Infotech and the Law: What's coming in 2004? Study 2003 for clues

Devon Hewitt

Last year was full of drama: war in Iraq and struggles for many major government contractors. Although 2004 will be unique on its own, many events of this new year have been foretold by the events of 2003.

In 2002, companies such as Enron, Arthur Andersen and WorldCom held the media spotlight because of fraud and wrongdoing. In 2003, heavily regulated contractors such as the Boeing Co., Sprint Corp. and Qwest Communications International Inc. took their place under the spotlight for offenses such as misappropriating trade secrets, financial and pricing irregularities and ignoring obvious conflicts of interest.

The popular refrain of economists everywhere is that the country's recovery depends on faith in the economy, which in turn reflects society's ability to root out fraud. Thus, 2004 will bring more regulation and oversight of government contractors. Contractors must have internal controls that will let them identify and eliminate fraud.

Regulations implementing the Sarbanes-Oxley Act appeared in 2003, and their application and further interpretation will begin in earnest in 2004. For example, the Defense Contract Auditing Agency issued its audit guidance on the act and the implementing regulations in October. However, even private companies will have to adopt policies and financial controls similar to those required by companies subject to Sarbanes-Oxley. This will be to satisfy the heightened level of scrutiny likely to come from government auditors, representatives doing due diligence, boards of directors and others charged with oversight of policies and operational controls adopted by a company. Sarbanes-Oxley has become the standard -- not the goal -- for all companies public and private, big and small.

The government's needs for contractor support will grow. The Department of Homeland Security came into being in 2003, finally issuing procurement regulations and filling key positions. More money will be spent on defense and anti-terror measures in 2004.

Money also will be spent on background checks for more people working in and with the government, including virtually all contractor and subcontractor employees. Thus, people with security clearances -- and the companies that employ them -- will have a considerable advantage in 2004 and will be a favored target of companies making acquisitions.

The government's need for contractors also will grow for two reasons: Agency budgets for areas other than defense will inevitably shrink, and the federal employees who are the most important knowledge resources have been leaving in substantial numbers.

The General Accounting Office published a report early last year stating that procurement reforms have resulted in the Defense Department downsizing its acquisition work force by half over the last several years. The government is facing a significant brain drain. The logistics of replacing these personnel, combined with the need for continuous support on key programs, will result in more federal contracting for technical and administrative support services.

Not surprisingly, analysts have predicted that the government will spend at least $56 million on outsourcing services between 2003 and 2007, with at least an 8 percent annual increase.

Unfortunately, the diminishing of the number of procurement professionals in the government inevitably will result in greater delay and carelessness in these transactions at a time when agency requirements are routinely bundled and increasingly complex. This year, therefore, also will see more protests. Both the GAO and the Court of Federal Claims saw an increase in protests filed during the last quarter of 2003 -- a harbinger of things to come.

Devon Hewitt is a partner of Government Practices at ShawPittman in McLean, Va. She can be reached at devon.hewitt@shawpittman.com.

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