Contracting imperiled by war, lax management, auditors say

Contract reviews for operations in Iraq have found that mechanisms exist to preserve the integrity of the contracting process but that they are imperiled by the stress of war and the failure of government agencies to follow laws and regulations.

The inspectors general of the Interior Department and the Coalition Provisional Authority, which once oversaw the U.S. occupation of Iraq, examined a number of Iraq-related contracts as well as the business practices of government contracting agencies and the companies they hire. The Interior report criticized the department's National Business Center, a fee-for-service contracting agency, for procuring commercial interrogators on behalf of military commanders in Iraq and Cuba using contracts for information technology.

The Interior IG, Earl Devaney, found 11 such procurements and said they were outside the scope of their contracts. Personnel at the business center utilized two General Services Administration schedule contracts for technology and professional engineering services. While Devaney noted that Interior, GSA and the Defense Department are correcting the irregularities, he will "open an investigation into the conduct of the individuals [at Interior] involved in these matters," he said in a July 16 memo to Interior's assistant secretary for policy, management and budget.

Devaney's investigation will extend to other contracting agencies at Interior that perform contracting on behalf of other agencies. In his annual plan, Delaney will include "an evaluation of [Interior's] fee-for-service activities to assess management controls over, and the relative benefits to, the department of performing those services." In addition to the National Business Center, Interior also houses a fee-for-service agency called GovWorks.

Devaney said several factors had contributed to the business center's awarding of interrogation services using technology contracts. For example, the center lacked "an effective system of policies, procedures and process controls" to ensure that contracts were competitively awarded and that they complied with acquisition laws and regulations, he said. Also, "a lack of monitoring and oversight by NBC management" plagued the contract awards, he noted.

But in his most significant criticism, Devaney questioned the very nature of fee-for-service agencies that have proliferated in government in recent years, administering billions of dollars in contracts. He drew a direct line between the interrogator contracts and "the inherent conflict in a fee-for-service operation, where procurement personnel, in their eagerness to enhance organization revenues, have found shortcuts to federal procurement procedures and procured services for clients whose own agencies might not do so."

"Without the checks and balances provided by internal controls," Devaney continued, "the 'risk taking,' 'out-of-box' thinking and 'one-stop shopping' advertised by NBC and encouraged by fee-for-service organizations can result in inappropriate procurements."

Devaney noted that he has been supported in this assessment by the General Accounting Office, and the GSA and Defense inspectors general. Those agencies have, for years, documented inappropriate use of contracts stemming from a desire on the part of federal agencies to be entrepreneurial in how they handle procurements, often focusing on increasing their own fees rather than providing a service to the government.

Devaney recommended that Interior terminate all active orders with CACI International and Lockheed Martin Corp., the companies that supplied the interrogators, that are not within the scope of the GSA schedules used. Also, Interior should revise its review procedures to include NBC procurements, develop formal policies to address the contract weakness the review found, and perform another review of NBC contracting in 2005 "to ensure that policy and procedure revisions were fully implemented," he urged.

Meanwhile, the inspector general for the Coalition Provisional Authority, which is still working though the CPA has dissolved, reviewed the internal management controls of five large contractors working in Iraq. The IG examined the broad category of corporate governance, which includes a company's auditing and accounting procedures as well as its ethics, at Fluor-AMEC LLC, Halliburton, Parsons Corp., Perini Corp. and Washington Group International. In almost all cases, the IG found that the companies had established sound policies governing their conduct in the war zone.

The IG highlighted a number of areas in which all or most of the contractors had met standards for accountability and transparency either set by the CPA or required by securities and accounting laws. In particular, audit committees within the companies "exercised an active oversight role," the firms had "strengthened or emphasized the importance of government compliance to their workforces" and all the companies had taken governance actions specifically related to their work in Iraq, the IG found.

However, the companies said they are looking to the government "to set the tone for conducting business in Iraq," the IG said. Also, they cautioned overseers not to have unrealistic expectations about corporate transparency, given "the realities of operating in a high risk, hostile, overseas environment," the IG said.

Company officials told the IG that, while they applauded the government for calling for an open contracting system, they "were concerned about … applying government contracting procedures to the unusual circumstance in Iraq."

"Working in a hostile environment that lacks basic amenities afforded to domestic programs also strains governance programs," and corporate governance policies could be weakened because of the smaller staffs deployed in the war zone and the longer hours they are required to work, the IG reported, citing company officials.