Audit 

 Report 

Corporate Governance for Contractors 

Performing Iraq Reconstruction Efforts 

Report Number 04-006 July 21, 2004 

Office of the Inspector General 

Coalition Provisional Authority 
Acronyms 

AMEX American Stock Exchange 

CPA Coalition Provisional Authority 

CPA-IG CPA Inspector General 

DCAA Defense Contract Audit Agency 

DFARS Defense Federal Acquisition Regulations 

DoDIG Department of Defense Inspector General 

FAR Federal Acquisition Regulation 

GAAP Generally Accepted Auditing Principles 

GAO Government Accountability Office 

NASDAQ National Association of Security Dealers Automated Quotation System 

NYSE New York Stock Exchange 

PCO Project and Contracting Office 

PMO Iraq Program Management Office 
COALITION PROVISIONAL AUTHORITY 

OFFICE OF THE INSPECTOR GENERAL

400 Army Navy Drive • Arlington, Virginia 22202

July 21, 2004 

MEMORANDUM FOR AMBASSADOR TO IRAQ 

DEPUTY ASSISTANT SECRETARY OF THE ARMY 

(POLICY AND PROCURMENT) 

IRAQ RECONSTRUCTION MANAGEMENT OFFICE 

SUBJECT: CORPORATE GOVERNANCE FOR CONTRACTORS PERFORMING IRAQ 

RECONSTRUCTION EFFORTS 

We are providing this audit report for your information and use. We performed the audit 

in accordance with our statutory duties contained in Public Law 108-106 which mandates the 

conduct of audits relating to the treatment, handling, and expenditure of funds by the Coalition 

Provisional Authority or its successor entities on Iraq reconstruction, and of the programs, 

operations, and contracts carried out in utilizing such funds. We considered comments from the 

contractors we visited on a draft of this report in preparing the final report. 

This final report contains no recommendations. Therefore, no additional comments are 

required. As no recommendations were made in this report, audit follow-up will not be 

performed. 

We appreciate the courtesies extended to the staff. Questions should be directed to 

Mr. Michael J. Guagliano at (703) 428-0244. Management may request a formal briefing on the 

results of this audit. The report distribution is shown at Appendix E. 

Stuart W. Bowen, Jr. 

 Inspector General 

 Coalition Provisional Authority 
Office of the Inspector General 

Coalition Provisional Authority 

Report Number 04-006 July 21, 2004 

Corporate Governance for Contractors Performing Iraq 

Reconstruction Efforts 

Executive Summary

Introduction: The Coalition Provisional Authority, Office of the Inspector General 

(CPA-IG), pursuant to Public Law 108-106, “The Emergency Supplemental 

Appropriations Act for the Defense and Reconstruction of Iraq and Afghanistan,” 

November 6, 2003, is conducting a series of reviews related to the contracts awarded in 

support of the Iraq relief and reconstruction efforts. The review of corporate governance 

is an element of the CPA-IG efforts to deter and detect any fraud, waste, and abuse within 

the Iraq reconstruction efforts. We judgmentally selected five contractors performing 

work in Iraq for our audit of corporate governance programs. 

As part of the CPA-IG efforts to deter and detect any fraud, waste, and abuse within the 

Iraq reconstruction efforts, this audit directly reviewed corporate governance programs. 

Future audits will include an assessment of corporate governance programs in the audit 

scope once a particular review identifies weaknesses in corporate internal controls. 

Public Law 108-106 authorized $18.4 billion for security, relief, rehabilitation, and 

reconstruction in Iraq. The Project and Contracting Office∗

 manages all activities 

associated with program, project, asset, construction, and financial management of the 

reconstruction efforts undertaken by the United States. The Project and Contracting 

Office established six sectors for the reconstruction effort: Building/Education/Health, 

Communications/Transportation, Electrical, Oil, Public Works/Water, and 

Security/Justice. 

While the Project and Contracting Office is responsible for the overall Iraq reconstruction 

program, the contractors have an important responsibility for executing programs and 

projects in the most economical and efficient manner in compliance with laws and 

regulations. 

Corporate governance touches all aspects of the way business activities are structured, 

objectives established, and risks assessed. Effective corporate governance fosters an 

enterprise-wide attitude of integrity and control consciousness and implements senior 

management’s commitment to ethical business practices and behavior. Key tenets of 

corporate governance are integrity and ethical values, codes of conduct, and management 

support of the program. Corporate governance becomes a key internal control to help 

 

∗

 The Coalition Provisional Authority Program Management Office was re-designated as the Project and 

Contracting Office on June 28, 2004. 
ii

ensure that the country and people of Iraq receive the greatest benefit from the funds 

provided for reconstruction. 

Objective: The objective of this audit was to determine the adequacy and effectiveness 

of corporate self-governance programs of contractors awarded contracts or task orders 

funded by the “Emergency Supplemental Appropriation Act for the Defense and 

Reconstruction of Iraq.” 

Conclusion: Our review of the governance programs of five major contractors involved 

in reconstruction projects in Iraq disclosed that viable programs existed at each of those 

contractors. Governance policies and programs resonate from the most senior officers of 

those companies and all five companies demonstrated a commitment to ethics and 

corporate excellence for their reconstruction projects in Iraq. Using their collective past 

experiences in Iraq and the Middle East, the five contractors were taking unique measures 

to adapt their respective governance programs to reduce the risk of fraud, waste, and 

abuse. We believe that governance programs are fundamental to ensuring that companies 

effectively and efficiently perform on government contracts. Challenges remain as the 

pace of reconstruction in Iraq continues and we believe that this results in a heightened 

necessity for governance programs to be in place and to be effective. Addressing those 

challenges is fundamental to the application of efficient systems of governance. 

Recommendations: We make no recommendations in this report because viable 

corporate governance programs existed at each of the five contractors reviewed. 
Table of Contents 

Executive Summary 

Background 1 

Objective 3 

Finding 

Corporate Governance Programs 4 

Appendix 

A. Scope and Methodology 13 

B. Contractor Profiles 15 

C. The Sarbanes-Oxley Act of 2002 - Overview and Securities 

Exchange Requirements 17 

D. Defense Federal Acquisition Regulations Subpart 203.70 -

Contractor Standards Of Conduct 19 

E. Report Distribution 20 
1

Background 

The Coalition Provisional Authority, Office of the Inspector General (CPA-IG), pursuant 

to Public Law 108-106, “The Emergency Supplemental Appropriations Act for the 

Defense and Reconstruction of Iraq and Afghanistan,” November 6, 2003, is conducting 

a series of reviews related to the contracts awarded in support of the Iraq relief and 

reconstruction efforts. The review of corporate governance is an element of the CPA-IG 

efforts to deter and detect any fraud, waste, and abuse within the Iraq reconstruction 

efforts. The scope and methodology used to perform this audit are discussed at 

Appendix A. Profiles of the contractors selected for our review are at Appendix B. 

