responsibility
clear. In a fourth area--hotline poster displays--the new FAR rules
could have the adverse consequence of reducing DOD's awareness of
potential ethics violations. Under the rules, contractors have been
exempted from the requirement to display DOD hotline posters if they
have their own internal hotlines. This is important because if
contractor employees make reports of contract-related fraud, waste, and
abuse to the company hotlines instead of DOD hotlines, DOD will be less
aware of potential problems. In addition, if employees use contractor
hotlines instead of DOD hotlines, the employees do not receive the same
protections from whistleblower laws.
DCAA Developed New Audit Guidance on Internal Controls for Contractor
Integrity and Ethical Values:
Although DCAA provides a range of services to contracting officers and
other DOD officials, DCAA's primary function is contract audit
services.[Footnote 22] As part of its ongoing oversight of contractor
performance during the contract administration phase, DCAA's field
audit offices conduct periodic audits of contractor internal control
systems. In carrying out such contract audits, DCAA personnel are to
follow the standards, policies, and techniques prescribed in the DCAA
Contract Audit Manual (CAM).[Footnote 23]
Senior headquarters policy and planning managers responsible for DCAA's
auditing standards indicated that the impact of the FAR contractor
ethics rules on DCAA contract audits has been to improve audit
guidance. To incorporate the December 2008 FAR ethics rules into its
audits of contractor controls for integrity and ethical values, in July
2009 the agency distributed to its field audit offices revisions of a
section of the CAM and its associated audit program.[Footnote 24]
Earlier in June 2009, when the Chief, Auditing Standards Division
updated us on the status of extensive revisions then under way to
improve the CAM audit guidance, she indicated that the revised guidance
under development would integrate the new FAR standards into DCAA's
auditing program. This was a change by DCAA since February 2009 when
headquarters officials told us that they planned to make only minor
changes. In their view, this was because many of the new FAR
requirements were already in the DFARS section upon which the earlier
audit program was based.
When we subsequently discussed preliminary findings to that effect in
June 2009, the Chief, Auditing Standards Division told us that the
agency had reconsidered its approach and was then proceeding to develop
much more extensive audit guidance revisions than what had earlier been
anticipated. In July 2009, DCAA provided us with its revised audit
guidance, including the section of the CAM on controls for contractor
integrity and ethical values and the associated audit program. DCAA's
new guidance now integrates the FAR standards into DCAA's auditing
program for identifying potential internal control deficiencies in
contractors' ethics and compliance programs.
DOD IG Established Contractor Disclosure Program as Required by New FAR
Rule:
The new FAR rule's requirement that contractors timely disclose
credible evidence of certain violations of federal criminal law or
violations of the civil False Claims Act made it necessary in December
2008 for DOD IG to replace its Voluntary Disclosure Program with the
new Contractor Disclosure Program. According to the program's manager,
DOD's new contractor disclosure process provides:
* contractors with Web-based and alternative means to report violations
in writing;
* coordinated evaluation of criminal, civil, and administrative actions
with Department of Justice (DOJ) and DOD stakeholders (including
offices for the Army, Navy, and Air Force suspension and debarment
authorities and buying agencies or weapon systems affected by the
disclosure);
* a framework for the government to verify and, when appropriate, act
on certain violations discovered through contractor self-policing; and:
* centralized management combined with decentralized execution and
faster turnaround of the investigative and prosecution processes.
To implement the new FAR rules, DOD took immediate steps--none of which
existed under the Voluntary Disclosure Program--to direct reporting of
all contractor disclosures to the Contractor Disclosure Program.
[Footnote 25] DOD IG also made early instructions available to
contractors on submitting information via the Contractor Disclosure
Program Web site and, in February 2009, issued a contractor's guide to
submitting a disclosure.[Footnote 26] The guide states that disclosures
are made with no advance agreement regarding possible DOD resolution of
the matter and with no promises from DOJ regarding potential civil or
criminal actions. In the event of disclosures of potential criminal
liability, however, prompt disclosure, full cooperation, complete
access to necessary records, restitution, and adequate corrective
actions are key indicators to DOD of an attitude of contractor
integrity. DOD IG is also developing instructions--to be issued in
2009--to provide internal guidance on various DOD contractor oversight
agencies' roles and responsibilities under the Contractor Disclosure
Program. The instructions call on the agencies to extensively
coordinate and share management of the investigation/prosecution
processes.
Before the new program, the DOD Voluntary Disclosure Program--
administered by DOD IG since 1986--had been largely ignored by
contractors for the past 10 years, according to comments received by
the FAR Council from DOJ and inspectors general. The number of
contractor disclosures to the Voluntary Disclosure Program fell steeply
over its 22-year history, declining from about 40 to 60 voluntary
disclosures accepted per year in its early years to only 9 voluntary
disclosures accepted in 2008.[Footnote 27] According to the program's
manager, in the first 7 months since the mandatory program's start-up
in December 2008, DOD has received 41 disclosures from contractors.
[Footnote 28]
DOD IG headquarters officials told us that the agency will include
information on the Contractor Disclosure Program--such as the volume,
nature, and disposition of active and closed disclosure cases--as part
of its semiannual report to Congress.[Footnote 29]
New FAR Rules Do Not Call for Verifying Implementation of Contractor
Ethics Programs during Contract Administration:
The FAR does not specifically require contracting officials to conduct
oversight of contractors' ethics programs during contract
administration, for example, verifying that the contractor has
implemented the new mandatory contractor business ethics requirement.
In contrast, in certain other areas of the acquisition process the FAR
provides guidance for contracting personnel regarding contractor
oversight that could serve as a model for DOD to use in considering
whether to step up oversight of contractor ethics programs during
contract administration. This guidance identifies several areas for
which express responsibility is assigned to contracting officials for
verifying contractor compliance with applicable laws and regulations.
These areas include activities related to environmental practices and a
drug-free workplace. In addition, guidance is provided to contracting
personnel regarding, as applicable, quality assurance and safety, both
of which are cited in the FAR as general standards for determining
whether a prospective contractor is responsible, just as having a
satisfactory record of integrity and business ethics is a
responsibility standard.[Footnote 30] Such oversight during contract
formation and administration is done, in part, to avoid any adverse
impacts on contract performance or cost after contract award.
As DOD's lead contract administration agency, DCMA provides a range of
services to contracting officers and other DOD officials after contract
award.[Footnote 31] If assigned to do so by a contracting officer as
part of DCMA's contract administration responsibilities after contract
award, DCMA monitors contractor performance and management systems to
ensure that cost, quality, and schedule are in compliance with the
terms and conditions of the contracts.[Footnote 32] DCMA's monitoring
is primarily performed by an administrative contracting officer (ACO)
located in the field at a contract administration office (CAO) who is
assigned to administer the contract with assistance from engineers and
other specialists at DCMA.[Footnote 33] To specifically combat
procurement fraud with a strong focus on assisting CAOs through
coordination of remedies and process improvement, DCMA also has a
Contract Integrity Center--operated by its Office of General Counsel--
with attorneys geographically dispersed across the United States.
