Magazine article National Defense

Cutting Costs Does Not Require Cutting Compliance

Magazine article National Defense

Cutting Costs Does Not Require Cutting Compliance

Article excerpt

Defense contractors face tremendous cost pressures as government customers face huge budget cuts. While defense budget reductions are inevitable, the extent and nature of proposed cuts varies by hundreds of millions of dollars and impacts all budget areas, including procurement, health care costs and retirement.

This cost-cutting, revenue-seeking environment increases the importance of contractor compliance. Lest anyone think the federal government will tolerate less contractor compliance, the current environment indicates that it is much more likely that the government will pursue allegations of non-compliance, fraud, waste and abuse with even greater vigor.

The Congressional Commission on Wartime Contracting recently concluded that more than $31 billion in taxpayer dollars had been lost to contract waste and fraud under reconstruction, logistics and security contracts in Iraq and Afghanistan. Reforms such as mandatory debarment are being proposed as a result.

A similar environment existed during the last defense spending peak, when the Justice Department's Operation Ill Wind uncovered pervasive corruption by U.S. government officials and contractors. At that time, a perception of corruption surrounded the defense industry and compliance costs increased for all.

Unsurprisingly, federal agencies have placed renewed emphasis on reporting mechanisms such as the Securities and Exchange Commission's Dodd-Frank program, and the IRS' Whistleblower Reward Program, which have yielded more than $7.3 billion in False Claims Act settlements since January 2009.

At the heart of these efforts is the common perception that the government's efforts to detect and prevent fraud, waste and abuse have failed to keep pace with the amount spent on federal contracting.

Contracting fraud is in the spotlight. Contractors that complement competitive competence with the highest standards of compliance will enjoy a critical advantage going forward. Those that sacrifice compliance inevitably will pay a steep price.

Balancing cost and compliance needs means satisfying certain "minimums" set forth by law, regulation and good business sense. The legal standard for compliance is strict, but contractors are permitted some discretion in how they implement it. The Federal Acquisition Regulation (FAR) requires each contractor to implement a business ethics awareness and compliance program and internal control system "suitable to the size of the company and extent of its involvement in government contracting." Though the FAR describes the condition of compliance with specificity, contractors determine the optimal allocation of resources.

Given limited manpower and strained finances, contractors should allocate compliance resources only after folly analyzing their own particular areas of risk. For example, the discovery and disclosure of questionable conduct--a central element of any compliance program--will be more difficult for contractors facing fiscal pressures. When jobs and business opportunities are scarce, the risk of misconduct may increase because some employees may operate out of fear rather than virtue. Responding to this requires vigilance by company leadership. Mandatory disclosures are far less painful and costly than undetected corporate wrongdoing, which can literally destroy a contractor. …

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