As part of the CPA-IG efforts to deter and detect any fraud, waste, and abuse within the 

Iraq reconstruction efforts, this audit directly reviewed corporate governance programs. 

Future audits will include an assessment of corporate governance programs in the audit 

scope once a particular review identifies weaknesses in corporate internal controls. 

Appropriations Act for Reconstruction. Public Law 108-106 authorized $18.4 billion 

for security, relief, rehabilitation, and reconstruction in Iraq. Of the $18.4 billion, 

approximately $12.6 billion is for construction efforts and approximately $5.8 billion is 

for non-construction efforts. The Coalition Provisional Authority (CPA) and its Project 

and Contracting Office1

 (PCO) are responsible for rebuilding Iraq through the execution 

of those funds appropriated on behalf of the CPA. 

The PCO manages all activities associated with program, project, asset, construction, and 

financial management for the reconstruction efforts undertaken by the United States. The 

PCO established six sectors for the reconstruction effort: Building/Education/Health, 

Communications/Transportation, Electrical, Oil, Public Works/Water, and 

Security/Justice. Some contractors have received multiple awards and some awards were 

made to companies that formed joint ventures to compete for the contracts. 

While PCO is responsible for the overall Iraq reconstruction program, the contractors 

have an important responsibility for executing programs and projects in the most 

economical and efficient manner in compliance with applicable laws and regulations. 

Corporate governance becomes a key internal control to help ensure that the country and 

people of Iraq receive the greatest benefit from the funds provided for reconstruction. 

Corporate Governance. Corporate governance (governance) touches all aspects of the 

way commercial business activities are structured, objectives established, and risks 

assessed. Effective governance fosters an enterprise-wide attitude of integrity and control 

consciousness and implements senior management’s commitment to ethical business 

practices and behavior. The necessity for self-governance in Iraq is, in fact, increased by 

the risks associated with the performance of the work and the importance of imparting 

transparent business practices to Iraq-based commercial partners whose experiences in 

this regard are likely to have been limited by the years of one-party rule in the country. 

Moreover, a healthy system of internal controls, ethics, and compliance provides a level 

of attestation with respect to the use of U.S. dollars that is expected by American 

taxpayers. Effective governance programs address a code of business ethics, attention to 

 

1

 The Coalition Provisional Authority Program Management Office was re-designated as the Project and 

Contracting Office on June 28, 2004. 
2

systems of internal control, commitment to compliance requirements, and adaptation to 

the changing business environments. 

Code of Business Ethics. Integrity and ethical values are the product of the 

entity’s ethical behavior standards, how those standards are communicated, and how 

those standards are reinforced in practice. Contractor management should establish and 

maintain a written code of conduct addressing ethical business practices, conflicts of 

interests, and the expected standards of ethical and moral behavior. Management also 

should establish and maintain an effective system of internal controls and selfgovernance. Management should continually demonstrate through words and actions a 

commitment to high ethical standards and should convey the message that integrity and 

ethical values cannot be compromised. Management should ensure that employees 

receive and understand that message and should not condone signs of inappropriate 

practices. 

Effective Internal Control Systems. Recent events involving alleged misdeeds 

by corporate executives and independent auditors have damaged investor confidence in 

the financial markets. Those events have highlighted the need for strong, competent, and 

vigilant audit committees with effective authority. In response to the threat to domestic 

financial markets posed by those events, Congress passed, and on July 30, 2002, the 

President signed into law the Public Law 107-204 that may be cited as the “SarbanesOxley Act of 2002” (the Sarbanes-Oxley Act). Pertinent extracts of the Sarbanes-Oxley 

Act (15 U.S.C. 7201) are discussed at Appendix C. 

The Sarbanes-Oxley Act mandates sweeping corporate disclosure and financial reporting 

reform to improve the responsibility of public companies for their financial disclosures. 

In addition, Sarbanes-Oxley requires corporations to document and certify to the 

effectiveness of their internal control systems. Among the areas of enhanced 

transparency and accountability, the Sarbanes-Oxley legislation and the subsequent 

Security and Exchange Commission regulations: 

• require corporate officers to certify that they are responsible for establishing, 

maintaining, and regularly evaluating the effectiveness of the issuer's internal 

controls; 

• provide for improved transparency in financial reporting and independent audits 

and accounting services; 

• increase corporate responsibility through the promotion of ethical codes; enhance 

conflict of interest standards and disclosures; and improve management’s 

assessment of internal controls. 

Academic research has suggested that the creation and enforcement of effective systems 

of governance may provide substantial benefits to companies in terms of both legal and 

financial measurements. Conversely, the absence of an ethical tone and systems of 

governance to support its vigilance may negatively affect a company’s reputation and 

result in legal difficulties. The tie between the “tone at the top,” the executable company 

function, and the checks and balances in between is clearly a product of a company’s 

culture of governance. 

Government Compliance. The Federal Acquisition Regulation (FAR), Part 3, 

prescribes policies and procedures for avoiding improper business practices and personal 

conflicts of interest and for dealing with their apparent or actual occurrence. The 
3

Defense Federal Acquisition Regulations (DFARS) section 203.7000 concerning policy 

states “Government contractors must conduct themselves with the highest degree of 

integrity and honesty.” The FAR, Part 3, and the corresponding provisions of DFARS, 

concern topics that may be addressed by the CPA-IG initiative on governance. DFARS 

“Subpart 203.70 – Contractor Standards of Conduct” is discussed in more detail at 

Appendix D. 

Performing U.S. government contract work requires that contractors provide strict 

adherence to prescribed compliance standards. Specifically, the contractors must take 

measures to ensure adherence to government compliance in areas such as billing systems, 

cost accounting standards, labor records, purchasing systems, and flow-down clauses for 

subcontracting. Strong governance in those defined areas is essential to maintain 

compliance with government requirements in the interests of the public trust. 