According to DCMA, these contracting integrity attorneys work full-time
on the prevention, detection, investigation, and prosecution of
allegations of procurement fraud and other misconduct.
Despite DCMA having the important role of performing contract
administration services for many of DOD's contracts after award, the
impact of the new FAR rules on changing the CAO function to include
some degree of oversight to verify implementation of contractor ethics
programs has been negligible. For example, most of the nine CAO staff
we talked to who provide ongoing contract administration and oversight
of seven major DOD contractors told us that they may receive
information from the contractors or from DCAA on the status of
contractors' ethics programs. In addition, they monitor contractor
ethics program actions to correct internal control deficiencies for
integrity and ethical values in response to deficiencies discovered
during DCAA audits. However, other than reacting as information comes
to them from the contractor and DCAA, the CAO staff indicated that they
were not planning to routinely verify contractor ethics program
efforts. Some of these staff indicated that they were willing to
monitor contractors' ethics programs but noted that it is currently not
required by the FAR. Some staff indicated that if such a task was
required, criteria or instructions on what to look for would be needed.
However, the new FAR rules are silent with regard to contracting
officer review or standards for examining contractor ethics programs
during contract administration. As such, without further guidance, CAO
staff will continue as before the new FAR rules were implemented with
limited oversight of contractors' ethics programs.
Before the FAR requirements were finalized in 2008--and Congress
mandated that we report on the extent to which DOD monitors or approves
defense contractors' ethics programs--we previously recommended in 2005
that DOD needs to obtain more knowledge of contractors' standards of
conduct efforts and that enhanced awareness of contractor ethics
programs would enable DOD to assess whether the public trust is
protected.[Footnote 34] We recommended that DOD take actions to improve
its knowledge and oversight of contractors' ethics programs. DOD
commented that the recommendation was currently implemented when
contracting officers make, prior to awarding a contract, an affirmative
determination of responsibility, which included consideration of the
potential contractor's business practices and the potential
contractor's integrity. As we then indicated in response to DOD's
comment, more could be done through assessments of contractor ethics
programs to enhance contracting officers' ability to make such
determinations.
Four years later, with the FAR rules having been significantly
expanded, DOD has not determined what if any changes are needed to its
oversight of contractor ethics programs during contract administration.
The FAR Council disposition in 2007 of public comments received from
the initial FAR rulemaking process provides some insight into what
contractors might expect of contracting officials' oversight of the new
ethics program requirements. For example, the FAR Council commented
that review of contractors' compliance would be incorporated into
normal contract administration on a discretionary basis, but provided
no description on how responsibility for that discretionary duty would
be assigned or exercised.[Footnote 35] If such a review were to be
required by DOD guidance, it could use the FAR's framework for
contractor ethics program standards to begin to provide a basis for
DCMA or other contracting officials to verify that a contractor has
established the type of internal ethics and compliance program to be
expected. This, in turn, would provide some assurance that contractors
are following ethics programs as expected by the FAR Council to help
prevent, detect, and timely disclose contract-related fraud, waste, and
abuse.
Beyond the issue of authority, there is no consensus among DOD
contractor oversight officials on where organizationally such
responsibility for verifying the implementation of the new FAR ethics
program requirements during contract administration would be assigned.
Some of DCMA's CAO staff that we spoke with at several of DOD's largest
contractor facilities said that oversight of contractor ethics program
compliance would fit into their contract administration area of
responsibility. Other contractor oversight officials at DOD IG, DCAA,
and the Office for the Under Secretary of Defense for AT&L told us that
verifying or monitoring DOD contractor ethics programs would logically
fit with DCMA's contract administration services.
DCMA headquarters officials, however, stated that it is not their
agency's functional responsibility to verify compliance with the new
contractor ethics requirements. One senior DCMA headquarters official
indicated that it would be better to assign responsibility for this
function to DCAA's contract audit services that assess the adequacy of
contractor internal controls for integrity and ethical values.[Footnote
36] In addition, assigning this function to DCMA alone would leave some
defense contractors unaddressed because DCMA is not delegated
management responsibility for all defense contracts, according to its
headquarters officials.[Footnote 37] Rather, CAO staff at DCMA's field
locations oversee just those contracts and perform contract
administration as assigned to them by procuring contracting officers at
DOD's buying offices. Thus, for many of DOD's contractors, the contract
administration function is retained by the procuring contracting
officer. As a result, other contracting officials across DOD procuring
offices would need to examine any contractors not covered by DCMA CAO
staff.
Not Requiring Display of DOD Hotline Posters Could Delay or Lessen
DOD's Awareness of Problems and Use of Whistleblower Protections:
Under the FAR rule effective in December 2007, defense contractors are
not required to display DOD IG's fraud hotline posters if the
contractors' ethics and compliance programs include reporting
mechanisms such as their own hotline posters.[Footnote 38] According to
a FAR Council response to public comments in finalizing the agency
hotline display rule in 2007, the exemption was to mirror earlier DFARS
guidance, which permitted contractors to post their own hotline
posters, in lieu of DOD hotline posters, to provide an outlet for
employees to raise issues of concern.[Footnote 39] This exemption has
two potential adverse consequences for DOD oversight of defense
contractors: lessening DOD's awareness of problems and diminishing
contractor employee awareness of whistleblower protections.
The display of the standard hotline posters available to contractors
from DOD IG, shown in figure 1, at contractor work sites is part of
DOD's efforts to fight procurement and other types of fraud, waste, and
abuse.
Figure 1: DOD Hotline Posters Available for Contractor Display:
[Refer to PDF for image: illustration]
The text on the first of two posters depicted:
Dept. of Defense Hotline For Reporting Fraud, Waste and Abuse:
800-424-9098:
Or Write:
Defense Hotline:
The Pentagon:
Washington, DC 20301-1900:
E-Mail us at hotline@dodig.mil or visit our Website at
http://www.dodig.mil/hotline.
The text on the second of two posters depicted:
Hotline:
E-Mail: hotline@dodig.mil:
800-424-9098:
Defense:
The Pentagon:
Washington, DC 20301-1900:
Department of Defense:
www.dodig.mil/hotline:
* Suspected threats to Homeland Security;
* Unauthorized Disclosure (leaks) of Classified Information;
* Fraud, Waste, and Mismanagement.
Source: DOD IG.
[End of figure]
In fiscal year 2008 alone, DOD's hotline received nearly 14,000
contacts resulting in 2,000 cases referred for investigation. However,
because the FAR rule exempts contractors whose ethics programs include
their own hotlines, and if more contractors opt not to display DOD's
hotline posters, there is a risk that defense contractor employees will
be unaware and not avail themselves of DOD's hotline. According to our
ethics program survey, 55 of the 57 contractors report having one or
more reporting mechanisms, such as a hotline for employees to report
known or suspected conduct that violates ethics standards or contract
requirements.
The DOD hotline poster's absence from contractor work sites could also
jeopardize use of whistleblower protections for contractor employees
put in place by DOD in response to legislation separate from the
development of the FAR's contractor ethics program requirements.
