Industry should prepare for review of ethics programs.

• Author: McGrath, Dorn C.
• Position: ETHICS CORNER

Contractors may soon have more complete answers as to how the Defense Department will verify contractor compliance with the Federal Acquisition Regulation's recent ethics program requirements.

For contracts projected to exceed $5 million with 120 days or more of performance, FAR 52.203-13 has mandated that most contractors have written codes of ethics and conduct, ethics awareness and compliance programs and internal control systems. Since the new requirements came into effect in December 2007, contractors have wondered how contracting officers would verify compliance with these requirements. Until recently, the answer simply has been, "contracting officer discretion." However, in addition to recently revised Defense Contract Audit Agency's audit guidance coveting the ethics requirements, the Government Accountability Office has new suggestions for the Defense Department.

Beginning in May 2008, GAO conducted a 16-month audit of major defense contractor internal ethics programs as required by Congress. The audit, which began prior to implementation of the December 2008 revision to the regulation, reviewed 57 major defense contractors. While 55 contractors already had ethics programs that included many of the FAR's new rules, the focus of GAO's review was not to test contractor compliance. It simply assessed the impact of the new rules on the department's oversight of contractor ethics programs. GAO concluded in its September 2009 report, "Defense Contracting Integrity, Opportunities Exist to Improve DoD's Oversight of Contractor Ethics Programs," that additional department oversight during contract administration would help ensure that such programs are in place and functioning.

Early in its review, GAO noted that DCAA originally had planned only minor changes to audit guidance in response to the expanded contract clause. Under DCAA's July 2009 guidance, auditors are required to incorporate new procedures during "Control Environment and Overall Accounting System Control" audits to address the ethics requirements. This guidance, which is included in DCAA's Contract Audit Manual, provides step-by-step instructions to auditors for ensuring contractor compliance with the ethics program mandate. The agency already has implemented this new policy and issued detailed requests to defense contractors to verify compliance with the rules delineated in the ethics program.

The regulation also requires mandatory self-reporting by contractors of certain...