Government oversight agencies such as the CPA-IG and the Defense Contract Audit 

Agency (DCAA) are focused on such efforts.

Objective. The objective of this audit was to determine the adequacy and effectiveness 

of corporate self-governance programs of contractors awarded contracts or task orders 

funded by the “Emergency Supplemental Appropriation Act for the Defense and 

Reconstruction of Iraq.” 
4

Corporate Governance Programs 

Our review of the governance programs of five major contractors involved 

in reconstruction projects in Iraq disclosed that viable programs existed at 

each of those contractors. Governance policies and programs resonate 

from the most senior officers of those companies and all five companies 

demonstrated a commitment to ethics and corporate excellence for their 

reconstruction projects in Iraq. Using their collective past experiences in 

Iraq and the Middle East, the five contractors were taking unique measures 

to adapt their respective governance programs to reduce the risk of fraud, 

waste, and abuse. We believe that governance programs are fundamental 

to ensuring that companies effectively and efficiently perform on 

government contracts. Challenges remain as the pace of reconstruction in 

Iraq continues and we believe that this results in a heightened necessity for 

governance programs to be in place and to be effective. Addressing those 

challenges is fundamental to the application of efficient systems of 

governance. 

Code of Business Ethics 

The Sarbanes-Oxley Act, section 406, requires public companies to institute a code of 

ethics for senior financial officers to promote “honest and ethical conduct, including the 

ethical handling of actual or apparent conflicts of interest between personal and 

professional relationships and full, fair, accurate, timely, and understandable disclosure 

and compliance with applicable governmental rules and regulations.” 

Each of the contractors we visited had established a code of business ethics that had been 

approved by the company’s board of directors, members of the board of director’s ethics 

committee, or senior management. Each of the contractors was providing training to its 

employees on its respective code of business ethics. The content of the respective code 

of business ethics was unique to each of those contractors. However, each code of 

business ethics covered similar issues such as equal employment opportunities, antitrust 

and competition laws, and standards of conduct that included ethics provisions. For 

example, one contractor’s Code of Business conducts states: 

“The [contractor] Code of Business Conduct is a guide for every Company Director, 

officer, employee and agent in applying legal and ethical practices to their everyday 

work. The Code describes not only our standards of integrity, but also some of the 

specific principles and areas of the law that are most likely to affect us. There is no 

quality more important than integrity. Integrity is a core value in our Code of Business 

Conduct. Compliance with the law and honesty and integrity in our dealings with others 

are not to be sacrificed in the name of profits. Management does not and will not 

condone any such actions.” 

While a code of business ethics sets the broad and general tone for the contractors 

employees, the companies’ attention to internal control systems, commitment to 

government compliance, and adaptation to changing business environments further 

refined the corporate governance programs of those contractors. 
5

Reviews of Internal Controls

The Sarbanes-Oxley Act focuses companies on the need for external audit and internal 

review of company policies and procedures and places a premium on strengthening 

internal control systems. Each of the contractors we visited was adopting comprehensive 

programs to comply with the Sarbanes-Oxley Act. 

Board of Directors. The Sarbanes-Oxley Act restructured the roles of the board of 

directors and audit committees for public corporations. Specifically, the Sarbanes-Oxley 

Act requires specific accountability actions by the board of directors as well as placing 

the board of directors at risk for actions taken. The board of directors, elected by and 

accountable to shareholders, is the focal point of the governance system. We found that 

senior officers of the five companies routinely reported to and were accountable to their 

boards of directors. 

Audit Committee. Sarbanes-Oxley Act, section 301, requires that audit committees of 

public companies establish “...procedures for the receipt, retention, and treatment of 

complaints received by the issuer regarding accounting, internal accounting controls, or 

auditing matters, as well as the confidential and anonymous submission by employees of 

the issuer of concerns regarding questionable accounting or auditing matters.” 

Audit committees for the five companies exercised an active oversight role. For 

example, at two companies, the audit committees, comprised of members of the board of 

directors, provided oversight and served as a check and balance on the companies’ 

financial reporting systems. The audit committees also provided independent review and 

oversight of their companies’ financial reporting processes, internal controls, and 

independent auditors. The audit committees provided a forum separate from 

management in which auditors and other interested parties could candidly discuss 

concerns. By effectively carrying out their functions and responsibilities, the audit 

committees helped to ensure that their managements’ properly developed and adhered to 

a sound system of internal controls, procedures were in place to objectively assess 

managements’ practices and internal controls, and independent auditors objectively 

assessed the companies’ financial reporting practices. 

Another strength we noted was that each company’s internal audit function reported to 

the company’s audit committee on a regular basis to discuss ongoing work. The internal 

audit functions responded to tasks assigned by the audit committees and sought approval 

for planned future audits. For example, at one company, the Director of the Internal 

Audit Department reported to the Chief Executive Officer as well as to the Director of the 

Audit Committee. In another example, one contractor required its corporate officers to 

provide the internal audit department a list of topics that should be reviewed within its 

respective global business units. At another contractor, the audit committee established 

requirements and provided directions for audits that the internal audit department was to 

perform and approved the proposed annual audit plan. 

Hotline. All five companies had means for employees and others to report allegations of 

fraud, waste, and abuse. For several of the contractors, the audit committee or the 

general counsel provided oversight for the hotline functions. Three of the contractors 

used an outside party to operate the hotline function which the contractors promoted 

using e-mail, posters, and training courses. The outside parties reported the results of the 

hotline to the responsible corporate official. In some cases, either a member of the audit 
6

committee or the office of general counsel reviewed each allegation and determined the 

appropriate course of action to take. At one company, the audit committee assigned the 

internal auditor to review selected hotline cases and required the internal auditor to report 

their findings to the audit committee. 

Disclosure and Exchange Requirements. Sarbanes-Oxley Act, section 404 requires the 

certifying officers of listed public companies are required to certify to the existence and 

effectiveness of internal controls of the company. Specifically, the rule requires 

certifying officers to evaluate and express their opinions on the effectiveness of their 

company’s internal controls and procedures for financial reporting for the period 

covering each quarterly and annual report. In addition, Sarbanes-Oxley Act, section 404, 

requires that company’s external public accounting firms attest to and report on 

management’s assessment of the effectiveness of internal controls. 