[Footnote 40] Under this legislation, federal protections were
strengthened for contractor employees against employer reprisals for
blowing the whistle to government entities (such as DOD IG through its
fraud hotline) on suspected gross mismanagement of or illegal
activities on a DOD contract. The contractor internal reporting
mechanisms, such as hotline posters required separately under the new
FAR rules, do not provide contractor employees with the type of
whistleblower protections that disclosure to DOD IG or to other DOD
entities offers.[Footnote 41]
Although DFARS, since January 2009, requires contractors to inform
their employees in writing of these federal whistleblower rights and
protections,[Footnote 42] without display of DOD's hotline poster in a
contractor work site, contractor employees could unwittingly disclose
information to the company's internal hotline, where they would not
have federal protections in the event of employer reprisals. To
facilitate contractor employee whistleblower protections, senior DOD IG
headquarters officials responsible for investigations and policy agreed
that it might be necessary to modify DOD hotline posters for display at
contractor work sites to inform contractor employees that their federal
whistleblower protections are limited to disclosures to government
entities only.
According to FAR Council responses to public comments received while
finalizing the hotline display rule, it is the responsibility of the
agency inspector general to determine the need for, and the contents
of, the fraud hotline poster. Given the magnitude of DOD's contract
dollars spent each year, with tens of thousands of contractors and
ongoing efforts by DOD through its Panel on Contracting Integrity to
reduce vulnerabilities to procurement fraud, we asked DOD IG, DCAA,
suspension and debarment, and AT&L contractor oversight officials for
their views.[Footnote 43] Specifically, we asked about the risk of
defense contractors not displaying DOD hotline posters and whether the
hotline poster's absence in workplaces where DOD contracts are
performed might impinge on DOD's ability to timely address contractor
violations. Several of the DOD oversight officials were not aware of
the FAR's exemption regarding display of the DOD hotline posters until
we told them.
Once informed, some of these DOD officials expressed concern that the
hotline poster's absence was not in the best interest of reducing DOD's
vulnerability to procurement fraud. DOD IG officials agreed that
changing DFARS to require all defense contractors to display the DOD
hotline poster should occur. Nearly all of the 57 contractors we
surveyed appear positioned to detect problems because they report
having mechanisms such as hotlines for employees to report problems.
However, the DOD IG team leader for military reprisal investigations
expressed concern that contractor employees may be uncomfortable
reporting to their companies' internal hotlines, an indication that
relying only on contractor reporting mechanisms could also result in
DOD not finding out about the problems at all. Moreover, relying on
contractor mechanisms could also delay DOD's awareness of such problems
and its efforts to verify and act on suspected violations. For example,
under the new FAR rules, the length of time it takes a contractor to
determine if there is credible evidence of a violation subject to
mandatory disclosure requirements could affect DOD's awareness of a
problem.[Footnote 44] With the DOD hotline, DOD has immediate awareness
of potential violations from contractor employee calls. While there
might be practical reasons for continuing to exempt some defense
contractors with their own hotlines from displaying DOD's hotline
poster, such as avoiding the confusion or duplication that could occur
with too many hotline posters on display in one place, senior contract
policy officials in the Office of the Under Secretary of Defense for
AT&L believe that further study is warranted of possible changes in
DFARS to more fully protect defense contracting integrity.[Footnote 45]
Conclusions:
The FAR requirements provide new direction for defense contractor
ethics programs and present DOD opportunities to improve its oversight
of these programs. The new rules seek to promote organizational
cultures that encourage ethical behavior as well as promote compliance
with the law. Our survey completed in 2009 shows that nearly all of the
57 major defense contractors reviewed included many of the ethics
program practices before the FAR rules were finalized consistent with
the standards later required for compliance. DOD, in turn, is making
positive changes to address some of the new FAR requirements.
However, additional opportunities exist to improve DOD's oversight in
two key areas. The first is in the area of verifying the existence of
contractor ethics programs after contract award as part of contracting
officers' contract administration responsibility. The need for new
oversight attention and guidance across DOD in the area of contract
administration has not been clearly identified or determined. Such
additional oversight of contractor ethics programs during contract
administration could help ensure that contractor ethics programs are in
place as intended.
The second is in the area of DOD's hotline program, for improved
oversight for potential contract-related fraud, waste, and abuse. The
new FAR contractor ethics rules have the potential to make the hotline
program less effective by ultimately reducing contractor exposure to
DOD hotline posters and diminishing the means by which fraud, waste,
and abuse can be reported under the protection of federal whistleblower
laws. Nearly all of the major contractors surveyed have in-house ethics
and compliance programs that exempt them from displaying the DOD
posters. It is conceivable that virtually no major contractor would be
required to display the DOD hotline posters. Contractor employees might
be reluctant to report violations to an in-house hotline that did not
provide federal protection against company retaliation. However,
employees do have such protection when reporting directly to the DOD
hotline.
Recommendations for Executive Action:
We are recommending four actions aimed at improving DOD's oversight of
defense contractors' ethics programs. First, to strengthen oversight
during contract administration, we recommend that the Secretary of
Defense direct the Under Secretary of Defense for AT&L to determine
what if any new DFARS or other guidance is needed to clarify functional
responsibilities of DCMA and other contracting officials during
contract administration for verifying the implementation of contractor
ethics programs as required under the FAR ethics rules.
To avoid delaying or lessening DOD IG awareness of contract-related
problems and diminishing of whistleblower protections for contractor
employees, we recommend that the Inspector General for the Department
of Defense, in accordance with the FAR, take the following two actions:
* Determine the need for defense contractors' display of DOD IG's fraud
hotline poster, including directing a contractor to display the DOD IG
hotline poster in common work areas for performance of DOD contracts.
* Determine the contents of the DOD IG's fraud hotline poster for
display by defense contractors, including revising the poster to inform
contractor employees of their federal whistleblower protections.
Fourth, if the need for hotline poster display is determined by the
Inspector General, we recommend that the Secretary of Defense direct
the Under Secretary of Defense for AT&L to propose revisions to DFARS
to include policy requiring a contract clause directing a contractor to
display the DOD IG hotline poster in common work areas for performance
of DOD contracts. DFARS policy should require a defense contractor's
display of the DOD IG fraud hotline poster irrespective of whether that
contractor has its own internal mechanism, such as a hotline for
employees to report contract-related improprieties.
Agency Comments:
We provided a draft of this report and the e-supplement that
accompanies it to DOD for comment.[Footnote 46] The Office of the Under
Secretary of Defense for AT&L's Director, Defense Procurement and
Acquisition Policy, wrote that DOD concurs with the first three
recommendations. For example, according to the Director, the first
recommendation will be referred to the Defense Acquisition Regulation
(DAR) Council to establish a DFARS case to determine whether additional
guidance is needed to clarify the administrative contracting officer's
functional responsibilities.
