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Dan Haynes Government Contract Accounting Update

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Government Contractors Update - Fraud in Aerospace and Defence Contractors

Government Contractors Update - Fraud in Aerospace and Defence Contractors

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  • 1. Government C G Contract A Accounting Update Presented b D H P t d by: Dan Haynes, CPA CFE CFF CPA, CFE,
  • 2. 1963 Founded in Harrisonburg as Phibbs, • Burkeholder, Geisert & Huffman 1984 Opened Fredericksburg office • 1999 Acquired Warrenton office • 2001 Acquired Harrisonburg office of McGladrey & • Pullen, joined McGladrey Network, Changed name to PBGH, LLP 2007 Acquired Fairfax, VA office • 2008 100 employees •
  • 3. Federal Acquisition Regulation (FAR) – The primary regulation used by federal agencies in the acquisition of supplies and services. q pp FAR Supplements DFARS – Defense FAR Supplement   GSAM – General Services Administration Manual  NASA FAR Supplement Dept. of Energy Acquisition Regulation 
  • 4. The FAR contains 8 Subchapters organized into 53 parts Subchapter FAR Part No. Title General A 1-4 Competition and Acquisition Pl C titi dA i iti Planning i B 5-12 5 12 Contracting methods and Contract Types C 13-18 Socioeconomic Programs D 19-26 General Contracting Requirements E 27-33 Special Contracting Requirements F 34-41 Contract Management G 42-51 42 51 Clauses and Forms H 52 Forms 53
  • 5. FAR Part 30 – Cost Accounting AP C A  Standards(CAS) Administration. Applicability: A li bilit   Trigger – single CAS covered contract of at least $7.5M  CAS coverage is then applied to negotiated awards over $650k. Exempt from CAS are:  Awards to small business  Sealed bid awards  Awards to be executed and performed outside the US  Full coverage over $50M modified coverage below $50M,
  • 6. Cost Accounting Standards (CAS) Applicability CAS Exemptions – 48 CFR 9903.201-1(b) Start Contract/subcontract with a small business Does contract/subcontract Negotiated Contract/subcontract Government meet one of the listed less than $7.5M ,provided contract/subcontract CAS exemptions? the contractor is not for $650K or less Yes currently p y performing any gy CAS covered Contract or subcontract contracts/subcontracts of Sealed bid contract is exempt from CAS $7.5M or more No N Price set by law or regulation T&M and labor hr Is current award $7.5M+ contracts for FFP Contracts awarded on the acquisition basis of adequate price of commercial competition w/out Yes items submission of cost or Award is CAS Covered pricing data Is the current award $50M or more?
  • 7. SBA Table of Small Business size standards  For Federal government procurements, you dl  must meet the small business size standard that the procuring agency’s contracting officer p gg y g specifies for the contract. Based on revenue and/or # of employees  Offices of CPA’s - $8 5M Consulting - $7 0M Offi f CPA’ $8.5M, C li $7.0M  American Small Business League – there are  more than 26M small businesses in the US, 98% have fewer than 100 employees yet basic standard for many industries is 500 employees
  • 8. FAR Part 31 – Contract Cost Principles and  Procedures . Selected unallowable costs from FAR P d Sl td ll bl tf 31.205: Airfare in excess Exec comp in Memberships in of customary excess of social standard established organizations ceilings Alcoholic Al h li Federal income F d li Patent P t t costs not t t beverages taxes required by contract Bad debts Fines and Lobbying costs penalties Contributions Goodwill Organizational and donations costs Entertainment Interest on Certain idle borrowings facilities costs
  • 9. Gains and Losses on the Disposition of Assets  (Lockheed Martin Corp., ASBCA No. 54169, Oct 11, Corp No 54169 11 2007) Armed Services Board of Contract Appeals  FAR 31.205-16 and CAS 409.50  Sales proceeds – NBV vs. Contracting parties may account for  g gains and losses arising from mass or extraordinary g y dispositions in a manner equitable to all parties In a real estate transaction, the intent of the buyer was  considered in apportioning proceeds between depreciable and non-depreciable assets Economic substance of the transactions should be effectuated in  accounting for them.