The Exchanges2

 require each issuer to adopt and disclose a code of business conduct and 

ethics for directors, officers, and employees and disclose any waivers of the code for 

directors or executive officers in an 8-K filing. The NYSE requires that each issuer must 

have an internal audit function. NASDAQ requires that an issuer must provide for an 

enforcement mechanism that ensures clear and objective standards for compliance, a fair 

process by which violations are determined, prompt and consistent enforcement of the 

code, and protection for persons reporting questionable behavior. 

Three of the four companies we visited that were subject to the disclosure requirements 

had established comprehensive programs to review and strengthen internal controls to 

ensure that the senior officials of the companies would be able to positively assert to the 

state of the company’s internal controls. The fourth company was finalizing its draft 

plan. 

Compliance with Government Contracting Policy and Procedures

Several of the companies took actions to improve their compliance with federal 

requirements for contractors due to the increase in the amount of federal work that is 

being offered, especially the Iraq reconstruction efforts. Aside from Iraq-specific work, 

the contractors performed federal work for other Department of Defense (DoD) 

components, the Department of Energy, the Department of State, and other government 

organizations. 

Government Compliance. All five companies had recently strengthened or emphasized 

the importance of government compliance to their workforces. The companies had 

established federal compliance units, hired consultants with expertise in federal system 

requirements, restructured organizational units for government related operations, and 

were actively working with the DCAA to make their systems compliant with government 

requirements. 

At all five companies, the government compliance officer was at the board director, vice 

president, or office of the general counsel level within the corporation. Those positions 

provided appropriate authority to enforce the responsibilities of the government 

 

2

 For the purposes of this report, “exchanges” means the New York Stock Exchange (NYSE), American 

Stock Exchange (AMEX), and the National Association of Security Dealers Automated Quotation 

System (NASDAQ). 
7

compliance officer without risk of undue influence from corporate personnel or lack of 

response by employees. 

At one company, a consulting firm was hired to assist in developing and refining policies, 

procedures, and processes to ensure compliance with pertinent federal requirements. 

Another company established additional policies to address the laws and regulations 

governing business and contracting with the federal government. 

One company with a large government business unit, restructured its procurement 

division to provide a more robust procurement capability by adding a compliance 

division with five locations throughout the Middle East, including an office in Baghdad. 

Specifically, the company added additional procurement management staff, established a 

procurement academy, hired senior procurement officials with extensive federal 

procurement experience, and provided on-sight procurement training for its personnel 

deployed to Iraq. In addition, the procurement division and government compliance 

division of that company were working on resolving past discrepancies identified by 

DCAA. Another company developed a 2-day government contracting training course to 

familiarize its employees with government contracting. 

Several of the companies established compliance groups to provide an additional internal 

measure of oversight of their company’s efforts. For example, during March 2004, one 

company established a compliance group to provide internal oversight for its Iraq 

reconstruction contracts. That compliance group, among other things, conducted presubmission reviews of the company’s billings to the U.S. Government to ensure that the 

submitted billings had adequate supporting documentation and were in accordance with 

prescribed contractual requirements and regulations. As of June 2004, the company had 

hired five people for the compliance unit, three of whom are former DCAA auditors. In 

addition to those five members, the company was in the process of hiring an additional 

compliance group member to be deployed to Iraq. 

Defense Contract Audit Agency. DCAA has established 10 different Accounting and 

Management Internal Control Audits for evaluating contractor internal controls and 

assessing related risk at large contractors. The DCAA Internal Control Audits include 

“Control Environment and Overall Accounting Controls,” which is a part of governance. 

According to a DCAA memorandum to the CPA-IG, “Draft Audit Report, Corporate 

Governance for Contractors Performing Iraq Reconstruction Efforts,” July 16, 2004, 

DCAA Control Environment and Overall Accounting Controls audits were in process at 

the majority of the contractors visited by the CPA-IG. DCAA noted that their audits may 

identify internal control deficiencies related to the contractors’ self-governance programs 

that are not reflected in the CPA-IG draft report. 

DCAA had noted in an audit report that certain aspects of DFARS requirements for 

standards for conduct were not addressed in one company’s policy (one of the companies 

included in our audit). The company stated that it would evaluate the DCAA 

recommendations for possible incorporation into updated company policies and 

procedures. That company, to address the DCAA concern, had established a formal 

ethics training program for its employees in addition to the ethics requirements 

documentation the company provides to its employees. DCAA acknowledged that the 

company was taking aggressive action to resolve those issues. We observed the same 

actions on the part of that particular company. 
8

Overall, we observed that the companies we visited were working closely with DCAA to 

ensure that management processes and systems were in accordance with applicable 

federal and DoD standards. For example, one company we visited used personnel 

experienced in government procurement to oversee a corrective action plan to address 

deficiencies identified by the DCAA. In our opinion, the governance programs of the 

companies we reviewed, as those programs pertained to the Iraq reconstruction efforts, 

were adequate. 

Contractor Actions Taken for Efforts in Iraq

The requirement for effective self-governance for companies performing work in Iraq is, 

in fact, increased by the risks associated with the performance of the work and the 

importance of imparting transparent business practices to Iraq-based commercial partners 

whose experiences in this regard are likely to have been limited by the years of one-party 

rule in the country. 

Business Risks. Doing business in Iraq presents a myriad of challenges to the 

governance programs of the companies involved in the reconstruction of Iraq. Generally, 

there is an increased business risk attendant to operations involving numerous 

commercial entities with wide-ranging occupational, ethical, and corporate practices and 

co-mingled spheres of contractual authority. Those potential problems present challenges 

to the integration of self-governance mechanisms. Under current circumstances in Iraq, 

where such challenges are further influenced by a dearth of recent historical reference to 

transparency in business operations, language barriers, the magnitude of the enterprise, 

and the overarching impact of security on the conduct of work performance; selfgovernance risk is further heightened. Addressing these risks, however, is fundamental 

to the application of efficient systems of self-governance.

All five contractors were developing and implementing various governance measures 

applicable to their reconstruction efforts in Iraq. Specifically, the contractors had 

established compliance units, hired additional corporate officers to assist in oversight, 

hired external auditors for reviews of Iraq work, provided daily or weekly updates on Iraq 

efforts, revised their internal audit functions, and were using their past experiences in Iraq 

or the Middle East to determine what key governance related documents should be 

translated into Arabic for Iraqi subcontractors. 