Regarding the last recommendation, the Director wrote that DOD
partially concurs because it is not necessary (as we recommended) for
the Panel on Contracting Integrity to propose the revisions. However,
in response to this recommendation, the Director will submit the
proposed revisions to DFARS via memorandum to the DAR Council. Since
DOD's comment concurs with the substance of the recommendation, we
revised it to better align with DOD's preferred method for
implementation. DOD's comments are reprinted in appendix II.
We are sending copies of this report to the Secretary of Defense, the
DOD Inspector General, the Director of the Office of Management and
Budget, the major defense contractors identified in this report, and
other interested parties. The report also is available at no charge on
the GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-4841 or needhamjk1@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix IV.
Signed by:
John K. Needham:
Director, Acquisition and Sourcing Management:
List of Congressional Committees:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Ike Skelton:
Chairman:
The Honorable Howard P. "Buck" McKeon:
Ranking Member:
Committee on Armed Services:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
Congress included a provision in the National Defense Authorization Act
for Fiscal Year 2008 requiring us to report on the internal ethics
programs of major defense contractors.[Footnote 47] In January 2009, we
briefed the Senate and House Armed Services Committees on the
preliminary results regarding the reporting requirements specified in
the act. After this congressional mandate, revisions to the Federal
Acquisition Regulation (FAR) to require internal ethics programs of
contractors were finalized. As shown in table 10's side-by-side
comparison, ethics program elements identified by Congress for
inclusion in this report are very similar to the contractor ethics
program elements now required by the FAR.
Table 10: Comparison of Ethics Program Elements in Congressional
Mandate and FAR Requirements:
Contractor internal ethics program elements: Written code of business
ethics and conduct;
Congressional mandate: [Empty];
FAR requirements: [Check].
Contractor internal ethics program elements: Internal mechanisms, such
as hotlines, for reporting misconduct;
Congressional mandate: [Check];
FAR requirements: [Check].
Contractor internal ethics program elements: Notification to employees
of external mechanisms, such as the Department of Defense (DOD)
Inspector General (IG) hotline, for reporting misconduct;
Congressional mandate: [Check];
FAR requirements: [Check].
Contractor internal ethics program elements: Notification to employees
of their right to be free from reprisal for disclosing a substantial
violation of law related to a contract;
Congressional mandate: [Check];
FAR requirements: [A].
Contractor internal ethics program elements: Ethics training programs;
Congressional mandate: [Check];
FAR requirements: [Check].
Contractor internal ethics program elements: Internal audit or review
programs;
Congressional mandate: [Check];
FAR requirements: [Check].
Contractor internal ethics program elements: Requirements for self-
reporting violations to government officials;
Congressional mandate: [Check];
FAR requirements: [Check].
Contractor internal ethics program elements: Disciplinary action;
Congressional mandate: [Check];
FAR requirements: [Check].
Contractor internal ethics program elements: Appropriate management
oversight;
Congressional mandate: [Check];
FAR requirements: [Check].
Sources: Section 848 of the National Defense Authorization Act for
Fiscal Year 2008 and FAR Subparts 3.10, Clauses 52.203-13, and 52203-14
(information); GAO (analysis and presentation).
[A] We also reported on contractor employee whistleblower protections,
which were addressed in § 846 (b)(2)(C) of the National Defense
Authorization Act for Fiscal Year 2008, Pub. L. No. 110-181, and § 842
(a) of the National Defense Authorization Act for Fiscal Year 2009,
Pub. L. No. 110-417 (2008).
[End of table]
Given the similarity between some of the ethics program elements in our
congressional mandate and the current FAR requirements, our audit and
reporting objectives were to (1) describe the extent to which
contractors had ethics programs before the finalization of the FAR
rules that included practices consistent with standards now required by
the FAR and (2) assess the impact the new FAR rules have on DOD
oversight of contractor ethics programs.
Section 848 defined a major defense contractor as any company awarded
contracts by DOD during fiscal year 2006 in amounts totaling more than
$500 million. To identify those contractors, we analyzed data on the
values of contracts awarded to all companies from DOD's Statistical
Information Analysis Division. We initially identified 65 contractors,
but we eliminated six companies that merged or were joint ventures, as
well as two foreign government entities from our review. Based on our
review of DOD's data, we found that the data were sufficiently reliable
for the purpose of identifying which contractors to include in this
report. As a result, we identified the 57 contractors meeting the major
defense contractor criteria to include in our review. As shown in table
11, which ranks the 57 major defense contractors by the value of their
fiscal year 2006 DOD contract awards, these companies accounted for
more than half of DOD's total contract awards in 2006--$164.5 billion
of the total $295 billion.
Table 11: Contractors Reviewed by GAO, by Value of Total Contract
Awards from DOD in Fiscal Year 2006 (Dollars in millions):
Contractor: Lockheed Martin Corporation;
Value of DOD contract awards: $26,620;
Contractor: Boeing Company;
Value of DOD contract awards: $21,721;
Contractor: Northrop Grumman Corporation;
Value of DOD contract awards: $16,627;
Dollars in millions: Contractor: General Dynamics Corporation;
Value of DOD contract awards: $11,942;
Dollars in millions: Contractor: Raytheon Company;
Value of DOD contract awards: $10,069;
Dollars in millions: Contractor: BAE Systems PLC;
Value of DOD contract awards: $6,192;
Contractor: KBR, Inc.;
Value of DOD contract awards: $6,060;
Contractor: L-3 Communications Holding, Inc.;
Value of DOD contract awards: $5,197;
Contractor: United Technologies Corporation;
Value of DOD contract awards: $4,453;
Contractor: Science Applications International Corporation (SAIC);
Value of DOD contract awards: $3,211;
Contractor: Computer Sciences Corporation (CSC);
Value of DOD contract awards: $2,884;
Contractor: Humana, Inc.;
Value of DOD contract awards: $2,642;
Contractor: ITT Corporation;
Value of DOD contract awards: $2,522;
Contractor: General Electric Company;
Value of DOD contract awards: $2,328;
Contractor: Health Net, Inc.;
Value of DOD contract awards: $2,119;
Contractor: Triwest Heathcare Alliance Company;
Value of DOD contract awards: $2,022;
Contractor: Electronic Data Systems Corporation;
Value of DOD contract awards: $2,008;
Contractor: AM General, LLC;
Value of DOD contract awards: $1,944;
Contractor: Agility Logistics;
Value of DOD contract awards: $1,838;
Contractor: Honeywell International, Inc.;
Value of DOD contract awards: $1,679;
Contractor: Textron, Inc.;
Value of DOD contract awards: $1,369;
Contractor: URS Corporation;
Value of DOD contract awards: $1,369;
Contractor: Amerisourcebergen Corporation;
Value of DOD contract awards: $1,346;
Contractor: Harris Corporation;
Value of DOD contract awards: $1,339;
Contractor: FedEx Corporation;
Value of DOD contract awards: $1,303;
Contractor: Bechtel Group, Inc.;
Value of DOD contract awards: $1,264;
Contractor: Booz Allen Hamilton, Inc.;
Value of DOD contract awards: $1,245;
Contractor: BP America, Inc.;
Value of DOD contract awards: $1,199;
Contractor: Exxon Mobil Corporation;
Value of DOD contract awards: $1,176;
Contractor: Shell Oil Company;
Value of DOD contract awards: $1,151;
Contractor: Alliant Techsystems, Inc.;
Value of DOD contract awards: $1,128;
Contractor: Oshkosh Truck Company;
Value of DOD contract awards: $941;
Contractor: Rockwell Collins, Inc.;
Value of DOD contract awards: $824;
