In: Accounting
discuss the code's approach to the requirement that certain contracts must be in writting and the alternative methods of compliance
Threshold for Application of Mandatory Requirements
FAR 3.1001 states that the “requirements set forth in the clauses at 52.203-13, Contractor Code of Business Ethics and Conduct, and 52.203-14, Display of Hotline Poster(s), are mandatory if the contracts meet the conditions specified in the clause prescriptions at FAR 3.1004.” The thresholds for applicability of these two clauses differ slightly. Neither clause is required for acquisition of commercial items under FAR Part 12, nor for contracts that will be performed entirely outside the United States. The Code of Conduct clause is only to be used for contracts that are expected to exceed $5 million in value and that have a performance period of 120 days or more. The Fraud Hotline Poster clause is required when the agency has a fraud hotline poster or if the contract is funded with disaster assistance funds, and exceeds $5 million in value or such lesser thresholds as established by the agency.Hereinafter, contracts that meet these criteria will be referred to as “covered contracts.
Code of
Business Ethics and Conduct
All Contractors The mandatory requirements in FAR 52.203-13 are
divided into those that apply to all contractors and those that
only apply to large businesses. Any contractor that receives a
covered contract must comply with the requirements set forth in
52.203-13(b). Specifically, the contractor must, within 30 days
after contract award,
Have a written code of business ethics and conduct,
Provide a copy of the code to each employee engaged in the
performance of the contract, and
Promote compliance with its code of business ethics and
conduct.
Large Businesses
The requirements that are only mandatory for large businesses
are set forth in FAR 52.203-13(c). This provision specifically
states that the requirements do not apply “if the [c]ontractor has
represented itself as a small business concern pursuant to the
award of this contract.” It is important to note that a business
must be classified as a small business pursuant to the North
American Industry Classification System (NAICS) code applicable to
that specific solicitation in order to be exempt from these
requirements. Thus, an emerging business may win some contracts
where they are exempt from the requirements of this section and may
win others where the same requirements are mandatory.
Per FAR 52.230(c), the large business contractor shall establish,
within 90 days after contract award,
1. An ongoing business ethics and business conduct awareness program and
2. An Internal Control System.
i.The contractor’s internal control system shall:
A.Facilitate timely discovery of improper conduct in connection
with government contracts; and
B.Ensure corrective measures are promptly instituted and carried
out.
ii. For example, the contractor’s internal control system should
provide for:
A.Periodic reviews of company business practices, procedures,
policies, and internal controls for compliance with the
contractor’s code of business ethics and conduct and the special
requirements of government contracting.
B.An internal reporting mechanism, such as a
hotline, by which employees may report suspected instances of
improper conduct, and instructions that encourage employees to make
such reports;
C.Internal and/or external audits, as appropriate; and
D.Disciplinary action for improper conduct.
However, the contracting officer (CO) can allow a longer period
than 30 or 90 days. The regulations do not offer guidance as to
when it would be appropriate for the CO to grant more time, nor
does the clause limit the amount of additional time that can be
granted.
As was the case in the FAR 3.10 policy statement, the term “code of
business ethics and conduct” is not defined. Similarly, no guidance
is provided as to what constitutes an acceptable awareness or
compliance promotion program. Though the clause does set forth some
objectives of an internal control system, it does not prescribe any
specific approach. Conspicuous by its absence is any requirement to
disclose improper conduct.
Though some of the terminology is taken from the U.S. Sentencing
Guidelines, the lack of precise definitions is exacerbated because
the policy statement and clause requirements use different terms to
describe what appear to be similar, if not the same, functions. Per
the policy, all contractors of whatever ilk should have an ethics
and compliance training program. Additionally, any contractor,
large or small, that wins a covered contract must promote
compliance with its code of conduct. Large contractors that win a
covered contract must further establish an ongoing business ethics
and conduct awareness program. As these phrases are undefined, it
is impossible to determine, with any level of confidence, how a
training program differs from a promotional program or from an
awareness program.
However, as the FAR Council purposely uses different terminology
applicable under different circumstances, the phrases must be
describing different programs. All businesses that win a cov-
ered
con- tract must promote compliance while only large busi- nesses
must both promote compliance and establish an awareness program.
Therefore, it can be deduced that an awareness program is more
extensive than promotion activities. Despite the fact that training
is only mentioned in the non-mandatory policy section, it would be
foolhardy for any contractor to assume that an acceptable promotion
or awareness program could lack training.
Significantly, the government is not required to review and approve
the code, the training program, the promotional activities, or the
awareness program. Though not specified in the clause, the FAR
Council stated that the CO is only required to verify that internal
controls exist. However, it is not clear how this verification is
to be
accomplished. Of course, the larger defense contractors may be
subject to Defense Contract Audit Agency review of their internal
controls. The FAR Council states that the CO may request
information pertaining to the compliance program as part of routine
contracts administration, but is not required to do so. Compliance
with these requirements would most likely be reviewed in the event
an ethics violation has occurred.
Presumably, this laissez faire approach has been adopted, in part,
to minimize the paperwork and bureaucracy associated with the new
requirements. As the clause lacks terminology definitions,
acceptability guidance, or approval requirements, the contractor
has wide leeway to draft a code of conduct, promote compliance,
provide training, and establish an awareness program and internal
controls in any manner that seems appropriate under the
circumstances. In fact, if there are no ethical issues, the
government may never know whether a contractor complied with this
clause. On the other hand, in the event an ethics violation occurs,
the contractor may discover that in addition to their other
problems, the government may consider them to be noncompliant with
this clause and, thus, in default of their contract. The government
could reach this conclusion even if the contractor implemented a
compliance program that it believed was adequate. Such a finding
would not only subject the contractor to the possibility of a
default termination, but would also presumably result in harsher
treatment from the justice system, not the leniency typically
granted to companies with strong compliance programs. Therefore,
contractors should take the requirements of the clause seriously,
even though it does not require government approval.
There is another subtle difference between the mandatory
requirements applicable to all contractors and those applicable
only to large businesses. For all contractors, only employees
“engaged in the performance of the contract” need to be provided
with copies of the contractor’s code of business ethics and
conduct.
Mandatory Requirements:
Display of Hotline Posters The mandatory requirements set forth in FAR 52.203-14 are, thankfully, much simpler to understand. All contractors shall prominently display the pertinent agency or Department of Homeland Security (DHS) fraud hotline poster. The specific posters to be displayed will be identified by the CO in the clause. The posters are to be displayed at business segments performing work under the contract or at work sites. To the extent a contractor maintains a Web site as a method of providing information to employees, the contractor shall display an electronic version of the poster(s) on the Web site.13
There is a caveat, however. The contractor does not have to display the agency poster if the contractor has a business ethics and conduct program that includes a reporting mechanism such as a hotline poster. However, the DHS poster, if required, would still have to be displayed. As previously noted, there is no requirement for a reporting mechanism to allow for anonymous reporting. Additionally, this clause also must be included in any covered subcontracts. This ability to use your own hotline poster in lieu of the agency’s poster is important because it will almost always be in the contractor’s best interest to have employees report misconduct to the company rather than directly to the government.