Corporate Officer Involvement. Iraq reconstruction efforts were receiving the attention 

of senior corporate officers. In some instances, senior corporate officers were kept 

apprised of the Iraq reconstruction efforts on a daily basis. For example, according to the 

President and Chief Operating Officer of one company, he and the Chief Executive 

Officer were being provided updated reports daily from all business units performing Iraq 

efforts. In addition, that company’s corporate officers discussed Iraq reconstruction 

efforts and current news events concerning governance issues related to Iraq. The senior 

officers of that company, in anticipation of contract awards, discussed establishing a 

compliance group for providing internal oversight functions for future Iraq efforts. 

To improve corporate level oversight of their Iraq efforts, several of the companies hired 

individuals with extensive government contracting experience. For example, one 

company hired additional corporate officers to aide in providing corporate level oversight 

of Iraq efforts. In addition, corporate officers and management staff used situational 

awareness information such as government reports, industry information, media reports, 
9

and press articles to identify governance related issues that occurred in Iraq. Company 

officials stated that they used the reports and information to assess governance issues 

against the company’s own performance. 

Audit Oversight. Several of the companies were increasing their internal and external 

audit capabilities to provide additional oversight of their Iraq reconstruction efforts. 

Internal Audit. Several companies were increasing the size of their internal 

audit departments and revising their audit plans to include audits of the Iraq 

reconstruction efforts. For example, one company hired an additional auditor for its 

internal audit department because of the anticipated additional oversight workload. 

Officials of the internal audit departments for the five companies stated that they were 

incorporating internal oversight for their Iraq efforts. The internal audit departments of 

two companies had already deployed personnel to either Iraq or Kuwait to review their 

companies’ operations. Another companies had planned to deploy its internal auditors to 

Iraq in April 2004 but due to security concerns the trip was postponed until August 2004. 

External Audit. External auditor oversight provides a measure of independent 

scrutiny of a company’s performance. For example, one of the companies hired external 

auditors to augment the indigenous internal audit capabilities. In another example, a 

company engaged a major accounting and auditing firm to provide additional audit 

oversight and, as of June 2004, the external auditors were performing a risk analysis for 

the company’s Iraq reconstruction efforts. The risk analyses was to form the basis for 

additional specific audit and oversight actions that need to be taken. 

Iraq Orientation Guide. One company developed a tailored Iraq Employee Orientation 

Guide to assist its employees deploying or working in Iraq. The orientation guide 

addressed the ethical responsibilities and obligations of its personnel and provided other 

pertinent information that the company deemed necessary for deployment of its 

personnel. Specifically, the guide stated: 

“recent newspaper articles that described problems with billings and potential ethical 

lapses on Iraqi contracts... [Contractor] operates all of its business under a Business 

Ethics Code that makes it quite clear that all employees, agency employees, and agents 

must comply with all applicable laws and must report information accurately and 

honest1y. There are further duties to ...avoid conflicts of interest and not to give or 

receive gifts in the course of business. Clearly, bribery and kickbacks are strictly 

prohibited and may even be criminal offenses. [Contractor] has a zero tolerance for legal 

and ethical violations of any type... it is never worth it to jeopardize your employment 

and reputation, and the reputation of [Contractor], regardless of the circumstances. You 

must read (or re-read) the Business Ethics Code in the next 14 days.”

Training. All five companies had developed training and orientation courses that were 

to be presented to employees prior to their deploying to Iraq. However, one company 

was not able to ensure that it had provided all deploying employees compliance training 

during the initial mobilization process. The company deployed a training instructor to 

Iraq in May 2004 for targeted compliance training to resolve the situation. In addition, 

the company prepared an 8-hour compliance training videotape and packets of required 

reading material to be distributed to its employees in Iraq. 

Another company had developed a 5-day new-employee orientation program for Iraq 

operations. This program included ethics and hotline awareness, human resource 
10

briefings, proper recording of timesheets using realistic Iraq work environments, and 

training for preparing expense reports. The company also provided briefings of Iraq 

operations by company employees who already have experience working in Iraq. 

Hiring. Several companies established specific new hire programs for their Iraq efforts 

and three company’s programs included criminal investigations and drug testing for new 

hires. One of the three companies also performed a psychological screening of the new 

employees. 

Translation. Several of the companies had already developed, or were in the process of 

developing, translation services for employees as well as translation of key governance 

and code of conduct policies to impart to Iraqi subcontractors. For example, one 

company provided a translator for pre-bid meetings and job-site visits. Subcontractors 

who were not familiar with the contracting process were able to ask for and receive oneon-one assistance with deliverables, invoice requirements, payment terms, and other 

contract terms and conditions. In addition, the company provided technical and 

procurement staff and a translator, if necessary, during the project execution phase. 

Further, the company was translating its contracts into Arabic as well as screening the 

contracts for compliance with Shari’ah3

. 

Another company was assessing key governance related documents for translation into 

Arabic for its future subcontracts to Iraqi companies. The company had planned to 

translate key corporate governance documents for distribution to two distinct levels of the 

Iraqi workforce. At one level, the company would provide specific policy and 

procedures in English and translate those documents into Arabic. At the other level, the 

company was developing one to two pages of key elements of governance that a common 

laborer would need to know. Those pages would also include a statement to seek out an 

Iraqi manager if there were questions on acceptable actions, code of conduct, ethics, or 

other governance matters. 

Management Support. Management support for governance is critical for success of 

company programs. The companies we reviewed demonstrated considerable 

management support for governance programs. The main concern for management was 

that unethical or liability-creating conduct by company employees would decrease the 

company’s reputation and/or shareholder value. According to officials of one company, 

two employees working in Iraq were terminated from service with the company because 

the military believed that communications send or received were inappropriate. In 

another example, two companies developed videos for ethics-training that featured the 

Chief Executive Officer discussing the importance of employees maintaining a high level 

of ethical conduct. 

Challenges to Corporate Governance 

An effective governance system is constantly adapted to its environment when company 

officials recognize challenges and implement measures to reduce the risks to an 

acceptable level. When we discussed the challenges of governance with officials of the 

 

3

 Shari’ah is the revealed and the canonical laws of the religion of Islam. The legislative power in the 

government lies in the hands of legislative assembly. The legislators are to make rules and regulations 

within the scope and dimensions of the Qur'an and the Sunnah of the Prophet (s.a.w.). These rules 

constitute the Shari'ah. 
11

companies we visited, those officials identified several issues that they believed needed 

to be addressed as the Iraq reconstruction program moved forward. They believed that 

the government and the companies involved in Iraq will need to work together to 

effectively meet these challenges. 