Contractor: Korea Agricultural Cooperative;
Value of DOD contract awards: $761;
Contractor: DRS Technologies;
Value of DOD contract awards: $730;
Contractor: Phillips & Jordon, Inc.;
Value of DOD contract awards: $705;
Contractor: CACI International, Inc.;
Value of DOD contract awards: $681;
Contractor: General Atomic Technologies Company;
Value of DOD contract awards: $670;
Contractor: McKesson Corporation;
Value of DOD contract awards: $670;
Contractor: Valero Energy Corporation;
Value of DOD contract awards: $661;
Contractor: Thales;
Value of DOD contract awards: $657;
Contractor: Aerospace Corporation;
Value of DOD contract awards: $654;
Contractor: Mitre Corporation;
Value of DOD contract awards: $652;
Contractor: Massachusetts Institute of Technology;
Value of DOD contract awards: $640;
Contractor: Dell, Inc.;
Value of DOD contract awards: $636;
Contractor: Cardinal Health, Inc.;
Value of DOD contract awards: $635;
Contractor: Syracuse Research Corporation;
Value of DOD contract awards: $613;
Contractor: Chugach Alaska Corporation;
Value of DOD contract awards: $593;
Contractor: Refinery Associates of Texas;
Value of DOD contract awards: $577;
Contractor: Environmental Chemical Corporation;
Value of DOD contract awards: $570;
Contractor: Parsons Corporation;
Value of DOD contract awards: $526;
Contractor: Johns Hopkins University;
Value of DOD contract awards: $525;
Contractor: Battelle Memorial Institute;
Value of DOD contract awards: $519;
Contractor: Shaw Group, Inc.;
Value of DOD contract awards: $519;
Contractor: Maersk Line Ltd.;
Value of DOD contract awards: $516;
Contractor: Jacobs Engineering Group, Inc.;
Value of DOD contract awards: $505;
Contractor: Kraft Foods, Inc.;
Value of DOD contract awards: $501;
Total DOD contract awards to these 57 contractors in 2006:
Value of DOD contract awards: $164,448.
Total DOD contract awards to all contractors in 2006:
Value of DOD contract awards: $294,976.
Sources: GAO (analysis); DOD (data).
Note: The dollar value of DOD contract awards in 2006 for each
contractor was rounded to the nearest million.
[End of table]
We conducted this performance audit from May 2008 through August 2009
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
The scope and methods we used to perform this audit are described in
greater detail in the remainder of this appendix.[Footnote 48]
First Audit Objective:
To determine the extent to which 57 major defense contractors included
in our review have internal ethics programs that include certain
practices consistent with standards now required by the FAR, we
designed and conducted a Web-based survey of all 57 contractors. To
gain an initial understanding of the variety and scope of information
reasonably available on the range of practices used in relation to
internal ethics programs, we reviewed chapter 8 (Sentencing of
Organizations) of the 2007 Federal Sentencing Guidelines Manual and
government contract management publications for information to describe
the FAR contractor ethics program requirements. We also interviewed
officials from government and public entities with knowledge in this
area, including the Defense Industry Initiative on Business Ethics and
Conduct, the Ethics Resource Center, DOD, and the Department of
Justice's National Procurement Fraud Task Force.
To conduct this survey, we pretested it in July 2008 with Lockheed
Martin Corporation, Electronic Data Systems Corporation, Agility
Logistics, and Mitre Corporation to determine if the questions were
clear and unbiased, if the terminology used to describe the programs
was precise, and whether the survey questionnaire placed an undue
response burden on companies. After revising the survey to incorporate
pretest comments in August 2008, we sent an e-mail to all 57
contractors in early September 2008 with instructions for accessing the
survey and followed up with nonrespondents by e-mail and telephone to
encourage their responses. After we closed out the survey on October
24, 2008, congressional committee staff requested that we pursue
responses from the remaining unresponsive contractors, and we contacted
the contractors; reopened the survey on March 13, 2009, for 5 business
days; and obtained their responses.
The multisection survey was designed to address all of the ethics
program elements identified in Section 848 and those now required by
the FAR, as shown in table 10's side-by-side comparison. The survey was
organized in various sections to obtain contractors' self-reported
information on their internal ethics programs in key areas, such as (1)
code of business ethics and conduct, (2) internal and external
mechanisms for reporting misconduct, (3) notification to contractor
employees of their right to be free from reprisal for disclosing a
substantial violation of law, (4) ethics training programs, (5)
internal audits, and (6) appropriate management oversight. GAO's e-
supplement, GAO-09-646SP, provides the questions used for the survey as
well as the aggregated responses. We analyzed responses from the 57
contractors that responded to the survey--a survey response rate of 100
percent--in comparison to the FAR requirements introduced from December
2007 through December 2008. In addition to analyzing self-reported
information from the survey responses, we requested that all 57
contractors send us corroborating documentation to review for various
practices in their internal ethics programs, including practices now
required by the FAR, such as management oversight and ethics and
compliance training. We did not verify implementation or test the
effectiveness of contractor ethics program practices self-reported
through our survey.
We selected a nongeneralizable sample of 4 of the 57 contractors for
site visits in order to review in detail implementation practices for
some of the ethics program policies or procedures described in their
survey responses, such as disciplinary actions, hotline calls, and
ethics training programs. Our selection criteria in part were whether
(1) the contractors were ranked among the top 15 contractors in terms
of dollar value of DOD contracts awarded to them in fiscal year 2006
and (2) their survey responses indicated that the contractors had such
policies or procedures in use. We visited Boeing Company, General
Dynamics, Computer Sciences Corporation (CSC), and Science Applications
International Corporation (SAIC) from December 2008 through February
2009 and obtained detailed information from senior company officials
responsible for management of ethics program-related practices
described in their responses to our survey.
To determine the benefits and challenges contractors face in
implementing the new FAR requirements, we analyzed contractor views
from our Web-based survey. To identify views and perspectives similar
to or different from those obtained from the survey, we reviewed
responses to public comments prepared by the FAR Council and published
in the Federal Register.
Second Audit Objective:
To assess the impact that expanded FAR contractor ethics program
requirements have on DOD monitoring or approval of defense contractor
ethics programs, we focused on defense and military organizations
responsible for oversight and investigation of contractor operations
and improper business practices: (1) Defense Contract Management Agency
(DCMA); (2) Defense Contract Audit Agency (DCAA); (3) DOD IG; (4) the
Air Force, Army, and Navy offices responsible for suspension and
debarment; and (5) the Office of the Under Secretary of Defense for
Acquisition, Technology and Logistics (AT&L). We interviewed senior
procurement officials; general counsel; and contract administration,
audit, and investigative service officials concerning these agencies'
roles and responsibilities for monitoring or approving contractor
ethics programs. Through interviews and information obtained from these
officials, we obtained views and reviewed supporting documentation
concerning the impact the new FAR rules have had or could have on DOD
contractor oversight activities regarding monitoring contractors'
compliance with ethics program practices required by the FAR rules.
