Recently we posted an article about a defense contractor who “self-disclosed” cost accounting problems that led to overbilling the Department of Defense.  We noted that “Because the company had voluntarily reported its misconduct and cooperated with the DOJ in the investigation, its settlement was limited to damages actually incurred by the government. Had the circumstances been different, up to treble damages might have been sought.”

During 2007 and 2008, the FAR was revised to enhance requirements related to contractor ethics and business conduct policies.  Among the various changes was the addition of a new subpart at § 3.10 (Contractor Code of Ethics and Business Conduct) and significant revisions to the contract clause 52.203-13 (“Contractor Code of Ethics and Business Conduct”).  Our recent article in the May 2010 edition of West’s Government Contract Costs, Accounting & Pricing Report (entitled “Government Audits of Contractor Ethics and Business Conduct Compliance Programs”) discussed those changes and issues related to DCAA audits of the contractor policies.  Importantly, the FAR revisions eliminated the former “voluntary disclosure program” and implemented a new “mandatory disclosure program” (which DOD simply calls “contractor disclosure”).  Contractors who fail to timely disclose wrongdoing face suspension or debarment from federal contracting.

To be clear:  disclosure of certain acts of wrongdoing related to a contractor’s government contract(s) is no longer a matter within management’s discretion; it is now a contractual requirement.  Although Bell Helicopter Textron apparently benefited from the voluntary disclosure program, it is doubtful that another contractor in a similar situation would reap similar benefits today.

Moreover, it is questionable whether voluntary disclosure was always the wisest course of action.  It is poorly remembered today, but Arthur Andersen originally self-disclosed its document shredding to the Department of Justice during the Enron litigation.  That gesture of goodwill was insufficient to overcome the audit firm’s prior acts of wrongdoing, and the firm was eventually convicted of a crime related to obstruction of justice, and ceased to exist as a viable entity.  That the conviction was eventually overturned by the U.S. Supreme Court was a hollow victory to the roughly 26,000 U.S. employees who lost their jobs as a result of the original conviction.  One is left to wonder what Andersen gained—if anything—from its self-disclosure to the DOJ.

From that question, one might inquire whether having a robust compliance program is truly a value-added proposition.  Sure, a contractor must comply with the letter of the FAR requirements, but is there any value to going beyond the minimum necessary program requirements, and creating a truly robust compliance program that is designed to detect employee wrongdoing—one that deters wrongdoing by its very existence?  Do the U.S. Sentencing Guidelines provide contractors with a tangible reward for having effective compliance programs?  (Readers may recall that we discussed recent changes to the USSG in this article.)

That question was on the minds of attendees at the 2010 Compliance Week Conference in Washington, D.C., as they discussed the role and value of compliance programs.  Acting Deputy Attorney General Gary Grindler spoke to the attendees on May 25, 2010.  Among other topics, ADAG Grindler said—

Now, how can you best advise your clients in light of the Department’s enforcement priorities and given the climate we are in where there is so much distrust of corporate America.

First, you can make sure that your clients have robust, effective compliance programs and internal controls. A company’s compliance program continues to be one of the most important factors that we consider under the Principles of Federal Prosecution of Business Organizations. … Compliance programs must not exist only on paper.

In this context, I want to point out that the United States Sentencing Commission recently amended the Sentencing Guidelines on the issue of compliance programs. Specifically, the Commission clarified the importance of assessing and modifying compliance programs after you discover criminal conduct at your company. The current Guidelines provide that, following the discovery of criminal conduct, a company should, among other things, make ‘any necessary modifications to the organization’s compliance and ethics program.’

In addition, the latest Guideline amendments clarify the circumstances under which an effective compliance and ethics program can entitle an organization to a 3-level reduction in its culpability score. Specifically, the amendment allows an organization to receive the decrease if the organization meets four criteria: (1) the individual or individuals with operational responsibility for the compliance and ethics program have direct reporting obligations to the organization’s governing authority or appropriate subgroup thereof; (2) the compliance and ethics program detected the offense before discovery outside the organization or before such discovery was reasonably likely; (3) the organization promptly reported the offense to the appropriate governmental authorities; and (4) no individual with operational responsibility for the compliance and ethics program participated in, condoned, or was willfully ignorant of the offense. These amendments reinforce the point that having a robust compliance program is critical not only to preventing misconduct in the first place, but also how your organization will be treated in the event criminal conduct does take place.

According to the article (link above), “some in the compliance industry have expressed doubts about the importance of a pre-existing compliance program, asserting that prosecutors will simply wrangle as many concessions out of a company facing a criminal action as they can, regardless of the state of its compliance efforts… Some of the uncertainty seems to stem from the lack of concrete examples in which compliance systems netted a better outcome for a defendant. …”

ADAG Grindler spoke directly to the skeptics when he said—

‘I want to emphasize… that having an effective compliance program will be taken under consideration when you have to talk to the government about a criminal violation.  I’ve reviewed … a number of negotiated resolutions where effective and solid compliance programs did make a difference.  Now I have heard that we don’t talk about the impact of compliance programs on our decision to absolve a matter, and at least when I was in the Fraud Section, I emphasized the importance of doing that. What we can’t do is get into all the details about it because … each case is different.’

Our position at Apogee Consulting, Inc. is that robust, effective compliance programs make good business sense.  The cost of a compliance failure—in terms of fines and penalties, litigation expense, opportunity cost of internal resources, loss of market capitalization, and even brand devaluation—clearly indicates a business case where the potential damages far outweigh the cost of a compliance detection and prevention program.  Regardless of whether you believe that the Department of Justice really will take a company’s compliance program into account when considering culpability, having that compliance program in place is simply good business.