Several of those company officials stated that they were looking to the government to set 

the tone for conducting business in Iraq. While all applauded the goals established by the 

CPA to provide transparency and large scale involvement of Iraqi companies and U.S. 

small businesses in the reconstruction program, they believed that those goals should be 

tempered with the realities of operating in a high risk, hostile, overseas environment. 

They also believed that extending their corporate values to international subcontractors 

would be a significant challenge. 

Further, company officials were looking for a more orderly process for the awarding of 

government task orders. Invariably, company officials believed that when task orders are 

awarded, those orders will require a company to respond quickly and deploy large work 

forces to accommodate the work. They believed that this immediate and significantly 

increased amount of work effort can cause strain to the implementation of governance 

programs. They believed that a more balanced and planned distribution of task orders 

would allow a company to develop a more well-developed plan to ensure that governance 

was adequately and effectively instilled into their efforts. Other risks that company 

officials were concerned about included applying government contracting procedures to 

the unusual circumstances in Iraq, incorporating new Iraqi government requirements, 

maintaining controls in a dynamic environment, subcontracting with Iraq companies, and 

sustaining a high level of Iraqi employment to avoid the incitement of the local 

population provided employment levels could not be maintained. 

Lastly, company officials believed that working in a hostile environment that lacks basic 

amenities afforded to domestic programs also strains governance programs. Specifically, 

staff levels are smaller than usual, the hours worked are longer, and critical decisions and 

actions performed in some instances are required within very short timeframes. They 

believed that such a fast paced rapid environment is conducive to employees doing things 

that may not comport with accepted governance policies. 

Conclusion 

Each company we reviewed demonstrated a viable governance program. Those 

companies had taken actions to identify and eliminate liability-creating conduct. 

Officials of each company had designed and implemented governance policies in unique 

approaches to best meet the needs of their companies. 

Governance consists predominantly of an attention to systems of internal controls, a code 

of business ethics, and a commitment to compliance requirements. Sound governance 

provides reasonable but not absolute assurance that a company and its employees will not 

engage in liability-creating conduct. However, sound governance should deter and detect 

such instances and adapt itself to mitigate the chance of the instance from reoccurring. 

Effective governance facilitates an enterprise-wide attitude of integrity and control 

consciousness, implements upper management’s commitment to ethical business 

practices and behavior, and adapts to a changing business environment. 
12

We believe that strong internal controls are key to the furtherance of an effective 

governance program. We further believe that compliance with the Sarbanes-Oxley Act 

and the extensive disclosure requirements placed on companies strengthens governance 

programs and provides an additional check and balance to ensure that companies 

effectively and efficiently perform on government contracts. Moreover, a healthy system 

of internal controls, ethics, and compliance provides a level of attestation with respect to 

the use of taxpayer dollars that is expected by the providers of such sources of funds. 

The U.S. government relies on its contractors’ governance programs as the first line of 

defense to deter and detect fraud, waste, and abuse. Taxpayers, our coalition partners, 

and Iraqi citizens are the shareholders with a vested interest in the company’s efforts to 

implement effective governance programs for the Iraq reconstruction efforts. 
13

Appendix A. Scope and Methodology 

We performed this audit from April to July 2004 in accordance with generally accepted 

government auditing standards. 

We judgmentally selected five contractors for our review. The criteria for selecting the 

contractors were the aggregate contract award amount and the particular Program 

Management Office (PMO - the Coalition Provisional Authority Program Management 

Office was re-designated as the Project and Contracting Office on June 28, 2004) sector 

for which the work was to be performed. The contractors were selected from a list of 

reconstruction Indefinite Deliver/Indefinite Quantity contracts awarded on behalf of the 

CPA as of March 27, 2004. Our intent was to provide coverage of high-dollar contracts 

and provide oversight in as many of the sectors as possible. We performed our audit work 

at the following contractors: 

• Fluor-AMEC LLC, Greenville, South Carolina 

• Halliburton, Houston, Texas 

• Parsons Corporation, Pasadena, California 

• Perini Corporation, Boston, Massachusetts 

• Washington Group International, Boise, Idaho 

We examined the applicability of defense-specific contractor requirements contained in 

the DFARS; Sarbanes-Oxley Act requirements (with respect to governance and 

transparency); and tested the impact of other attendant laws, regulations (such as the 

FAR), and systems as they applied to effective self-government mechanisms. In 

particular, we examined the FAR and DFARS requirements related to governance and 

internal controls and compliance in the performance of a contract. 

We conducted interviews with corporate officers and managers in human resources, 

government compliance, government operations, internal audit, and procurement 

functions who are responsible for the management and oversight of the companies’ Iraq 

reconstruction efforts. We identified and reviewed the contractors’ various policies and 

procedures concerning governance in areas such as codes of business ethics, codes of 

conduct, compliance manuals, corporate policy manuals, internal controls mechanisms 

and compliance systems, new employee information packages, and training 

documentation; as well as specific guidance and direction for Iraq operations. We 

documented the policies and procedures established and compared them to the actions 

and statements of the corporate officers and managers. 

In addition to the companies’ policies and procedures that were reviewed, we compiled 

publicly available data pertaining to governance issues within corporate America, as well 

as alleged unethical/criminal actions reported to have occurred by companies performing 

reconstruction efforts in Iraq. 

Scope Limitation. This review contained scope limitations that could materially impact 

the results. 

• We did not perform detailed testing in Iraq of the companies’ field-level 

compliance with governance policies and procedures. 
14

• The DCAA Control Environment and Overall Accounting Control audits 

currently in process may identify issues we did not detect in our review that relate 

to corporate governance that could impact the Iraq reconstruction efforts. 

Use of Computer-Processed Data. We did not use computer-processed data to perform 

this audit. 

Prior Audit Coverage

During the last 5 years, the Government Accountability Office (GAO) and the Inspector 

General of the Department of Defense (IG DoD) have issued two reports discussing 

corporate governance. Unrestricted GAO reports can be accessed over the Internet at 

http://www.gao.gov. Unrestricted IG DoD reports can be can be access at 

http://www.dodig.osd.mil/audit/reports. 

