This is the second in a series of posts regarding what we believe will be an onslaught of government investigations and audits of COVID relief funds and contracting. Previously, we identified the government offices that will be conducting the investigations and performing the audits. Below, we identify three categories of programs, contracts, and companies we believe are more likely to be investigated or audited.
The first group of companies ripe for audits are those accepting COVID relief funding and contractors performing large COVID-specific contracts, as well as contractors performing traditional government contracts that entail certain COVID-related twists impacting performance.
Companies accepting COVID relief funds are likely at the top of auditors’ lists for several reasons. First, because of the magnitude of funds at issue. Second, due to the complex and ambiguous eligibility, use, and reporting requirements. For example, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and supplemental legislation appropriated funds to reimburse eligible healthcare providers for healthcare-related expenses or lost revenues attributable to COVID. Receipt of funds was easy. Most recipients’ funds were automatically deposited into their bank accounts. But healthcare provider recipients have not yet been required to file reports attesting to the proper utilization of the relief funds. Relief funds recipients in other non-healthcare industries may also be affected. Certain monies received under the CARES Act also involve ongoing and downstream reporting requirements by companies regarding statutory limitations on compensation paid to certain employees and the receipt of a variety of potential tax credits. Thus, recipients’ use of funds has not been tested, and it is unlikely that all usage has been in compliance with the ambiguous requirements and multiple rounds of agency guidance and interpretations.
Similarly, based on the dollars involved and the speed in making awards, contractors receiving large COVID-specific contracts are likely candidates for government audits. For example, notwithstanding their success, we expect government auditors to delve into the Operation Warp Speed contracts to test the contractors’ representations and certifications. And notwithstanding their similar stepping-up to respond to the pandemic, we expect Project Airbridge contracts and those awarded pursuant to the Defense Production Act will not be immune from auditor review. Auditors are not swayed by the fact that these contractors stepped in at the eleventh hour to help the country respond to the pandemic. Auditors follow their manuals and checklists and allow others with higher authority decide whether pandemic heroism trumps questioned costs.
In addition, we anticipate auditors testing Department of Defense and Department of Health and Human Services use of other transaction authority (“OTA”) to make COVID-related awards because of the speed of such awards and the perception that OTAs are used to avoid following federal acquisition regulations. Although OTAs are generally not subject to the Federal Acquisition Regulation, or related Agency Supplements, the Defense Contract Audit Agency (“DCAA”) has inserted themselves into the audit process of these arrangements. In its 2020 annual report to Congress, the DCAA announced an initiative to expand audit services to OTAs and that it has developed corresponding audit procedures covering the full life cycle of an OTA, from incorporation of terms and conditions on the front end to review of contractor payments on the back end.
Finally, ongoing government contracts—not COVID-specific—which are subjected to routine audits, will not be able to avoid COVID-related inquiries. Routine DCAA audits will necessarily include financial reporting issues as a result of the pandemic under cost reimbursement contracts. Such issues include, for example, financial forecasting and changed projections stemming from the pandemic; idle office space as a result of the pandemic and whether such costs are allowable and, if so, for how long; and the allowability of costs related to decreased employee productivity or the simple fact that tasks take longer as a result of employees working remotely. This remains a fluid situation and the DCAA’s audit objectives are generally in their formative stages; i.e., expect more to come and expansion of oversight.
The second category of likely targets subject to investigation are companies and individuals trying to take improper advantage of COVID relief efforts. Enforcement in this area has already started. In January 2021, the Department of Justice settled allegations of fraud involving loans issued pursuant to the Paycheck Protection Program (“PPP”). Similarly, New York federal prosecutors brought charges against an individual for allegedly making false claims in applying for PPP loans that his companies had hundreds of employees and a multimillion-dollar payroll, submitting false business records and financial statements, and falsely claiming to be a medical equipment supplier. And Rhode Island prosecutors brought criminal charges against a PPP loan applicant who falsely claimed to have dozens of employees at three restaurants even though the restaurants were not even open for business. Other fraud indicators include applicants seeking loans to “open” new businesses and withdrawing loan funds in cash or transferring the funds to personal and/or newly opened bank accounts.
Others falling into this category are profiteers seeking to price gouge, hoard, and/or misrepresent products related to the sale of personal protective equipment (“PPE”). Companies and individuals seeking substantial profit margins or engaged in PPE scams by selling fake or counterfeit products also are low-hanging fruit for investigators.
Finally, some companies and individuals may find themselves being audited or investigated because, whether or not accurate, they are perceived to have been aligned with the Trump administration. Given the current political environment in Washington, one cannot dismiss the notion that certain companies and contractors may find themselves in the crosshairs of congressional investigations. For example, it is reported that the Government Accountability Office (“GAO”) initiated a review of a contractor based on a telephone call from a U.S. senator. There have been numerous media reports regarding Trump associates and supporters receiving millions in PPP loans. Any company whose CEO appeared in a White House Rose Garden ceremony where its efforts responding to the pandemic were touted should not be surprised to have its contracts audited or, if applicable, eligibility for relief funds reviewed.
We expect the collective government agencies to cast a very wide net and, as a result, even companies that do not necessarily fall into one of the categories above may be swept into the government’s audits and investigations. Companies need to prepare for this possibility now.
Follow Merle and Craig’s blogs on other issues concerning to government audits and investigations arising from the pandemic:
Merle DeLancey is a partner with Blank Rome LLP where his practice focuses on a wide variety of government procurement law. He represents clients contracting with federal and state governments, with an emphasis in the healthcare industry. Merle has experience in a broad spectrum of government contracting issues and litigation.
*Craig Stetson is a partner with Capital Edge Consulting where he focuses on assisting contractors interpret and apply the accounting and regulatory compliance requirements associated with federal government contracts. Craig routinely deals with a wide range of compliance matters related to accounting, pricing, contract administration, business systems, financial reporting and interpreting the requirements of the Federal Acquisition Regulation (“FAR”) and Cost Accounting Standards (“CAS”). Craig frequently speaks and writes on a wide variety of government contracting compliance matters, regulatory updates and current events.