Received a Government Audit Letter? Take a Deep Breath, and Consider These Best Practices
According to the United States Government Accountability Office, Congress appropriated $4.6 trillion in emergency assistance for people, businesses, the health care system, and state and local governments in response to the COVID-19 pandemic. Such COVID-19 funding, whether for procurement purchases, relief funding or otherwise, has generally had powerful compliance and financial accounting strings attached. As noted in our prior Advisories about Coronavirus Aid, Relief, and Economic Security (CARES) Act spending, history teaches us that periods of emergency government contracting and relief spending are often followed by periods of heightened enforcement (e.g., audits and investigations).
Every company that accepts government money through grants, contracts or otherwise, should understand that a government audit is always possible, sometimes years after the fact. But what should you do if you receive a government audit letter? Don’t panic, but appreciate that a substantive and serious response is in the company’s best interest. The following best practices can help you manage any government audit letter inquiries without creating more of a headache for the company.
- Be prepared. Ensure invoices to the government include only costs that are allowable and for purposes covered by contract, agreement or regulation, and document the proper accounting of all charges to the government. Evidence showing that government funds were utilized appropriately or invoiced in accordance with the agreement or regulation at issue is key. Contractors (like grantees) are responsible for accounting for costs appropriately and for maintaining records to show compliance, and should gather such records to the extent they have not been kept in an orderly manner.
- Follow existing policies and procedures. If you have policies that address the subject matter of the audit, be certain to follow those procedures or confirm that those responsible followed the policies and procedures.
- Identify the response team. Have a process in place to ensure government audit letters are routed appropriately within the company. Get the letter into the “right” hands as soon as possible. Accounting, contracting and legal personnel should generally be included in the response team. Have an internal meeting or, at minimum, send an internal message to all relevant employees to ensure everyone understands their role and responsibility in developing a response. Strike a balance between casting a wide enough net to ensure all relevant parties are consulted and appropriately limiting distribution.
- Appoint someone as the primary point of contact between your company and the auditors. Ensure that person keeps an audit or investigation file that serves as the record of the audit. Keep a detailed spreadsheet of Requests for Information (RFI), indicating the request date, nature of the request, response date (or clarification), and a link to the material provided in response to the RFIs.
- Evaluate the request. Understand its scope and the auditor’s plan for conducting the audit. Ask questions if there are ambiguities. Do some digging if the purpose of the request isn’t immediately obvious. Is it just an audit or has the government already identified something it thinks is a problem?
- Be responsive and cooperative; but seek to narrow if over broad. Non-responsiveness or lack of cooperation may trigger adverse inferences. That said, understand your rights. While the government is often entitled to a wide variety of documents, evaluate their request in light of legal authorities, and consider whether the auditor has overreached and there are legitimate reasons to seek to narrow the inquiry. Document any agreed-to revisions to the requests.
- Ask for more time if necessary and reasonable. Government letters often state a short deadline for responding. Acknowledge receipt, but request a time extension to more fully develop your response when appropriate. The government wants an accurate and complete response, which should not be compromised by artificial time limits. Document any agreed-to extensions of time.
- Understand the audience. If a government auditing agency is involved based on a request of the Contracting Officer, you may want to keep the Contracting Officer abreast of the audit activity. The authority to act on any audit findings related to contractual issues generally rests with the Contracting Officer; thus, it will be helpful for the Contracting Officer to know your perspective early in the process—otherwise the Contracting Officer will be colored by the government auditor’s point-of-view.
- Providing an accurate response is paramount. Do your due diligence before submitting any response. Any incorrect statements in a response could cause serious consequences beyond the scope of the government’s original investigation. Answer the government’s questions, but do not volunteer superfluous information. There’s a delicate line to draw between fully assuaging the government’s concerns and creating confusion that may trigger a broader investigation.
- Mark your submission and supporting documents. If you provide documents, it is generally appropriate to mark them as confidential, proprietary and exempt from release under the Freedom of Information Act. Confer with counsel if there are specific confidentiality concerns with requested materials.
- Address any follow-on issues appropriately. If your diligence uncovers an issue, confer with counsel immediately to assess any mandatory disclosure obligations. Care will need to be taken to ensure the information is appropriately and expeditiously presented to the appropriate federal authorities.
- Take a breath. Contractors often believe that they are uniquely targeted in both audits and the audit process. Government auditors typically are not familiar with commercial practices, and expect every contractor to meet the auditor’s perspective of compliance. Unfortunately, the government always holds the upper hand, so patience must be a watchword.
Although a government audit is an exercise most would prefer to avoid, it is a predictable and unsurprising result of accepting government funding. Following these best practices will meet one’s obligation to ensure that the government receives the information to which it is entitled while minimizing disruption to the company.
© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.