Government Accountability Office 

GAO-02-494SP, “Highlights of GAO’s Corporate Governance, Transparency and 

Accountability Forum,” March 5, 2002 

DoD Inspector General 

IG DoD Report No. 2000-6-006, “Evaluation Report on Contractor SelfGovernance Programs,” April 25, 2000 
15

Appendix B. Contractor Profiles 

The following provides a synopsis of each contractor judgmentally selected for our 

review, including prior experience with DoD and other federal agencies: 

Fluor-AMEC LLC. Fluor-AMEC LLC is a joint venture between Fluor Corporation 

(USA) and AMEC plc (United Kingdom). Fluor Corporation provides services on a 

global basis in the fields of construction, engineering, maintenance, operations, 

procurement, and project management. AMEC provides design, engineering, 

maintenance support, and project delivery to clients in the industrial, infrastructure, oil 

and gas, and transport sectors. AMEC works at the local, national and international 

levels and employs 45,000 people in some 40 countries worldwide. Of the $18.4 billion 

appropriated for the Iraq reconstruction efforts, Fluor-AMEC LLC has been awarded 

contracts for Iraq reconstruction projects as follows: 

Electrical $500M 

Public Works and Water (NORTH) $600M 

Public Works and Water (SOUTH) $500M 

 Total $1,600M 

Halliburton. Founded in 1919, Halliburton is one of the world's largest providers of 

products and services to the oil and gas industries. The company adds value through the 

entire lifecycle of oil and gas reservoirs. It provides and integrates products and services; 

starting with exploration and development, moving through production, operations, 

maintenance, conversion and refining, to infrastructure and abandonment. Halliburton 

employs more than 100,000 people in over 120 countries working in five major operating 

groups. The Engineering and Construction Group, known as Kellogg Brown & Root, 

serves the energy industry by designing and building liquefied natural gas plants, 

production facilities and pipelines, and refining and processing plants, both onshore and 

offshore. The Kellogg Brown & Root non-energy business meets the engineering and 

construction needs of governments and civil infrastructure customers. Kellogg Brown & 

Root also provides operations and maintenance for a wide variety of facilities. Of the 

$18.4 billion appropriated for the Iraq reconstruction efforts, Halliburton has been 

awarded contracts for Iraq reconstruction projects as follows: 

Oil (SOUTH) $412M 

Prior to the Coalition Provisional Authority (CPA) contracts, Halliburton was awarded 

the Logistic Civil Augmentation Program and Restore Iraqi Oil contracts. 

Parsons Corporation. Parsons Corporation was founded in 1944 and currently has over 

9,000 employee-owners engaged in executing more than 5,000 projects in 46 States and 

37 foreign countries. The Parsons Infrastructure and Technology Group – International 

Division is responsible for Iraq reconstruction efforts. Of the $18.4 billion appropriated 

for the Iraq reconstruction efforts, Parsons Corporation, including its joint venture 

partnerships, has been awarded contracts for Iraq reconstruction projects as follows: 

Buildings, Education, and Health $500M 

Security and Justice $900M 

Security and Justice (Iraqi Military Bases) $31M 
16

Oil (NORTH) $415M 

Sector PMO Public Works and Water $55M 

 Total 1,901M 

Prior to the CPA contracts, Parsons Corporation was awarded the Captured Enemy 

Ammunition Projects and Tadji Military Base Reconstruction contracts. Parsons has 

been performing construction efforts in Iraq from the 1950s through the mid-1980s in oil, 

transportation, and water projects. 

Perini Corporation. Perini Corporation was founded in 1894 and is ranked fourth 

among the top 10 power contractors performing operations and maintenance. This 

ranking reflects the operations of the Perini Corporation Power Group and the company’s 

ongoing relationship with Exelon Nuclear to provide operations and maintenance support 

services at 10 power generating stations, consisting of 17 operating units in the United 

States. Of the $18.4 billion appropriated for the Iraq reconstruction efforts, Perini 

Corporation has been awarded contracts for Iraq reconstruction projects as follows: 

Electrical (Transmission and Distribution SOUTH) $500M 

Prior to the CPA contracts, Perini Corporation was awarded Restore Iraqi Electricity 

under a U.S. Central Command contract. Perini is the prime contractor of a fasttrack, 

design/build project for the U.S. Army Corps of Engineers, Transatlantic Programs 

Center near Kabul, Afghanistan. Perini has begun construction of a 6,000-man training 

camp for the First Brigade of the Afghanistan National Army. The scope of work 

includes site development and infrastructure, including electrical power distribution, 

storage and distribution, waste water treatment, and water supply. Perini also performs 

contract work for the Department of State for upgrading embassies. 

Washington Group International. The Washington Construction Company was 

founded in 1964 and is an integration of more than 16 companies, each with a different 

niche or specialty. Washington Group International has over 26,000 employees working 

in 30 countries around the world and focuses on construction, engineering, and 

management solutions. Currently, the company has six business units; including defense, 

energy & environment, industrial/process, infrastructure, mining, and power. 

Washington Group International has been contracted by the CPA to build and repair 

electrical, water, and other infrastructure. Of the $18.4 billion appropriated for the Iraq 

reconstruction efforts, Washington Group International has been awarded contracts for 

Iraq reconstruction projects as follows: 

Electrical (Transmission and Distribution NORTH) $500M 

Public Works and Water $600M 

 Total $1,100M 

Aside from the CPA contracts, Washington Group International is supporting the 

U.S. Central Command and the U.S. Army Corps of Engineers in Afghanistan in the 

construction of a number of administration facilities - including a new base to support 

that country’s military, located south of Kabul, Afghanistan. 
17

Appendix C. The Sarbanes-Oxley Act of 2002 - 

Overview and Securities Exchange 

Requirements 

Recent events involving alleged misdeeds by corporate executives and independent

auditors have damaged investor confidence in the financial markets. Those events have 

highlighted the need for strong, competent, and vigilant audit committees with effective 

authority. In response to the threat to domestic financial markets posed by those events, 

Congress passed, and on July 30, 2002, the President signed into law the Sarbanes-Oxley 

Act of 2002. The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) is codified at 

15 U.S.C. 7201. 

Audit Committees: Functions and Role Requirements to be Effected Through 

Listing Standards. Sarbanes-Oxley Act, sections 204 and 301, directs the New York 

Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the National 

Association of Security Dealers Automated Quotation System (NASDAQ) to issue 

certain listing standards that impose the following requirements on audit committees’ 

functions and role: 

• Independence. Sarbanes-Oxley Act, section 301, requires audit committees must 

be composed entirely of independent directors. To be “independent” under the 

Sarbanes-Oxley Act, an audit committee member may not accept any consulting, 

advisory, or other compensatory fee from the company, except in his or her 

capacity as a board or board committee member. 