In addition, we communicated with selected officials from the DOD
agencies listed above to obtain updates regarding changes in their
policies and procedures to implement the expanded FAR requirements,
reviewed available guidance and instructions these agencies developed
to implement the FAR changes, and analyzed public comments attributed
to DOD or other government sources and FAR Council responses published
in the Federal Register relevant to agencies' implementation of the
requirements. We also interviewed senior DCAA and DCMA officials
colocated at four contractor field office locations to discuss their
oversight of contractor ethics programs and any concerns they might
have related to those programs on contractor performance and costs. We
did not test DOD agencies' effectiveness in implementing their
contractor ethics program oversight activities.
[End of section]
Appendix II: Comments from the Department of Defense:
Office Of The Under Secretary Of Defense:
Acquisition, Technology And Logistics:
3000 Defense Pentagon:
Washington, DC 20301-3000:
September 16, 2009:
Mr. John K. Needham:
Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Needham:
This is the Department of Defense (DoD) response to the GAO Draft
Report, GAO-09-591, "DOD Contracting Integrity: Opportunities Exist to
Improve DoD's Oversight of Contractor Ethics Programs," dated August
21, 2009 (GAO Code 120736).
The Department comments on the report recommendations are enclosed.
Sincerely,
Signed by:
Shay D. Assad:
Director, Defense Procurement and Acquisition Policy:
Enclosure: As stated:
[End of letter]
GAO Draft Report - Dated August 21, 2009:
GAO-09-591 (GAO Code 120736):
"DOD Contracting Integrity: Opportunities Exist To Improve Dod's
Oversight Of Contractor's Ethics Programs"
Department Of Defense Comment To The GAO Recommendation:
Recommendation 1: The GAO recommends that the Secretary of Defense
direct the Under Secretary of Defense (Acquisition, Technology and
Logistics) to determine what if any new Defense Federal Acquisition
Regulation Supplement (DFARS) or other guidance is needed to clarify
functional responsibilities of Defense Contract Management Agency
(DCMA) and other contracting officials during contract administration
for verifying the implementation of contractor ethics programs as
required under the Federal Acquisition Regulation (FAR) ethics rules.
DOD Response: Concur, The recommendation will be referred to the
Defense Acquisition Regulation Council to establish a DFARS case to
determine whether additional guidance is needed to clarify the
functional responsibilities of the administrative contracting officer.
Recommendation 2: The GAO recommends that the DoD Inspector General
(DoD IG), in accordance with FAR, determine the need for defense
contractors' display of the TG's fraud hotline poster to include
directing a contractor to display the DoD IG hotline poster in common
work areas for performance of DoD contract.
DOD Response: Concur.
Recommendation 3: The GAO recommends that the DoD IG, in accordance
with FAR, determine the contents of the TG's fraud hotline poster for
display by defense contractors to include revising the poster to inform
contractor employees of their federal whistleblower protections.
DOD Response: Concur.
Recommendation 4: The GAO recommends that the Secretary of Defense
direct the Under Secretary of Defense (Acquisition, Technology and
Logistics) to task the DoD Panel on Contracting Integrity draft
proposed revisions to the DFARS to include policy requiring a contract
clause directing a contractor to display the DoD IG hotline poster in
common work areas for performance of DoD contracts. DFARS policy should
require a defense contractor's display of the DoD IG fraud hotline
poster irrespective of whether that contractor has its own internal
mechanism such as a hotline for employees to report contract-related
improprieties.
DOD Response: Partially concur. The FAR clause 52.203-14 already
requires the contractor to prominently display the DoD Hotline Poster
in common work areas within business segments performing work under the
contract and at contract work sites with the exception noted at
paragraph (c). The issue is the exception noted at 52.203-14(c) which
states that if the contractor has implemented its own business ethics
and conduct awareness program including a reporting mechanism, the
agency fraud hotline poster need not be displayed. DPAP will submit the
proposed revision to DFARS in a memorandum to the Director, DAR
Council, identifying this GAO recommendation. It is not necessary for
the Panel on Contracting Integrity to propose revisions. The DFARS team
working this policy area will consider the GAO recommendations.
[End of section]
Appendix III: Required Federal Acquisition Regulation Components for
Contractor Ethics Programs:
The final FAR rule--effective in December 2008--reflects contractor
ethics program standards across four broad components, as shown in
table 12.[Footnote 49] According to the FAR Council, the rule
establishes a framework for institutional ethics management and
disclosure but does not prescribe specific ethical requirements.
Contractors are free to establish the appropriate ethical standards for
their businesses.
Table 12: Required FAR Components for Contractor Ethics Program
Practices:
Component requirement: Code of business ethics and conduct;
Description: Required for businesses with contracts or subcontracts
over $5 million and a period of performance of 120 days or more; must
be implemented within 30 days of contract award; must be written and
distributed to all employees.
Component requirement: Ethics awareness and compliance program;
Description: Required for noncommercial item acquisitions and
businesses that are other than "small" and with contracts or
subcontracts over $5 million and a period of performance of 120 days or
more; must be implemented within 90 days of contract award. The ongoing
program shall include steps to periodically communicate the
contractor's business ethics standards and procedures by conducting
training programs for all employees.
Component requirement: Internal control system;
Description: Required for noncommercial item acquisitions and
businesses that are other than "small" and with contracts or
subcontracts over $5 million and a period of performance of 120 days or
more. Among others, minimum practices required for the contractor's
internal control system include the following.
Component requirement: High level of management oversight;
Description: Assignment of high-level responsibility within the
organization and adequate resources for the ethics and compliance
program.
Component requirement: Periodic reviews, audits, or both;
Description: Required to evaluate effectiveness of company business
practices, procedures, and policies, and internal controls for
compliance with the established code of business ethics and conduct and
the special requirements of government contracting.
Component requirement: Internal mechanism for reporting misconduct;
Description: Mechanisms, such as a hotline, for employees to report
anonymously or confidentially suspected instances of improper conduct
and instructions that encourage employees to make such reports. Unless
the contract is performed entirely outside the United States or is for
commercial items, a contract clause may also be used to require display
of agency fraud hotline posters, but the contractor need not do so if
it has implemented an ethics program with an internal reporting
mechanism, such as a hotline poster of its own.
Component requirement: Disciplinary systems;
Description: Follow through with disciplinary action for improper
conduct or failing to take reasonable steps to prevent or detect
improper conduct; exclude an individual as a principal who has engaged
in conduct in conflict with the established code of ethics.
Component requirement: Timely disclosure;
Description: In connection with the award, performance, or closeout of
a contract or subcontract, mandatory reporting of credible evidence of
violations of (1) federal criminal law involving fraud, conflict of
interest, bribery, or gratuity violations found in Title 18 of the U.S.
