• Glass Houses and Stones - Does Anyone in Government Ever Try to Connect the Dots?
  • February 2, 2009 | Authors: John W. Chierichella; Bruce Shirk
  • Law Firm: Sheppard, Mullin, Richter & Hampton LLP - Washington Office
  • In its 2008 report on the Government’s financial consolidated statements released on December 15, the Government Accountability Office criticized “serious financial management problems at the Department of Defense, the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and the federal government’s ineffective process for preparing the consolidated financial statements.”  GAO further reported that the Government did not comply “with significant laws and regulations.”  Ironically, this report issued just days after the Government forced all federal contractors to implement their own internal control systems under penalty of suspension or debarment.

    Since passage of the Federal Managers Financial Integrity Act (“FMFIA”) in 1982, each executive agency has been required to report on the effectiveness of its internal controls.  In 1986, OMB Circular A-123 implemented FMFIA, and afforded agencies practical guidance for ensuring effective internal control systems.  Despite the resources available to agencies to implement these statutory mandates, GAO reports that “[f]or the 12th year in a row, [it] was prevented from expressing an opinion on the consolidated financial statements of the U.S. government . . . because of numerous material internal control weaknesses and other limitations.”  The worst offenders were the departments of Defense, Homeland Security, and State, as well as NASA, which once again all failed to obtain clean audits.  Their failure means that, for fiscal year 2008, approximately $847 billion, or 43 percent of the Government’s reported total assets, and approximately $833 billion, or 23 percent of the Government’s reported net cost, remain unaudited.  Twelve years in a row – a streak of futility (and, may we add, illegality) unmatched by any other institution other than, perhaps, the Detroit Lions.

    The irony here is painful, on many levels.  The lack of such controls on the part of most Government contractors would have the Department of Justice bemoaning the “reckless disregard” for truth inherent in such inadequate financial system, and relying on that reckless disregard to establish the “knowing” element of a False Claims Act violation.  At a minimum, the lack of effective controls would run afoul of the new “Contractor Business Ethics Compliance Program and Disclosure Requirements,” which became effective on December 12, 2008, 73 Fed. Reg. 67064, which mandates, inter alia, that covered contractors:

    • Assign responsibility for internal controls to a person “at a sufficiently high level” with “adequate resources” to implement the system
    • Implement periodic reviews to detect wrongdoing
    • Establish an internal reporting mechanism and
    • Discipline both offenders and those who fail to take “reasonable steps to prevent or detect improper conduct”

    Congress obviously believes in the merit of these principles.  Is it just possible that, after twelve consecutive years of failing to comply with the law, someone – or rather, a number of “someones” -- in the Federal Government ought to be held accountable?  Before whipping up a frenzy to pass the inevitable next round of punitive legislation against the contractors who are indispensable to our national defense, Congress might want to at least consider the admonition found in Luke, 4:23 – “Physician, heal thyself.”