• Authority to Engage Advisors. Sarbanes-Oxley Act, section 301, requires audit 

committees must have the authority and any funding it finds appropriate; to 

engage an outside auditing firm, independent counsel, and other advisers as it 

determines necessary to carry out its duties. 

• Employee Complaint Procedures. Sarbanes-Oxley Act, section 301, requires 

audit committees must establish procedures for the receipt, retention, and 

treatment of complaints regarding accounting, internal accounting controls, or 

auditing matters and for the confidential, anonymous submission by employees of 

concerns regarding questionable accounting or auditing matters. 

• Auditor Reports to Audit Committees. Sarbanes-Oxley Act, section 204, 

requires registered public accounting firms to make timely reports to the audit 

committee of: 

o all critical accounting policies and practices to be used; 

o all alternative treatments of financial information within General Accepted 

Accounting Principles that have been discussed with management, 

ramifications of the use of such alternatives, and the treatment preferred 

by the accounting firm; and 
18

o other material written communications between the accounting firm and 

management, such as any management letter or schedule of unadjusted 

differences. 

All companies with securities registered pursuant to the Securities Act of 1933 and/or the 

Securities Exchange Act of 1934 are subject to the Sarbanes-Oxley Act. However, in 

addition to the corporate governance (governance) standards of the Sarbanes-Oxley Act 

set forth above, each of the Exchanges (for purposes of this memorandum, “Exchange” 

means the NYSE, AMEX or NASDAQ) is to require each listed issuer to meet various 

governance standards, most of which go above and beyond the requirements of the 

Sarbanes-Oxley Act. The rules of each Exchange with respect to these governance 

standards vary to certain degrees and there are exceptions for certain foreign private 

issuers and small business issuers. However, for purposes of this report, a brief 

explanation of the material governance standards required by the Exchanges is set forth 

below. 

Internal Audit Function 

 The NYSE requires that each issuer must have an internal audit function. 

Corporate Governance Guidelines 

 The NYSE requires that each issuer must adopt and disclose governance 

guidelines, which include: director access to management, director qualification 

standards, director responsibilities, and, as necessary and appropriate, annual 

performance evaluation of the board, director compensation, director orientation and 

continuing education, independent advisors, and management succession. 

Code of Business Conduct and Ethics 

The Exchanges require each issuer to adopt and disclose a code of business 

conduct and ethics for directors, officers, and employees and to promptly disclose any 

waivers of the code for directors or executive officers in an 8-K filing. NASDAQ 

requires that an issuer must provide for an enforcement mechanism that ensures prompt 

and consistent enforcement of the code, protection for persons reporting questionable 

behavior, clear and objective standards for compliance, and a fair process by which to 

determine violations. 
19

Appendix D. Defense Federal Acquisition 

Regulations Subpart 203.70 -

Contractor Standards Of Conduct 

203.700 Policy. 

Government contractors must conduct themselves with the highest degree of integrity and 

honesty. Contractors should have standards of conduct and internal control systems that:

(1) Are suitable to the size of the company and the extent of their involvement in 

Government contracting,

(2) Promote such standards,

(3) Facilitate timely discovery and disclosure of improper conduct in connection 

with Government contracts, and

(4) Ensure corrective measures are promptly instituted and carried out.

203.7001 Procedures.

(a) A contractor's system of management controls should provide for:

(1) A written code of business ethics and conduct and an ethics training 

program for all employees;

(2) Periodic reviews of company business practices, procedures, policies, 

and internal controls for compliance with standards of conduct and the 

special requirements of Government contracting;

(3) A mechanism, such as a hotline, by which employees may report 

suspected instances of improper conduct, and instructions that encourage 

employees to make such reports;

(4) Internal and/or external audits, as appropriate;

(5) Disciplinary action for improper conduct;

(6) Timely reporting to appropriate Government officials of any suspected 

or possible violation of law in connection with Government contracts or 

any other irregularities in connection with such contracts; and

(7) Full cooperation with any Government agencies responsible for either 

investigation or corrective actions.

(b) Contractors who are awarded a DoD contract of $5 million or more must 

display DoD Hotline Posters prepared by the DoD Office of the Inspector General 

unless:

(1) The contract will be performed in a foreign country; or

(2) The contractor has established an internal reporting mechanism and 

program, as described in paragraph (a) of this section. 
20

Appendix E. Report Distribution 

Office of the Secretary of Defense 

Under Secretary of Defense (Comptroller)/Chief Financial Officer 

Director, Defense Procurement and Acquisition 

Department of the Army 

Assistant Secretary of the Army, Acquisition, Logistics & Technology 

Auditor General, Department of the Army 

Other Defense Organizations

Director, Defense Contract Audit Agency 

Inspector General, Department of Defense 

Administrator, Coalition Provisional Authority 

Director, Coalition Provisional Authority Program Management Office 

Non-Defense Federal Organizations 

Department of State 

Office of Management and Budget 

General Accounting Office 

U.S. Agency for International Development 

Inspector General, Department of Health and Human Services 

Inspector General, Department of Commerce 

Congressional Committees and Subcommittees, Chairman and 

Ranking Minority Member 

Senate Committee on Appropriations 

Senate Subcommittee on Defense, Committee on Appropriations 

Senate Committee on Armed Services 

Senate Committee on Governmental Affairs 

Senate Committee on Foreign Relations 

House Committee on Appropriations 

House Subcommittee on Defense, Committee on Appropriations 

House Committee on Armed Services 

House Committee on Government Reform 

House Subcommittee on Government Efficiency and Financial Management, Committee 

on Government Reform 

House Subcommittee on National Security, Emerging Threats, and International 

Relations, Committee on Government Reform 

House Subcommittee on Technology, Information Policy, Intergovernmental Relations, 

and the Census, Committee on Government Reform 
Audit Team Members 

This report was prepared by the Office of the Assistant Inspector General for 

Auditing, Coalition Provisional Authority. 

John Betar 

Brian Flynn 

Robert Murrell 

Michael Guagliano 

Gerald Montoya 

Michael Roark 

Kristin Caskey 

Mackensie Ryan