  • 10. Date SEC Action End of 2009 Limited group of large companies given the option to use IFRS. SEC estimates 110 U.S. companies will be able to take advantage of the offer offer. 2011 SEC evaluates progress of achieving proposed milestone, and makes a decision about whether to mandate adoption of IFRS. p 2014 Year the first wave of companies will be mandated to use IFRS if adopted in 2011. 2016 Year that all public companies, big and small, will be p p ,g , mandated to report financials using IFRS if adopted in 2011 Source The Securities Exchange Commission
  • 11. The FAR contains 8 Subchapters organized into 53 parts Subchapter FAR Part No. Title General A 1-4 Competition and Acquisition Pl C titi dA i iti Planning i B 5-12 5 12 Contracting methods and Contract Types C 13-18 Socioeconomic Programs D 19-26 General Contracting Requirements E 27-33 Special Contracting Requirements F 34-41 Contract Management G 42-51 42 51 Clauses and Forms H 52 Forms 53
  • 12. •FAR Part 3 – Improper Business Practices and Personal Conflicts of Interest •3.10 Contractor Code of Business Ethics and Conduct •3.1002 Policy – applies as guidance to all Contractors •Government contractors must conduct themselves with the highest degree of integrity and honesty. •Contractors should have a written code of business ethics and conduct •Contractors should have an employee business ethics and Contractors compliance training program and internal control system that- •Are suitable to the Company’s size and operations •Facilitate timely discovery of improper conduct F ili i l di fi d •Ensure corrective measures are carried out
  • 13. •FAR 52.203-13 and FAR 52.203-14 Compliance Requirements •Contracts subject to the new rules •Contracts issued on or after December 24, 2007 •Contracts expected to exceed $5 million (including options) •Contract period of performance expected to exceed 120 days Contract •Applies to subcontracts, issued under covered prime contracts •Contracts excluded from new rules: C l d df l •Contracts for commercial items procured under FAR Part 12 (acquisition of commercial items) •Contracts performed entirely outside the U.S. •Contracts issued to small business exempt from some requirements
  • 14. •FAR 52.203-13 and FAR 52.203-14 Compliance Requirements •Requires formalized written code of business ethics and conduct •Employees who perform on covered contracts must be provided with a copy of the policy •An ongoing awareness program promoting business ethics and proper conduct •An internal control system to facilitate timely identification and notification of improper conduct •Hotline posters •Defense industry initiative organization suggests maintaining a Defense current comprehensive risk assessment and conducting periodic compliance program effectiveness audits.
  • 15. •Effective December 24, 2007(prospective), Contracts $5M + 120 days •W/in 30 days after contract award contractor shall •Have a written code of business ethics and conduct •Must provide a copy of the code to each employee engaged in performance of the contract & promote compliance. •W/in 90 days of contract award (N/A for small business) •Establish an ongoing business ethics and conduct awareness program •An internal control system that- An that •Facilitates the timely discovery of improper conduct •Ensures corrective measures are promptly instituted and carried out •Should provide f periodic reviews, internal reporting Sh ld id for, i di i i l i mechanism (hotline), internal/external audits, disciplinary action. •Contractor shall include the substance of this clause in subcontracts Contractor >$5M & performance period of more than 120 days unless: •Contract is for acquisition of a commercial item •Contract performed entirely outside the U.S.