Oops! 

We’re quite sure that Massachusetts-based EMC Corporation uttered that word (or worse) when the Department of Justice intervened in a whistleblower “qui tam” suit alleging, among other things, violations of the False Claims Act.  Here’s the DOJ announcement, reporting that EMC agreed to pay $87.5 million to settle various allegations stemming from its GSA Schedule.

EMC Corporation, a Fortune 500 company traded on the NYSE, is a multi-billion dollar global provider of IT services.  The company describes itself thusly:

EMC’s Information Infrastructure business provides a foundation for customers to manage and secure their vast and ever-increasing quantities of information, automate their data center operations, reduce power and cooling costs, and leverage critical information for business agility and competitive advantage. EMC’s Information Infrastructure business comprises three segments – Information Storage, Content Management and Archiving and RSA Information Security.

EMC’s VMware Virtual Infrastructure business, which is represented by EMC’s majority equity stake in VMware, Inc. (“VMware”), is the leading provider of virtual infrastructure software solutions from the desktop to the data center and to the cloud. VMware’s virtual infrastructure software solutions run on industry-standard desktop computers and servers and support a wide range of operating system and application environments, as well as networking and storage infrastructures.

We found an EMC brochure discussing its Federal government services.

Members of this website have access to our knowledge resources.  Among those resources one might find a couple of discussion papers covering risk areas associated with GSA Schedules.  Commonly thought to be “low risk” contracts with the Federal government, the reality is that GSA Schedule contracts are fraught with risk for unwary contractors.  Contractors whose only government contract is their GSA Schedule contract, or contractors who consider themselves to be “commercial companies” are at the most risk—because such companies typically fail to invest in control systems that would help to reduce the risk of a contract compliance failure. 

One of our discussion papers has this to say:

• Risk Area: Pre-award disclosure of commercial sales practices and discounts
• Contractor provides data on commercial sales practices and discounting policies.
• Commercial Sales Practices (CSP) Format needs to be current, accurate and complete at submission.  If there is any doubt about category of customers, discounts or concessions, err on the side of disclosure.
• Risk Area: Identification of Price Reduction Clause “Basis of Award” customers and pricing relationship
• Contractor negotiates “Basis of Award” (BOA) category of customers and BOA/GSA pricing relationship.
• Designate a category of customers that is realistic and manageable, not too broad such as all commercial customers or all national accounts.  Make sure the category of customers price is accurate.
• Ensure that underlying terms and conditions of the most favored customer pricing are clearly disclosed and understood.
• Be clear on pricing relationship between MAS contract price and BOA category of customers price (i.e., proportional vs. absolute relationship).

The DOJ had this to say about its allegations regarding EMC’s Schedule contract:

… by misrepresenting its commercial pricing practices, EMC fraudulently induced the General Services Administration (GSA) to enter into a contract with prices that were higher than they would have been had the information technology company not made false misrepresentations. Specifically, the United States alleged that the … company represented during contract negotiations that, for each government order under the contract, EMC would conduct a price comparison to ensure that the government received the lowest price provided to any of the company’s commercial customers making a comparable purchase. According to the government’s complaint, EMC knew that it was not capable of conducting such a comparison, and so EMC’s representations during the negotiations – as well as its subsequent representations to GSA that it was conducting the comparisons – were false or fraudulent.

Oops—EMC should have read our discussion paper!  But that’s not all the DOJ has to say about this particular contractor—

The United States also alleged that EMC engaged in an illegal kickback scheme designed to influence the government to purchase the company’s products. EMC maintained agreements whereby it paid consulting companies fees each time the companies recommended that a government agency purchase an EMC product. These kickback allegations are part of a larger investigation of government technology vendors that has resulted in settlements to date with three other companies, with several other investigations and actions still pending. The kickback investigation was initiated by a lawsuit filed under the qui tam, or whistleblower, provisions of the False Claims Act, which allow private citizens to sue for fraud on behalf of the United States and share in any recovery.

EMC’s latest quarterly 10Q report (May 7, 2010) had this to say in a footnote:

United States ex rel. Rille and Roberts v. EMC Corporation. Effective as of May 4, 2010, EMC entered into a settlement agreement (the “Agreement”) with the United States of America, acting through the Civil Division of the United States Department of Justice (the “DoJ”). The Agreement relates to a previously disclosed “qui tam” action that followed an investigation conducted by the DoJ regarding (i) EMC’s fee arrangements with systems integrators and other partners in federal government transactions, and (ii) EMC’s compliance with the terms and conditions of certain agreements pursuant to which we sold products and services to the federal government, primarily a schedule agreement we entered into with the General Services Administration in November 1999. Pursuant to the Agreement, EMC will pay the United States $87.5 million. In consideration of this payment, the United States has agreed to release EMC with respect to the matters investigated and the claims alleged by the DoJ in the civil action. As set forth in the Agreement, EMC expressly denies any liability or wrongdoing in connection with such matters and claims, and the settlement represents a compromise to avoid the costs, distraction, and uncertainty of continued litigation. As previously disclosed, EMC recorded an $87.5 million accrual for this contingency as of December 31, 2009.

Well there you go.  Readers might recall our recent article on kick-backs.  We told you they are a “no-no”—especially in the government contracting environment.

Saying “we told you so” somehow seems to lack the air of professionalism for which we generally try to achieve.  But we will say this:

Sorry, EMC Corporation, but you should have checked this site before you decided to get into the GSA Schedule contracting business.