Salacious allegations leveled against PricewaterhouseCoopers last week have continued the fallout from the Los Angeles Department of Water and Power’s botched 2013 rollout of an online bill payment system.

While the city’s effort to recoup some $70 million paid to the consulting firm for work on the billing system disaster is certainly a huge issue for the company, the utility has threatened to initiate debarment proceedings that could ban PwC from receiving any city contracts for up to five years.

The effect of debarment on a company can be devastating. While existing contracts can be carried out, no new business can be won or additional money added to current projects. While PwC is a global business, the impact of debarment on a smaller regional firm could be its demise.

“It’s a big problem,” said W. Jay DeVecchio, a partner in Morrison & Foerster’s Washington, D.C., office and chair of the firm’s government contracts practice group. “Once existing contracts are up, you’re done. If that’s your business, you’re out of business.”

This is especially true at the federal level, where debarment at one agency puts a company on a list that is checked by every other department before they can hand out work to private contractors. Local governments have similar lists, but they are far less extensive. Los Angeles County has 13 companies and individuals listed as debarred while the city of Los Angeles does not currently have any, according to online records.

Truc Moore, an attorney for the county who provides guidance for the hearing board that adjudicates debarments, said that the dearth of banned companies is because it’s a last resort.

“It’s a very serious decision to take away someone’s ability to compete and bid on public contracts,” Moore said. “Debarment is there to protect a county from bad actors.”

Moore said that agencies will usually work with contractors to directly address issues of service instead of initiating debarment proceedings. She said there are numerous corrective measures that can be taken to help companies get on track.

That might be one reason lawyers who operate in the space were surprised that the DWP would threaten to debar PwC while the civil case is still active. Todd Canni, a partner in Pillsbury Winthrop Shaw Pittman’s Washington, D.C., office and former director of suspension and debarment for the Air Force, said that while he was not familiar with the specifics of the PwC case, debarment threats can be seen as an attempt to elicit a settlement from a company.

“In a case where you’re litigating a civil action, facts are still being learned and it’s inappropriate to take administrative action because you’re essentially leveraging he threat of suspension,” he said.

Canni, who also serves as co-chair of the American Bar Association’s suspension and debarment committee, said most agencies wait until a settlement is reached or allegations of wrongdoing are confirmed before initiating debarment proceedings.

“In a lot of cases, basic facts are in dispute and most agencies are not equipped to undertake a fact-finding mission,” he said.

The DWP and the Los Angeles City Attorney’s Office declined to answer questions about the status of debarment proceedings.

In a statement issued June 30 about the alleged improprieties, including PwC project managers spending city funds on prostitutes and bachelor parties in Las Vegas, the utility said it would “pursue all appropriate remedies, up to and including the possibility of debarment.”

Deep impact

Once debarment proceedings are initiated, DeVecchio said the facts that agencies are most concerned with have to do with companies’ “present responsibilities” – essentially what the current state of affairs are at a company and whether any past misconduct has been addressed and remedied. Even in instances where egregious conduct was cited in civil or even criminal actions, companies can avoid debarment if they show a robust effort to combat a reoccurrence.

“If employees have done bad things, a company has to either remove them from government business, remove them entirely, or have a very good explanation why what they did wasn’t actually bad,” DeVecchio said.

With the underlying facts in the PwC case still very much in dispute, it would seem that despite the DWP’s allusions to debarment, a ban for the company on city work is not an immediate fear.

The civil case and the reputational damage for PwC is another matter. The city’s amended complaint, which it is seeking permission from a judge to file in Los Angeles Superior Court, alleges fraudulent misconduct by PwC and several senior managers.

PwC has staunchly maintained it did nothing wrong.

“PwC never submitted falsified time records to LADWP and never received a single dollar from LADWP to which it was not due,” Daniel Thomasch, a partner at Gibson Dunn & Crutcher in New York representing PwC, said in a statement. “LADWP’s amended complaint is not provoked by concerns over a subcontractor’s billing practices – it is a crude attempt to disparage PwC because PwC has had the audacity to stand up to LADWP’s much-hyped, but baseless, lawsuit.”