Code or (2) the civil False Claims Act. For contracts or subcontracts
over $5 million and a period of performance of 120 days or more, as
required by contract clause, they shall timely disclose these
violations of federal criminal law and the civil False Claims Act in
writing to the agency Office of the Inspector General with a copy to
the contracting officer.
Sources: FAR Subpart 3.10, clauses 52.203-13, and 52.203-14
(information); GAO (analysis and presentation).
[End of table]
[End of section]
Appendix IV GAO Contact and Staff Acknowledgments:
GAO Contact:
John K. Needham (202) 512-4841 or needhamjk1@gao.gov:
Acquisition and Sourcing Management:
Carolyn Kirby, Assistant Director Erin Schoening, Analyst in Charge
Myra Watts Butler, Senior Analyst Gwyneth Woolwine, Senior Analyst Erin
Stockdale, Analyst Aglae Cantave, Analyst Ryan Stott, Analyst Intern
Greg Campbell, Senior Communications Analyst:
Applied Research and Methods:
Jean McSween, Senior Social Science Analyst Walter Vance, Senior Social
Science Analyst:
General Counsel:
John Krump, Deputy Assistant General Counsel:
[End of section]
Footnotes:
[1] DFARS is a supplement to the Federal Acquisition Regulation (FAR)
that provides DOD-specific regulations. Among its requirements, DFARS
contains DOD-wide policies and deviations from FAR requirements.
[2] GAO, Defense Ethics Program: Opportunities Exist to Strengthen
Safeguards for Procurement Integrity, [hyperlink,
http://www.gao.gov/products/GAO-05-341] (Washington, D.C.: Apr. 29,
2005). In concurring with this report, DOD stated that the
recommendation to assess contractor ethics programs was currently
implemented when contracting officers, before awarding a contract, make
an affirmative determination of responsibility, which includes
consideration of the potential contractor's business practices and the
potential contractor's integrity.
[3] Since December 24, 2007, contractors receiving awards worth more
than $5 million and involving work in excess of 120 days have been
required to have a written code of business ethics and conduct.
However, until further amended effective December 12, 2008, the rule
did not apply to contracts for commercial items or to contracts
performed outside the United States. 72 Fed. Reg. 65873-82 (Nov. 23,
2007).
[4] The National Defense Authorization Act for Fiscal Year 2008, Pub.
L. No. 110-181 § 848.
[5] App. I provides a side-by-side comparison in table 10 of the ethics
program elements identified in § 848 for inclusion in this report with
those contractor ethics program elements now required by the FAR, all
of which became the basis for our survey on major defense contractors'
ethics programs. Pub. L. No. 110-181 § 848 (2008).
[6] The FAR Council--whose members include the DOD Director of Defense
Procurement and Acquisition Policy, the National Aeronautics and Space
Administration Associate Administrator for Procurement, and the General
Services Administration Chief Acquisition Officer--oversees development
and maintenance of the FAR. The Office of Federal Procurement Policy
Administrator in the Office of Management and Budget serves as chair of
the FAR Council, which meets quarterly to discuss and resolve
significant or controversial FAR changes.
[7] For purposes of this report, an improper business practice is
defined as a known or suspected 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.
[8] 48 C.F.R. § 203.7000 (2007).
[9] 48 C.F.R. § 203.7001 (2007).
[10] See also GAO, Contract Management: DOD Vulnerabilities to
Contracting Fraud, Waste, and Abuse, [hyperlink,
http://www.gao.gov/products/GAO-06-838R] (Washington, D.C.: July 7,
2006).
[11] 72 Fed. Reg. 65876 (Nov. 23, 2007).
[12] 72 Fed. Reg. 65873-82 (Nov. 23, 2007).
[13] On June 30, 2008, Congress enacted the Close the Contractor Fraud
Loophole Act as part of the Supplemental Appropriations Act, 2008. The
act requires the FAR to include provisions that require timely
notification by federal contractors of violations of federal criminal
law or overpayments in connection with the award or performance of
covered contracts or subcontracts, including those performed outside
the United States and those for commercial items. Supplemental
Appropriations Act, 2008, Pub. L. No. 110-252, Title VI, ch. 1.
[14] FAR § 3.1004.
[15] In finalizing the rule, the FAR Council declined to expressly
define "significant overpayment" in response to concerns raised in the
public comments. Instead, FAR Council comments indicated that
"significant overpayment" implies more than just dollar value and
depends on the circumstances of the overpayment as well as the amount.
More specifically, it is the type of overpayment that the contractor
knows will result in unjust enrichment and yet fails to disclose. As
part of the comments, it was also noted that since contractors are
required by the FAR's payment clauses to report and return overpayments
of any amount, it is within the discretion of the suspension and
debarment official to determine whether an overpayment is significant.
[16] See The Defense Industry Initiative on Business Ethics and
Conduct, 2007 Annual Public Accountability Report (Washington, D.C.,
2008); Tara A. Edwards and Frank Spasoff, "Compliance with the New FAR
Ethics and Internal Control Requirements," Contract Management (April
2009): 34-42; and Terrence M. O'Connor, Federal Procurement Ethics: The
Complete Legal Guide (Vienna, Va.: Management Concepts, 2009).
[17] Edwards and Spasoff, 40.
[18] Edwards and Spasoff, 41, and O'Connor, 7-10.
[19] United States Sentencing Commission, Guidelines Manual, § 8B2.1
(November 2007).
[20] Since January 2009, 10 U.S.C. § 2409 and 41 U.S.C. § 251 et seq.
address protections for contractor employees who disclose information
to government officials with regard to waste or mismanagement, danger
to public health or safety, or violation of law related to a DOD
contract or grant. Specifically, an employee may not be discharged,
demoted, or otherwise discriminated against as a reprisal for
disclosing to the government information concerning contract-related
violations. As of January 2009, DOD regulations also require
contractors to inform their employees in writing of these federal
whistleblower rights and protections. DFARS Subpart 203.970.
[21] James C. Fontana, J. Scott Hommer III, and Peter A Riesen, "The
Brave New World of Government Contractor Compliance Programs:
Maximizing Effectiveness and Minimizing Risk," Contract Management
(January 2009): 48-59.
[22] To facilitate DCAA's contract audit work, under its decentralized
organizational structure, DCAA has field audit offices that include
resident offices at larger contractor facilities such as those included
in this study.
[23] Defense Contract Audit Agency, DCAA Contract Audit Manual, DCAAM
7640.1 (Nov. 5, 2008).
[24] CAM 5-306--Integrity and Ethical Values, in 5-300 Section 3--Audit
of Internal Controls--Control Environment and Overall Accounting System
Controls.
[25] For example, in December 2008 the Under Secretary of Defense for
AT&L issued a memorandum to provide DOD contracting officers with
guidance regarding implementing the FAR requirement for contractors'
timely disclosure, in writing, to the DOD IG office of certain contract-
connected violations. The Under Secretary's memorandum expressly
notified DOD contracting officers of the DOD IG's designation and
address for its new Contractor Disclosure Program. AT&L also initiated
actions that month to incorporate this guidance in DFARS. Under
Secretary of Defense (AT&L) Memorandum, DOD Implementation of the
Disclosure Requirement Under FAR Clause 52.203-13 (Dec. 29, 2008).
