By Joseph P. Dirik
Jenkens & Gilchrist

The collapse of Enron, WorldCom, as well as other recent high-profile failures, has brought greater scrutiny on corporate integrity-and on the construction industry.

Public construction companies are subject to the Sarbanes-Oxley Act of 2002, which governs many corporate compliance issues. But both public and private construction companies require formal programs to ensure compliance with the high standards now governing business conduct.

The Need for Compliance Programs

A corporate compliance program identifies required conduct, provides training to support such conduct and ensures compliance by protecting contractors before problems occur. Federal and state agencies are responsible for many regulations that govern how public and private contractors do business.

Contractors face regulations concerning false claims, antitrust, EEO, OSHA, Disadvantaged Business Enterprises, environment, government contracting and labor laws, among others. Moreover, the federal government will only do business with contractors that are "presently responsible."

This term addresses contractors' ability to complete a contract successfully, as well as their honesty and integrity. Although private companies do not fall under the financial controls imposed by Sarbanes-Oxley, the business world now demands higher standards regarding financial reporting and accountability.

Contractors face other risks as well.

The federal sentencing guidelines apply to organizational defendants in criminal cases and substantially increase the financial penalties for corporations whose employees engage in unlawful conduct ostensibly intended for the corporation's benefit.

On the other hand, corporations with effective internal compliance programs established to "prevent and detect violations of the law" are rewarded under the guidelines. An effective compliance program can greatly reduce penalties for criminal violations of almost all federal statutes.

The federal False Claims Act generally involves false claims made against the federal government. However, the act may apply to a claim made against a governmental agency or intermediary, such as a state department of transportation, if the federal government provides any portion of the funding.

Some courts have held that the act applies to false representations of compliance with all applicable rules and regulations, where such compliance is a condition of payment. Similarly, a violation made in ignorance, but with reckless disregard of the truth or falsity of the claim, can qualify as a violation.

The act does not require that statements be made with the intent to defraud. Offending companies face stringent penalties.

Sarbanes-Oxley requires that publicly held companies appoint an audit committee of nonmanagement individuals to hire and receive communications from external auditors. This requirement is intended to strengthen auditor independence by limiting certain "consulting services" such as business advice, payroll, bookkeeping, valuations, information technology and human resources that firms can provide to audit clients.

Although not required, this approach makes sense for private companies as well.
Many in the business community believe that even honest auditors are biased in favor of their clients. Contractors should consider isolating their outside audit function.

The independent CPA who audits a contractor's books should not be the same person who created that contractor's financial and accounting system
It may be only a matter of time before states adopt the audit requirements of Sarbanes-Oxley. While Sarbanes-Oxley does not apply to private companies, many states are enacting related legislation.

The Texas Legislature recently adopted a new Texas Public Accountancy Act imposing new regulations and penalties for CPAs.

Characteristics of Effective Compliance Programs Effective compliance programs should: