Most folks reading this blog understand that when you contract with the Federal government—indeed, when you merely submit a proposal in an attempt to win a contract award from the Federal government—you expressly cede to representatives from the Federal government (including DCAA auditors) the right to enter your place of business and inspect, review, and otherwise audit your books and other financial records.

Examples of solicitation provisions and contract clauses that grant audit access to representatives of the Federal government include:

• 52.214-26, Audit and Records – Sealed Bidding

• 52.215-2, Audit and Records – Negotiation

• 52.232-7, Payments Under Time-and-Materials and Labor-Hour Contracts

• 52.230-2, Cost Accounting Standards

Looking at those provisions and clauses, one sees that the contractor has granted Federal government representatives broad access to such items as—

• “… books, documents, accounting procedures and practices, and other data, regardless of type and regardless of whether such items are in written form, in the form of computer data, or in any other form.”

• “… all of the Contractor’s records, including computations and projections…”

• “… all records and other evidence sufficient to reflect properly all costs claimed to have been incurred … directly or indirectly … [to] include inspection of the Contractor’s plants …”

What is especially interesting (to lawyers, at least) is that nowhere in the foregoing language does one see that the contractor has granted access to the contractor’s employees. Except for the 52.212-4 clause found in Commercial Item or Commercial T&M/Labor Hour contracts, there is no contractual authority granting the DCAA the power to interview employees.

As lawyers sometimes say, “The documents speak for themselves.” Or perhaps, the documents are supposed to speak for themselves, without the need for contractor personnel to provide any additional meaning.

We all understand that, oftentimes, some translation is necessary. Thus: the need for “audit liaison” staff who facilitate DCAA’s audits and help ensure that the contractor is being responsive to the auditors’ requests for information. Moreover, certain audit procedures (e.g., the MAAR 6 “floorcheck” audit) absolutely require that the auditors interact with contractor personnel.

And yet, contractors need to keep in mind that DCAA’s access to contractor personnel is severely limited and there is ample legal room to push back, if necessary. Why would contractors even consider pushing back on a DCAA auditor’s request to interview an employee? Well, we are not attorneys, but a couple of reasons immediately spring to mind.

1. The employee in question may not be knowledgeable about the topic. For example, asking a front desk receptionist about treatment of unallowable G&A expenses may be counter-productive. (Yes, this is a real-life example. And yes, it was extremely counter-productive. Lesson learned. Big time.) The contractor may want to ensure that only knowledgeable personnel respond to the auditors’ questions by restricting who can answer those questions.

2. The matter DCAA wants to discuss may be subject to attorney-client privilege, where discussion with DCAA would act to waive that privilege. (See our discussion of that scenario right here.)

3. The questions asked by the auditor may not be relevant to the scope of the audit procedures being performed. For example, asking questions about employees’ perceptions of management’s commitment to ethical conduct may not be relevant to a MAAR 13 audit of purchased material existence and consumption. “Fishing expeditions” can be minimized by challenging the auditor to justify the relevance of the interview questions, and by ensuring that contractor personnel answer only questions that are relevant to the audit scope.

4. The DCAA interview questions may lead to legal repercussions for either the company or the employee. Thus, the contractor may want to restrict the time, place and/or subject of the discussions in order to have an attorney present who can represent the company. Further, employees have the Constitutional right against self-incrimination, which protects them even when discussing contract cost accounting and pricing matters with a Government auditor. The topic of discussion may be such that the employee would want to have his/her own legal counsel present. For example, the question “Has anybody ever directed you to mischarge your time?” may lead the employee to a self-incriminating answer.

Historically, DCAA has provided its auditors with detailed procedures on how to handle a “denial of access” to contractor records. Those procedures require quick escalation, and can ultimately lead to payments being suspended and receipt of an official subpoena. Yet guidance to address the deemed “denial of access to contractor personnel” has been lacking. (Possibly because the legal justification for DCAA’s position was similarly lacking.)

DCAA recently remedied the lack of guidance by issuing MRD 13-PPS-015(R) on July 30, 2013. The MRD stated—

The Policy Directorate (Policy) received feedback from several Field Audit Offices (FAOs) that some contractors are challenging DCAA’s right to interview and observe employees during the performance of our audits. Some contractors have argued that FAR Part 52.215-2 limits DCAA’s access to records only, and do not believe that this includes access to their employees. DCAA does not agree with this interpretation of the FAR and considers timely access to contractor employees essential for its audit activities. … DCAA considers access to contractor employees a routine and established audit procedure that is necessary to satisfy the Generally Accepted Government Auditing Standards (GAGAS).

The MRD continued—

Performing inquiries and observations of contractor employees and their processes during the performance of mandatory annual audit requirement (MAAR) No. 6, provides auditors with the evidence needed to formulate an opinion, and is a fundamental part of the audit process. Interviews allow the auditor to evaluate compliance with labor charging policies and procedures and internal controls designed to ensure the reliability of the timekeeping records and the contractor’s compliance with the terms and conditions of its Government contracts (i.e., FAR and CAS). Observations confirm that the employee is at work, performing in the correct job classification, and charging time to the appropriate cost objective.

As you can see, DCAA’s justification for its position is that GAGAS requires access to contractor employees, regardless of whether or not the contractor has agreed to provide that access by submitting a proposal or executing a contract. It’s possible that DCAA’s position may collide with a contractor’s (or a contractor’s attorney’s) position. What happens then?

According to the MRD—

If during the course of any audit, the auditor considers access to employee observations or interviews to be essential to completing their audit, and the contractor fails to permit the auditor to interview those employees or observe them during the performance of their current duties, the auditor should follow the guidance in CAM Section 1-504.5, Resolution of Contractor Denials. If those efforts prove unsuccessful, the field audit office should continue to elevate the matter as an access to records issue, in accordance with DCAA Instruction 7640.17

The reality of the situation is that it’s almost never going to reach that adversarial stage. Most (if not all) contractors will find some means of reaching a compromise with their Government auditors, so as to avoid the repercussions associated with a “denial of access.” On the other hand, should it reach an adversarial stage and lead to litigation, we suspect DCAA is going to be hard-pressed to justify its position to a Judge.

One proactive step that contractors should consider taking, so as to avoid triggering this landmine, is to make sure they have competent and experienced audit liaison staff to “interface” with DCAA auditors. Often, the audit liaison can negotiate the necessary compromise without things getting too ugly. Another step is to make sure the company has a clear position on access to personnel, and that it both communicates that position to its cognizant Government auditors and adheres to it consistently.

The goal being, of course, to have DCAA complete its audit quickly and smoothly, so that problems do not materialize downstream. The goal is, in a phrase, to avoid disputes and litigation. Therein lays the value added by the right audit liaison staff.