  • 16. , •Effective December 24, 2007 •Display of hotline posters •During contract performance prominently display in common work areas within business segments performing work under this contract and at contract work sites fraud hotline posters •Any Dept Homeland Security or any agency fraud hotline poster identified by the contracting officer •If website is used to provide employees information, then y must have electronic version of poster on website •Subcontracts. The contractor shall include the substance of this clause in subcontracts that exceed $5,000,000, except when the subcontract- •Is for the acquisition of a commercial item •Is performed entirely outside the United States
  • 17. •Anticipated that suspension and debarment will be among the p p p g potential consequences of a failure to comply with these new rules •Debarment: Action taken to exclude a contractor from government contracting and gov’t approved subcontracting for a specified gov t period (FAR 9.4) •Suspension: Action taken to disqualify a contractor temporarily y y from government contracting and gov’t approved subcontracting (FAR 9.4). •Contractors record of integrity and business ethics may now become part of the contractor’s performance record that is evaluated as part of the contract award process
  • 18. •Proposed additional rule p p , published November 14, 2007 •In addition to previous rules •Mandatory disclosure of suspected violations of criminal laws committed during award or performance of contract or subcontract •Minimum standards for internal control systems •Cause for debarment or suspension for knowing failure to disclose overpayments or violation of federal criminal law
  • 19. •2008 Aerospace & Defense Industry Supplement from PwC •Based on responses from •123 A&D companies globally •77 North American respondents 77 •Economic Crime is a Pervasive Threat – No Industry is Immune •33% of global A&D companies reported being victim of an economic crime during the past t i i d i th t two years vs. 43% of all other f ll th global industries •A&D Industry economic crime experience y p •Theft of assets & accounting fraud – as often as other industries •Theft of intellectual property – more than other industries •Bribery & corruption – less often than other industries
  • 20. Percentage of Companies Reporting Different types of economic crime 43% Any type of economic crime 33% 40% 30% Asset misappropriation 23% 28% 15% IP Infringement 16% 19% 13% Corruption & bribery 9% 5% 12% Accounting fraud 8% 7% 7% Other crimes 7% 2% % 4% Money laundering 1% 1% Global (All industries) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% A&D Worldwide A&D North America Source: 2007 PwC Global Economic Crime Survey
  • 21. How instances of serious economic crime were initially detected 36% Corporate controls 24% 37% 42% Corporate culture (Hotlines, tips) 38% 28% 22% Other (Accident, law enforcement) 38% 35% 0% 10% 20% 30% 40% 50% Global (All industries) A&D Worldwide A&D North America Source: 2007 PwC Global Economic Crime Survey
  • 22. Economic Crimes that are unique to th A&D Industry E i Ci th t i t the Id t Antitrust violations Agreements or informal arrangements among independent competitors which are intended to limit competition. Also know as collusive bidding, price fixing or bid rigging. Defective Pricing g Knowing failure to submit current, accurate and g complete cost of pricing data prior to contract negotiations. The submission of defective data entitles the Government to a price reduction under a contract clause whenever certified or pricing data is required. Labor/Cost Mischarging Knowingly charging unallowable costs, or costs for materials, goods or labor to a government contract, which did not incur the costs. Product Substitution Attempts to deliver nonconforming goods or services without informing the customer of the g deficiencies or violation of the contract or regulatory requirements. Source: 2007 PwC Global Economic Crime Survey
  • 23. Monetary Recoveries (in $ thousands) Criminal $59,484 Civil $88,539 Administrative $38,447 Seizures $6 $- $20,000 $40,000 $60,000 $80,000 $100,000 Source: 2007 PwC Global Economic Crime Survey
  • 24. Company and Individual Indictments and Convictions Indictments 230 Convictions 165 - 50.0 100.0 150.0 200.0 250.0 Source: 2007 PwC Global Economic Crime Survey
  • 25. Suspensions and Debarments Suspended-Company 20 Suspended-People 31 Debar-Company 93 Debar-People 116 - 20 40 60 80 100 120 140 Source: 2007 PwC Global Economic Crime Survey
