Statement of Policy on Contracting With Firms That Have Unresolved Audit Issues

Summary:
The Federal Deposit Insurance Corporation (FDIC) has adopted a policy statement concerning contracting with firms that have unresolved audit issues with FDIC. The policy statement sets forth the procedures to be followed to provide proper notification to an affected contractor or outside counsel when an audit report is issued, and a management decision has been made on a respective finding, in order to afford the firm an opportunity to respond. When an FDIC audit identifies questioned costs and issues remain outstanding or unresolved as a result of the firm’s failure to cooperate with FDIC management in resolving issues associated with identified disallowed costs, by for example: (1) failing to respond timely to an FDIC request to produce documentation to support claimed costs; or (2) otherwise failing to adequately document claimed costs; or (3) by failing to remit the disallowed portion of questioned costs identified in such audit reports, application of the policy may result in a determination to refrain from soliciting new business from that firm.

Effective date:
This policy statement is effective March 20, 1997.

For further information contact:
Michael J. Rubino, Associate Director, Acquisition Services Branch, at (202) 942-0376, Peter A. Ziebert, Counsel, Contracting Law Unit, at (202) 736-0742, or William S. Jones, Counsel, Legal Operations Section, at (202) 736-3055.

Supplementary Information:
The text of the Policy Statement follows:

1. Background
The FDIC Office of the Inspector General (OIG) routinely audits contracts with firms providing services to FDIC. These audits frequently contain an analysis whereby certain contract costs are questioned, as well as a recommendation that FDIC management disallow and attempt to recover these costs. When the OIG transmits the audit report and findings to the appropriate FDIC program office, FDIC management then reviews such findings and recommendation. This evaluation results in the issuance of a final decision that may sustain all of the audit findings, or a portion thereof. When FDIC management determines that certain questioned costs should not be charged to the Corporation, such questioned costs that are sustained are then deemed to be “disallowed” costs within the meaning of the Inspector General Act.

Once a management decision has been made to disallow such costs, active resolution efforts are undertaken by FDIC management to recover funds paid without adequate documentation or otherwise inappropriately paid to the firm during the course of the engagement. In those circumstances where the FDIC requests that an audited firm remit disallowed amounts and the contractor fails to do so or fails to actively cooperate with FDIC management in its efforts to resolve the issues associated with identified disallowed costs, it is prudent business for FDIC to selectively refrain from soliciting future services from the firm.

2. General Policy
To provide procedures whereby the FDIC may elect to refrain from soliciting a firm for new business if:

(a) the results of an audit reflect potentially recoverable disallowed costs and audit issues remain outstanding or unresolved within the time period set forth in the notice letter sent by FDIC; and

(b) the firm failed or declined to cooperate with resolution efforts undertaken by FDIC management in response to the audit findings, including the failure to adequately support its contract costs or the failure to remit the disallowed portion of the questioned costs identified in such audit report.

3. Definitions
(a) Disallowed cost means a questioned cost that management, in a management decision, has sustained or agreed should not be charged to the government.

(b) Management decision means the evaluation by FDIC management of the findings and recommendations included in an audit report and the issuance of a final decision by management concerning it response to such findings and recommendations, including actions concluded to be necessary.

(c) Questioned cost means a cost that is questioned in an audit by the OIG or similar auditing agency because of:

(i) an alleged violation of a provision of a law, regulation, contract, grant, cooperative agreement, or other agreement or document governing the expenditure of funds;

(ii) a finding that, at the time of the audit, such cost is not supported by adequate documentation; or

(iii) a finding that the expenditure of funds for the intended purpose is unnecessary or unreasonable.

4. Procedures
Issued audit reports that identify questioned costs relating to contractual engagements are assigned to the Division of Administration, Acquisition Services Branch (ASB) staff, or the Outside Counsel Unit, Legal Division (OCU), for resolution. In implementing this policy statement, the following steps shall be taken:

(a) Management decision. Once a management decision is made on a respective finding, the matter is then assigned to ASB or OCU for resolution. A copy of the relevant audit report shall be transmitted to the firm under a cover letter which:

(i) identifies the ASB or OCU which is responsible for resolving the audit issues;

(ii) identifies the ASB or OCU employee primarily responsible for resolution and to whom all communications from the firm should be sent;

(iii) requests that the firm respond to the findings contained in the report within ten (10) business days of receipt of the letter, or such other time as specified in the letter. Such responses should include supporting documentation where appropriate.

(b) If the firm fails to respond to this request, or fails to remit the disallowed portion of the questioned costs contained in the audit report, or otherwise fails to adequately respond to the issues raised in the report, the following procedures shall apply:

(i) with respect to audits of firms other than outside counsel, the ASB employee identified in section 4(a)(ii) shall send a letter to the firm advising the firm of its failure to cooperate, and which advises the firm that unless it remits the requested repayment or makes other arrangements satisfactory to the Associate Director who is responsible for resolution of this audit (whose name shall be provided to the firm) within ten business days of receipt of this letter, the Director, Division of Administration may, effective as of that date, make a determination that the FDIC refrain from soliciting any future services from this firm until such time as all issues identified in the subject audit report are resolved to the FDIC’s satisfaction, and direct that notice to be sent to the firm of this action.

(ii) with respect to audits of outside counsel, the Legal Division employee identified in section 4(a)(ii) shall send a letter to the outside counsel which advises such outside counsel that its failure to cooperate constitutes a conflict of interest with the FDIC, and which advises the outside counsel that unless it remits the requested repayment or makes other arrangements satisfactory to the Assistant General Counsel who is responsible for resolution of this audit (whose name shall be provided to the contractor) within ten business days of receipt of this letter, the matter will be referred to the Outside Counsel Conflicts Committee for appropriate action, which may include a determination that the FDIC refrain from soliciting any future services from such outside counsel and/or terminate FDIC’s existing engagements, until such time as all issues identified in the subject audit report are resolved to the FDIC’s satisfaction.