[26] The DOD IG site at [hyperlink, http://www.dodig.mil] has Web-based
disclosures and related guidance for the Contractor Disclosure Program.
[27] This disclosure history does not include an unknown number of
matters voluntarily disclosed by contractors that DOD IG did not accept
into the Voluntary Disclosure Program. For example, a disclosure would
not be accepted into the program if the government had prior knowledge
of the matter(s) disclosed, such as through government audit,
investigation, contract administration efforts, or reports to the
government by third parties. According to the Program Manager,
Contractor Disclosure Program, total annual voluntary disclosures
accepted by DOD IG into the program ranged as high as 59 cases in 1988
to as low as 3 cases in 2007.
[28] The volume of disclosures into the Contractor Disclosure Program
is not strictly comparable to the volume of voluntary disclosures,
according to the program's manager. Unlike its practices under the
Voluntary Disclosure Program, DOD IG accepts into the Contractor
Disclosure Program all disclosures submitted from contractors. This
would include accepting even disclosures of matter(s) that the
government has prior knowledge of through audit, investigation,
contract administration efforts, or reports by third parties.
[29] As required by the Inspector General Act of 1978, as amended, DOD
IG reports semiannually to Congress. According to DOD IG, the
semiannual report not only provides Congress and the taxpayer with a
detailed account of what this organization has done during each half of
each fiscal year, it is the embodiment of two important concepts upon
which the agency is based--accountability and transparency.
[30] FAR subpart 9.1.
[31] As of December 2008, DCMA reports managing 291,000 prime contracts
valued at $950 billion. However, according to DCMA headquarters
officials, most contracts DCMA manages pertain to major weapon system
procurements. Not generally covered by DCMA's contract management
services are most of DOD's services contractors, other than those on a
limited number of services contracts related to DOD weapon systems
maintenance and the Army's Logistics Civil Augmentation Program
contract to support worldwide contingency operations.
[32] After contract award, the procuring contracting officer at the
buying office may or may not assign contract administration (i.e.,
oversight) responsibility to a separate office. If the contracting
officer does not assign this responsibility to a separate office,
contract administration remains the contracting officer's
responsibility. Under the FAR, when a contract is assigned for
administration, the contracting officer normally delegates portions of
a list of 70 specific contract administration functions to a designated
contract administration office (CAO). FAR Subpart 42.3--Contract
Administration Office Functions. Under DFARS, some additional CAO
functions are identified for the review and evaluation of certain other
contractor cost estimating and accounting systems. DFARS Subpart 242.3--
Contract Administration Office Functions.
[33] On a given contract, there may be two types of contracting
officers: (1) the procuring contracting officer at the buying office,
who awards and signs the contract, and (2) if assigned by the procuring
contracting officer after contract award, the ACO at the CAO who
administers the contract, which includes monitoring contractor
performance. To facilitate its contract administration work, under its
decentralized organizational structure, DCMA's divisions have 47 field
CAOs and assign "corporate" administrative contracting officers to
provide oversight at larger contractor facilities, such as those
included in this study. As of December 2008, DCMA has about 10,000
civilian and military staff overseeing almost 19,000 contractors.
[34] [hyperlink, http://www.gao.gov/products/GAO-05-341].
[35] As part of the rulemaking process, several respondents questioned
how the contracting officer would verify compliance with the
requirements. The FAR Council commented that the contracting officer is
not required to verify compliance, but may inquire at his or her
discretion as part of contract administrative duties. 72 Fed. Reg.
65878 (Nov. 23, 2007).
[36] Under the FAR, however, DCAA's role is advisory, which means it
has less authority than DCMA's CAOs have to require contractor action
to correct deficiencies DCMA identifies through contract
administration.
[37] According to DCMA headquarters' officials, DCMA's contract
administrative functions do not address most of DOD's services
contractors.
[38] Under FAR 52.203-14--Display of Hotline Poster(s), a contractor is
exempt from the required display of DOD IG's fraud hotline poster if
the contractor has an ethics and compliance program that includes a
reporting mechanism such as a hotline poster. According to the FAR
Council, unless an agency's inspector general requires specific
requirements and information for posters, there is no need to have
multiple agency posters if a company has its own internal reporting
mechanism.
[39] DFARS Subpart 203.70--Contractor Standards of Conduct, guidance
removed by DOD on August 12, 2008. 73 Fed. Reg. 46815 (Aug. 12, 2008).
[40] Duncan Hunter National Defense Authorization Act for Fiscal Year
2009, Pub. L. No. 110-417 § 842 (2008).
[41] Under DOD IG hotline policy, to reduce fear of potential employer
reprisal and encourage hotline disclosures, the identity of contractor
employees who report through the DOD hotline is not released without
employee permission. DOD IG Mission Briefing (Feb. 24, 2009).
[42] DFARS Subpart 203.9.
[43] In February 2007, the Under Secretary of Defense for AT&L
established the Panel on Contracting Integrity, as required by section
813 of the Defense Authorization Act for Fiscal Year 2007. The panel,
whose executive director is the Director, Defense Procurement and
Acquisition Policy and Strategic Sourcing, includes more than 20 senior-
level procurement executives, inspectors general, and other
representatives from across DOD. As required by the act, DOD has
submitted two annual reports to Congress since December 2007 on the
panel's findings and recommendations to foster and monitor contracting
integrity across the department. John Warner National Defense
Authorization Act for Fiscal Year 2007, Pub. L. No. 109-364 § 813
(2006).
[44] Subsequent to detecting problems through such internal hotlines,
in accordance with the new FAR rules, contractors are to determine
whether there is credible evidence that certain contract-related
violations have occurred. If the contractor determines there is
credible evidence, the FAR then requires the contractor's timely
disclosure of violations to the agency inspector general. FAR 52.203-
13.
[45] According to senior contract policy officials in the Office of the
Under Secretary of Defense for AT&L, DOD's Panel on Contracting
Integrity could take up consideration of this and related matters
concerning DOD contracting oversight that are affected by FAR changes
requiring contractor ethics programs.
[46] The e-supplement, which presents results from the survey of
contractor ethics programs, can be found on our Web site at [hyperlink,
http://redesign-www.gao.gov/special.pubs/gao-09-646sp/index.html].
[47] Section 848(a) required us to report by January 28, 2009, on the
internal ethics programs of major defense contractors. Pub. L. No. 110-
181 § 848 (2008).
[48] The scope of our review limits our analysis as follows: (1) we
limited this review to 57 major defense contractors and thus our
results cannot be generalized as representing all defense contractors'
internal ethics programs and (2) we limited our review to self-reported
responses and corroborating documentation from contractors on their
internal ethics programs, which we did not independently verify for
implementation or test for effectiveness.
[49] 73 Fed. Reg. 67064-93 (Nov. 12, 2008).
[End of section]
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