Page 2 - Avoiding Litigation When Auditing Government Contractors

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fact that the law imposes liability on a among other things, address whether the ment are clear and that management truly
defendant that—with no intent to contractor is in compliance with the laws comprehends the significance of its repre-
defraud—acts recklessly or with deliberate and regulations that apply to the federal sentations to the auditors. Management rep-
ignorance, aggressive plaintiffs’ attorneys funding, an auditor engaged for that pur- resentations can become routine, and their
have argued that accountants charged with pose must have a keen understanding of gravity can be lost. A government contrac-
auditing contractors bear responsibility for the legal framework within which the con- tor will likely benefit if it errs on the side
false claims. While such lawsuits are often tractor operates. of disclosure. When the management rep-
dismissed prior to trial, they have also been Second, the auditor should promote a resentation letter is viewed as just another
settled for millions of dollars, and even a relationship that helps management rec- form to be hurriedly signed and returned,
successful defense can be costly. ognize that transparency and communi- remediable problems may be missed, with
When a government contractor is in cation are in the contractor’s best interest. adverse consequences for the government
trouble, its auditor may share the burden, Major problems are less likely to arise contractor, and sometimes the auditor.
even if it is not named in a whistleblower when management creates a culture that Fourth, while auditors must be skeptical,
suit. It might be compelled, in civil or crim- does not merely prohibit retaliation against it does not follow that every allegation of
inal litigation, to produce documents from whistleblowers, but actually encourages misconduct will be substantiated. Although
the audit or provide witnesses and records employees who suspect fraud to come for- auditors must obviously issue negative
in connection with an investigation. ward. An effective corporate environment opinions when they are warranted, the con-
Responding to these demands can be costly is most likely to emerge when employees sequences for government contractors are
and risky, as lawyers and investigators may are frequently reminded of their obligation particularly grave. Thus, if a government
focus on the auditing firm after reviewing to report suspicious activity, when contractor perceives that it will be pre-
its documents or testimony. employees who fail to do so are disci- sumed guilty, there will be little transparen-
Overreactions to the risks faced by gov- plined, and when management follows a cy. The client’s relationship with the gov-
ernment contractors and their auditors can policy of swiftly disclosing reports of sus- ernment makes it particularly important for
also undermine the auditor-client relation- pected fraud to the board’s audit commit- the auditor to convey neutrality, demon-
ship and make matters worse. On the one tee and the company’s outside auditor. strate that it keeps an open mind, and main-
hand, CPAs should not allow a concern for Relatively few management teams seek tain that perspective.
client relations to undermine an audit. A to defraud government agencies, and most Fifth, when the relationship is shattered,
weakened audit is, among other things, not are interested in contract compliance. Many the auditor, government contractor, and
in the long-term interest of the client. On government contracting disputes, and even public will likely benefit if it does not
the other hand, if the government contractor False Claims Act allegations, arise from linger. As a crisis emerges, a government
misperceives the auditor as its “enemy,” misunderstandings by clerical staff or contractor’s knee-jerk reaction will likely
problems that might otherwise be avoided midlevel managers, intracorporate miscom- be to restore relationships of trust with gov-
or minimized for the contractor, the auditor, munications, or confusing instructions from ernment agencies, investors or funders,
and the public may become the subject of government agencies. Such matters can banks, and auditors. It is often better for
heated controversy and litigation. often be handled with minor consequence the auditing relationship to end quickly, as
if they are promptly identified (as may arise a long, dramatic breakup is more likely to
Steering around Trouble when government contracting employees generate disputes, fuel investigations, and
There are several steps that auditors and are encouraged to report problems), thor- undermine credibility on all sides.
their government contracting clients can oughly reviewed by the contractor’s outside
take to strike the right balance and avoid counsel (generally under the shield of attor- Exercise Caution
unwarranted litigation. First, an auditor ney-client privilege), remedied (through a However well intentioned and skilled
should work with management to develop refund, if warranted, and with strengthened a government contractor and its auditor
an understanding of the business and its internal controls), and reported to the audit may be, controversies and litigation may
government obligations. While this is obvi- committee, auditors, and the relevant gov- arise. CPA firms should prepare for that
ously always important, it becomes critical ernment agency. Instances of contractual eventuality by documenting concerns,
when an auditor is engaged by a govern- noncompliance can easily turn into corpo- preserving evidence, and ensuring that
ment contractor to conduct an audit under rate crises when whistleblowers are problems are elevated to the appropriate
the federal Single Audit Act, as implement- ignored, allegations are cursorily dismissed levels and raised with legal counsel
ed by the Office of Management and by biased internal reviewers, or problems promptly. q
Budget’s Uniform Administrative are concealed.
Requirements, Cost Principles, and Audit Third, auditors should seek to ensure that Claude M. Millman, JD, is a partner at
Requirements. Since such an audit must, their own communications with manage- Kostelanetz & Fink, LLP, New York, N.Y.

APRIL 2019 / THE CPA JOURNAL 69