Government Contractors Update - Fraud in Aerospace and Defence Contractors

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.