Defense Contracting Integrity:

Opportunities Exist to Improve DOD's Oversight of Contractor Ethics Programs

GAO-09-591: Published: Sep 22, 2009. Publicly Released: Sep 22, 2009.

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Until recently, ethics programs and practices of defense contractors were self-policed. Given the significant sums spent to acquire goods and services, the Federal Acquisition Regulation (FAR) was amended twice starting in December 2007 to first mandate and later amplify contractor ethics program rules. Before FAR changes were finalized in December 2008, Congress required GAO to report in 2009 on the ethics programs of major defense contractors. This report (1) describes the extent that contractors had ethics programs before the finalization of the FAR rules that included practices consistent with standards now required by the FAR and (2) assesses the impact the new FAR rules have on Department of Defense (DOD) oversight of contractor ethics programs. To do this work, in September 2008 GAO surveyed all 57 contractors--those receiving more than $500 million in 2006 DOD contract awards--and interviewed DOD contractor oversight agency officials on the impact of the new FAR rules on oversight.

All 57 contractors responded to GAO's survey, and 55 reported having ethics programs that include many of the practices consistent with standards now required for compliance with the FAR. The ethics practices information GAO obtained was from before the FAR rules were finalized and thus was not designed to test contractor compliance with the rules that came later. In response to the new FAR rules, DOD has made two key oversight improvements by revising its contract audit guidance to cover the new ethics requirements and establishing the Contractor Disclosure Program to implement the mandatory disclosure requirement. However, opportunities exist to improve DOD's oversight in two other key areas. For example, in verifying implementation of contractor ethics programs during contract administration, the impact of the FAR rules on oversight at this point is negligible. GAO found that DOD had no plans to change contract administration offices' oversight because authority for oversight is not explicit nor is organizational responsibility clear. Also, with regard to contractors' hotline poster displays, the new FAR rules could reduce DOD's awareness of potential violations. The rules exempt contractors with ethics programs that include their own hotlines from the requirement to display DOD hotline posters. If contractor employees report violations to company hotlines instead of DOD hotlines, the employees do not receive the same protections from whistleblower laws. Whistleblower protections for employees unaware of the DOD hotline could be jeopardized.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD concurred and in response to our recommendation, issued a final rule on September 16, 2011, to amend the Defense Federal Acquisition Regulation Supplement to require contractors to display the DOD fraud hotline poster in common work areas. The final rule stated that the DOD Inspector General (IG) was revising the DOD IG fraud hotline poster to inform contractor employees of their federal whistleblower protections. However, according to a DOD official, the DOD IG determined that it would be better to create a separate poster for this purpose, and since issuance of the final rule, the DOD IG has created such a poster, which is available on the DOD IG web site, to inform contractor employees of their federal whistleblower protections.

    Recommendation: To improve DOD's oversight of defense contractor's ethics programs, and to avoid delaying or lessening DOD IG awareness of contract-related problems and diminishing of whistleblower protections for contractor employees, the Inspector General for the Department of Defense, in accordance with the FAR, should determine the contents of DOD IG's fraud hotline poster for display by defense contractors, including revising the poster to inform contractor employees of their federal whistleblower protections.

    Agency Affected: Department of Defense: Office of the Inspector General

  2. Status: Closed - Implemented

    Comments: DOD concurred and in response to our recommendation, issued a final rule on September 16, 2011, to amend the Defense Federal Acquisition Regulation Supplement to require contractors to display the DOD fraud hotline poster in common work areas. According to the final rule, the DOD Inspector General determined that DOD contractors, including contractors that have an ethics and compliance program that includes a reporting mechanism such as a hotline poster, need to display DOD fraud hotline posters in a common work area within business segments performing work under the contract and at contract work sites.

    Recommendation: To improve DOD's oversight of defense contractor's ethics programs, and to avoid delaying or lessening DOD IG awareness of contract-related problems and diminishing of whistleblower protections for contractor employees, the Inspector General for the Department of Defense, in accordance with the FAR, should determine the need for defense contractors' display of Department of Defense Inspector General's (DOD IG) fraud hotline poster, including directing a contractor to display the DOD IG hotline poster in common work areas for performance of DOD contracts.

    Agency Affected: Department of Defense: Office of the Inspector General

  3. Status: Closed - Implemented

    Comments: To implement this recommendation, in June 2010 the DOD's Defense Acquisition Regulation (DAR) Council opened Defense Federal Acquisition Regulation Supplement Case Number 2010-D021, Oversight of Contractor Ethics Programs. According to DAR Council staff in August 2010, since this recommendation also had governmentwide implications for contracting officials outside of DOD to verify implementation of contractor ethics programs as required under the Federal Acquisition Regulation (FAR) ethics rule, to implement this recommendation, DOD planned to ask the FAR Council to develop new FAR guidance. On May 31, 2011, in response to our recommendation, a new FAR rule was issued to modify FAR 42.302, Contract Administration Functions, to add to the list of contract administration functions, the function to ensure that contractors have implemented the mandatory contractor ethics program requirements of FAR 52.203-13.

    Recommendation: To improve DOD's oversight of defense contractor's ethics programs, and to strengthen oversight during contract administration, the Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology, & Logistics (AT&L) to determine what if any new Defense Federal Acquisition Regulation Supplement (DFARS) or other guidance is needed to clarify functional responsibilities of Defense Contract Management Agency (DCMA) and other contracting officials during contract administration for verifying the implementation of contractor ethics programs as required under the FAR ethics rules.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: DOD concurred and in response to our recommendation, issued a final rule on September 16, 2011, to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to require contractors to display the DOD fraud hotline poster in common work areas. According to the final rule, the DOD Inspector General (IG) determined that the FAR exemption for contractors with ethics programs that include reporting mechanisms such as a hotline poster from the requirement to display DOD hotline posters has the potential to make the DOD hotline program less effective by ultimately reducing contractor exposure to DOD IG fraud hotline posters and diminishing the means by which fraud, waste, and abuse can be reported under the protection of federal whistleblower laws. Therefore, DOD's prescription for use of a new DFARS clause provides no exception to the use of the DOD hotline poster for contractors that have implemented a business ethics and conduct awareness program, even those that include a reporting mechanism such as a hotline poster.

    Recommendation: To improve DOD's oversight of defense contractor's ethics programs, if the need for hotline poster display is determined by the Inspector General, the Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology, & Logistics (AT&L) to propose revisions to DFARS to include policy requiring a contract clause directing a contractor to display the DOD IG hotline poster in common work areas for performance of DOD contracts. DFARS policy should require a defense contractor's display of the DOD IG fraud hotline poster irrespective of whether that contractor has its own internal mechanism, such as a hotline for employees to report contract-related improprieties.

    Agency Affected: Department of Defense

 

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