  • 26. Average Direct Costs Associated With Economic Crime ($ in thousands) $2,421 Any type of economic crime $1,713 $1 713 $871 $1,277 Asset misappropriation $396 $450 $1,897 IP Infringement $1,193 $900 $881 Corruption & bribery $1,998 $450 $1,474 Accounting fraud $1,930 $1 930 $1,275 $1,125 Other crimes $162 $ $0 $254 Money laundering $50 $50 Global (All industries) $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 A&D Worldwide A&D North America Source: 2007 PwC Global Economic Crime Survey
  • 27. Average Case Management Costs of Economic Crime ($ in thousands) $550 Any type of economic crime $1,725 $1 725 $1,355 $301 Asset misappropriation $1,577 $1,459 $339 IP Infringement $471 $513 $262 Corruption & bribery $712 $3,750 $303 Accounting fraud $2,959 $2 959 $126 $332 Other crimes $54 $ $25 $478 Money laundering $- $- Global (All industries) $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 A&D Worldwide A&D North America Source: 2007 PwC Global Economic Crime Survey
  • 28. Total Avg Direct and Indirect Case Mgt Costs ($ in thousands) $2,971 Any type of economic crime $3,438 $3 438 $2,226 $1,578 Asset misappropriation $1,973 $1,909 $2,236 IP Infringement $1,664 $1,413 $1,143 Corruption & bribery $2,710 $4,200 $1,777 Accounting fraud $4,889 $4 889 $1,401 $1,457 Other crimes $216 $ $25 $732 Money laundering $50 $50 Global (All industries) $- $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 A&D Worldwide A&D North America Source: 2007 PwC Global Economic Crime Survey
  • 29. Companies’ Perception of Risk in the Next Two Years 11% Any type of economic crime 9% 7% 13% Asset misappropriation pp p 10% 9% 15% IP Infringement 18% 19% 10% Corruption & bribery 4% 3% 6% Accounting fraud 6% 1% 7% Money laundering 0% 0% Global (All industries) 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% A&D Worldwide A&D North America Source: 2007 PwC Global Economic Crime Survey
  • 30. Percentage of Companies Reporting Asset Misappropriation 30% Asset misappropriation pp p 23% 28% 0% 5% 10% 15% 20% 25% 30% 35% Global (All industries) A&D Worldwide A&D North America
  • 31. Percentage of Companies Reporting Intellectual Property Infringement 15% IP Infringement 16% 19% 0% 5% 10% 15% 20% Global (All industries) A&D Worldwide A&D North America Source: 2007 PwC Global Economic Crime Survey
  • 32. Percentage of Companies Reporting Corruption and Bribery 13% Corruption and B ib C ti d Bribery 9% 5% 0% 2% 4% 6% 8% 10% 12% 14% Global (All industries) A&D Worldwide A&D North America Source: 2007 PwC Global Economic Crime Survey
  • 33. Percentage of Companies Reporting Accounting Fraud and Money Laundering 12% Accounting Fraud 8% 7% 4% Money Laundering 1% 1% % 0% 2% 4% 6% 8% 10% 12% 14% Global (All industries) A&D Worldwide A&D North America Source: 2007 PwC Global Economic Crime Survey
  • 34. Profile of a Fraudster Global A&D A&D Characteristic (all industries) Worldwide North America Male 86% 58% 69% Female 15% 42% 31% Company employee 50% 54% 67% College educated 50% 81% 70% Senior or mid mgt 41% 32% 30% 41 to 50 years old 28% 42% 63% Avg yrs in position 5.3 8.8 5 Avg. years w/ Co. 7.3 10.5 7.9 Source: 2007 PwC Global Economic Crime Survey
  • 35. •Properly designed and implemented controls can detect criminal activity sooner and reduce both direct losses and case management costs. •A Comprehensive risk management and fraud mitigation program A should be implemented. The risk assessment should be performed or reviewed by an independent group, such as internal audit or external organizations that are not involved in the day to day operations of the organization. i ti •By understanding the crimes that affect the A&D industry and what controls are effective in deterring and detecting crimes, A&D companies g g , p are in a better position to minimize their losses and stay one step ahead of the fraud perpetrators. Source: 2007 PwC Global Economic Crime Survey
  • 36. Contact Dan Haynes for additional information: (540) 371-3566 Or dhaynes@pbgh.com www.pbgh.com
  • 37. Defense Contract Audit Agency:  www.dcaa.mil/ ICE Model (released May 2008) ( y ) Information for Contractors  Federal Acquisition Regulation (FAR) : www.arnet.gov/far/
  • 38. This presentation is intended only for the person(s) to whom have registered and contains confidential and general information. Unless stated to the contrary, any opinions or comments are personal to the writer and do not represent the official view of the company. Please do not copy it or use it for any purpose, or disclose its contents to any other person. Thank you for your cooperation.

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