• Stimulation Has Its Price - The Audit and Oversight Provisions of the 2009 Stimulus Bill Are Unlike Anything Most Funding Recipients Have Ever Seen
  • March 13, 2009 | Authors: John W. Chierichella; David S. Gallacher
  • Law Firm: Sheppard, Mullin, Richter & Hampton LLP - Washington Office
  • On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Tax Act of 2009 ("the Act" or "the Stimulus Bill") (P.L. 111-5) (H.R. 1). As widely reported in the media, the Stimulus Bill includes approximately $787 Billion in government spending and tax cuts. With regard to the government spending provisions (Division A of the Act, which appropriates approximately $520 Billion), the U.S. Government (as well as the State and local governments receiving this money) will disburse the funds through a number of different vehicles – namely government contracts, grants, cooperative agreements, and other transactions. The legislation is intended to deal with, on an expedited basis, economic conditions that many Americans have not experienced in their lifetimes and for which they want an accelerated cure. Those familiar with the federal acquisition and grant processes, however, know that immediacy is not built into those processes. Moreover, to the extent that the “need for speed” overtakes process, recipients of the funds will almost assuredly find themselves downrange from one of the most rigorous oversight regimes ever enacted. Companies, and even States and localities – should familiarize themselves with the full terms of the Faustian bargain they will be striking.  

    Traditional Government contractors are familiar with the rigorous oversight to which they have been customarily subjected by federal instrumentalities such as the Defense Contract Audit Agency, the Inspectors General, the Government Accountability Office, the Department of Justice and, of course, the armies of potential whistleblowers who are continually encouraged by the prospect of a hefty “finder’s fee” for bringing contractors to the bar of justice under the auspices of the qui tam provisions of the False Claims Act (31 U.S.C. §§ 3729-3731). However, non-traditional Government contractors (who may well be the bulk of companies pursuing the new Stimulus money) would be well advised to review the Stimulus Bill carefully before seeking financial stimulation, because – to quote the legendary Al Jolson – “You ain’t seen nothing yet.” Even traditional Government contractors – particularly those operating outside of the classified and Department of Homeland Security arenas – may find the panoply of oversight mechanisms to be startling:

    • Inspectors General. The Act appropriates over $200 million for the various agency Inspectors General. Unsurprisingly, Sections 1514 and 1515 require the IG to investigate allegations of wrongdoing and to examine the records of every contractor, grantee, subcontractor and subgrantee, and any State or local agency administering the affected contracts, subcontracts, grants and subgrants. But the mandate transcends traditional “audit” practice (which has traditionally accorded only a right to review company records) and accords the IG a statutory right to something for which DCAA has been arguing for years, i.e., the right “to interview any employee of the contractor, grantee, subgrantee, or agency regarding such transactions.” 
    • GAO Investigations. Section 901 requires the GAO to conduct ongoing oversight regarding the use of Stimulus dollars, and to issue reports accordingly. Section 902 requires all individuals receiving Stimulus money to agree to GAO audit access – access to records and, again, the right to interview employees at all tiers in the transaction hierarchy. 
    • The “Recovery Accountability and Transparency Board.” This new oversight Board – most assuredly to live in acronym history as the “RAT” Board – has the express mission of coordinating and conducting “oversight of covered funds to prevent fraud, waste and abuse.” The charter of the RAT Board is incredibly broad. For instance, it can:
      • Issue “flash reports” – yes, that is the language of the statute – to the President and Congress on pressing management and funding problems that require immediate attention. This, of course, is in addition to whatever non-“flash” reports the Board may consider “appropriate” from time to time.
      • Submit quarterly reports to the same recipients that summarize the findings of the RAT Board and of the Inspectors General of the various agencies. These reports, of course, are also in addition to the “flash reports” and any other “appropriate” reports the Board may elect to submit.
      • Then there will be the mandatory “annual report” of the RAT Board. Contractors, subcontractors, grantees, subgrantees, and State and local authorities can take comfort in the statutory provision that allows – but does not mandate – the redaction of information that would not be subject to disclosure under FOIA from publicly available copies of any RAT Board reports.
      • In the time left to it after preparing all these reports, the RAT Board is also empowered to conduct its own independent audits and reviews and to collaborate with IG investigations. The Board has the power to issue subpoenas to compel the testimony of non-Federal officers and employees, to hold public hearings, to compel testimony at those public hearings, and to “contract” out in support of its oversight functions.
      • The Board will also provide transparency to its functions by establishing a website that will include findings from audits, as well as Inspectors General and GAO investigations – somewhat akin to a 21st Century electronic version of the public stocks used to punish and embarrass reprobates in Puritan New England, albeit in advance here of any adversarial process to resolve factual disagreements. 

    To complement – or perhaps to "stimulate" – all of the Government reports that will be generated in connection with the above-described oversight functions, Section 1512 of the Stimulus Bill also requires companies and States that receive Stimulus dollars directly from the Government to provide detailed quarterly reports on how the money was spent. This does not appear to apply to companies who receive money from prime contractors or from a State recipient of the Stimulus funds.

    All of this oversight comes with three purposes – to deter, detect, and punish “fraud, waste and abuse.” Government contractors are well aware of how and with what effect the Government pursues these purposes and, given the political climate of the day and the unrest within the electorate, one need not overwork the imagination to envision the relish with which federal enforcement hierarchies will enlist in the crusade. They will be well armed. For instance:

    • Criminal False Statements (18 U.S.C. § 1001). There will be many, many interviews, and many, many opportunities for lies, half truths and obfuscation. Miguel Tejada of the Houston Astros recently learned in connection with the Congressional inquiry into steroid use, as did Martha Stewart and so many before them, that it often is not the initially threatened allegation that gets you – “it’s the cover up.” Section 1001 is a powerful enforcement tool in the Government's arsenal.
    • The Civil False Claims Act (31 U.S.C. §§  3729-3731). The FCA imposes treble damages and penalties on individuals and companies that “knowingly” (which does not have the meaning most would attribute to it in everyday parlance) submit false claims to the Government for payment. FCA liability is a huge club in the Government's "compliance tool box" to ensure that companies do not misuse federal dollars. Senator Charles Grassley has already encouraged the Government to vigorously pursue FCA actions against companies that fraudulently obtain Stimulus support. The applicability of the FCA to stimulus transactions is a complicated issue that is beyond the scope of this article, but one should expect it to be a heavily litigated issue, raising a number of questions left unresolved by the Supreme Court’s 2008 decision in Allison Engine (discussed here).  
    • Whistleblower Protections. Section 1553 prohibits any type of discrimination or recrimination against an employee that "reasonably believes" that Stimulus funds may have been improperly used. Traditional government contractors are well familiar with whistleblower protections, but the Section 1553 requirements may catch other non-traditional contractors off guard. Remember that these provisions are broadly construed, and that the IG has the right to investigate any such claims of discrimination if requested by the whistleblower. What this means is that, regardless of whether a whistleblower has a "legitimate" basis for complaining, the down-side risk (including an IG and DOJ investigation) forces companies into a proactive position where they must ensure that they are treating all whistleblowers (potential or actual) with respect and providing even-handed treatment.  

    If you are one of the many, many companies contemplating the chase for Stimulus Dollars, you are well advised to remember the good Dr. Faustus – every deal that we strike, every agreement into which we enter, comes at a price. You will live in a proverbial fishbowl. Be prepared – understand the risks, understand the burden you undertake to withstand that scrutiny, and put in place a system of internal controls that you can defend without qualification when the IG, the GAO, the RAT Board, casual viewers of your company website, and the Fourth Estate – come knocking on your door to find out where that money went, and why.