Internal investigations: accounting for in-house costs.

• Author: Fayad, Mike
• Position: ETHICS CORNER

Companies conducting internal investigations face many sensitive, complex legal, regulatory and business issues. Confronting employee misbehavior is not easy. Coordinating in-house resources and outside legal and consulting professionals to gather facts, determine cost impact, examine legal implications and determine an appropriate course of action is especially challenging.

It also can be expensive. For government contractors, direct costs of an investigation and costs to implement any resulting remedial measures may be hard to recover. This article examines the treatment of certain costs for an investigation and related corrective measures under the Federal Acquisition Regulation ("FAR"), and distinguishes those in-house costs that may be recovered from those that may not.

FAR Part 31 contains cost principles and procedures for pricing contracts, subcontracts and modifications where cost analysis is performed, or a contract clause requires the determination or negotiation of costs. The cost principles define general concepts related to the recovery of incurred costs, such as allowability, reasonableness and allocability. They also provide specific rules regarding the treatment of a multitude of selected costs. Among these selected costs, two types are particularly relevant to internal investigations: (1) costs related to a proceeding that includes an investigation and a determination of present responsibility or suspension or debarment, and (2) costs related to "fines, penalties, and mischarging."

Any internal investigation of possible wrongdoing that may give rise to criminal or civil liability likely will consume countless hours by corporate staff collecting, producing and analyzing data, and other investigation-related support. A cost impact analysis and determination can consume significant company resources. Costs associated with immediate remedial measures, such as developing and strengthening ethics and compliance program components including codes, policies, procedures and training to meet minimum FAR Part 9 standards governing contractor responsibility also may be significant.

Under FAR 31.205-47, costs relating to certain legal proceedings are unallowable in specified circumstances. This cost principle makes unallowable costs related to any proceeding brought by a federal, state, local or foreign government for violation of law by the contractor (including its agents or employees) if the result is a conviction or a finding of...