. i - I COMPTROLLER GENERAL OF THE UNITED STATES WASHiNGTON. D.C. 20548 S-162578 / To the President of the Senate and fiie ’ speaker of the House of Representatives This is our initial report on the audit of payments from the . special &und #A’I + c1 C. L... to Lockheed Aircrait?%rporation for the C-5A aircraft program during the period ended June 30, 1971. This audit was made pursuant Eo section 504, Public Law 91-441, which authorizes $200 million of in- terim funding for the C-5A aircraft program to be paid through a spe- ,&al, bank account. The law provides that Lockheed not be reimbursed icr intercompany profits, bid and proposal costs, independent research 2nd development costs, and other unsponsored technical costs, and de- preciation and amortization expenses. The law provides also that the General Accounting Office audit payments from the special bank account )on a quarterly basis and submit a report to the Congress net more than Xl days after the close of each quarter. Payments to Lockheed from the special bank account started on June 16, 1971, and totaled $20.4 million by June 30, 1971. Our review revealed no payments to Lockheed that were contrary to the provi- sions of Public Law 9 l-441 0 Since payments to Lockheed were made during the last 2 weeks of June 1971, we had only a limited time to $-nake our audit. Therefore we are continuing our examination and will include further comments on the results of our audit in subsequent re- . ports, . Copies of this report are being sent to the Director, Office of Mana~emcnt and Budget; the Secretary of Defense; and the Secretary ‘” uf the Air Force. 3i . Comptroller General of the United States Contents * CHAPTEK 1 INTRODUCTION 1 .: i 2 PAYMENTS FROM THE SPECIAL BANK ACCOUNT 3 blaterial and other charges 3 Labor costs 4 Overhead expenses 5 Defense Contract Audit Agency 5 3 GENERAL ACCOUNTIKG OFFICE AUDIT OF PAYMEKTS I FROM SPECIAL BANK ACCOUNT 6 i APPENDIX I Section 504, Public Law 91-441, October 7, 1970 11 ABBREVIATIONS DCAA Defense Contract Audi?%gency :. I?GTRODUCTION In March 1970 the chairman of Lockheed’s board of di- rectors notified the Deputy Secretary of Defense that the company would require additional funding, over and above the Air Force estimate of the contract ceiling price, in order to complete development and production of 81 C-SA air- craft. He also advised the Deputy Secretary of Defense that it would be financially impossible for Lockheed to complete performance on the C-5A aircraft program, as well as other major defense programs, without further financing from the Department of Defense. The Deputy Secretary of Defense informed the Congress of the Lockheed position and requested that it provide ad- ditional funding of $200 million, over the amount requested in the regular appropriation, as an interim measure to per- mit Lockheed to continue development and production of the C-54 aircraft. The Congress authorized the $200 million by Public Law 91-441, section 504, approved October 7, 1970, to con- tinue the C-5X aircraft program. (See app. I.) Section 504 specified that: 1. All payments from the $200 million fund be made through a special bank account for reasonable and allocable direct and indirect costs incurred on the C-5:\ aircraft program. 2. The contractor not be reimbursed for intercompan) profits; bid and proposal costs; independent re- starch and dL?velOp~cnt costs; :rnd Other Similar LIII- sponsored technical effort costs ; and drprccint ion :lncl amortization costs on ;>13nt, propert)-, or cqui pment . 3. These escl~tded costs not be recoverable under any other contract. 4. A11 payments from the special bank account be au- dited by the Defense Contract Audit Agency (DCAA) and the General Accounting Office. 5. The Comptroller General report to the Congress not more than 30 days after the close of each quarter on the results of the General Accounting Office audit. PAWENTS FROM THE SPECIAL BANK ACCOUNT Payments from the $200 million fund and from the spe- cial bank account were initiated on June 16, 1971, and the amounts deposited and withdrawr through June 30, 1971, were as follows: Special Bank $200 million account fund Beginning halance None 3200,000,000 Deposits $21,405,511 Withdrawals: Material and other charges $13,103,466 Intercompany transactions: Charges $3,094,031 Credits -7,505,352 -4,411,321 Labor 4,793,596 Overhead 6,916,967 20,403,OOS $ 21,405,511 Balance at June 30, 1971 $-1,002 .“OZ $178.592.489 __-- Procedures established by the Air Force to control with- drawals from the special bank account require that reimburse- ment vouchers be submitted by Lockheed to the Air Force con- tracting officer for approval. The Air Force contracting officer approves these payments subject to audit by DCAA. These vouchers are supported by detailed listings of matc- rial, labor, and overhead costs incurred on the C-5A air- craft program, The following comments describe the methods used by Lockheed to support withdrawals from the bank ac- count. FiATERIhl, AKD OTfIER CHARGES Natcrial costs and other miscellaneous charges paid from the special bank account through June 30, 1971, totaled $13,103,466. Payments were supported by purchase orders, vendors' invoices, and receiving reports. To ensure prompt payment to vendors, Lockheed has dc- veloped a weekly report that shows all vendor accounts \chich have not been paid ldithin 30 days. The total amount of 3 - . accounts payable outstanding more than 30 days and appli- cable to the C-5A aircraft program is to be deducted from the amount of reimbursement vouchers to Lockheed. Lockheed de- ducted from the first voucher $1 million to cover the esti- mated amount of all accounts payable related to the C-SA aircraft program that may remain unpaid for JO days or longer during the first month. The accounts payable report for July 2, 1971, showed a total of $483,889, which represented vendor accounts payable applicable to the program over 30 days old and which indi- cated that the amount withheld was more than adequate. Intercompany transactions llost development and production work on the C-5A air- craft program is being done by the Lockheed-Georgia Company, Marie t la, Georgia, and by outside vendors and subcontractors. Some costs , however, are being incurred at the following Lockheed locations. Lockheed Aircraft Corporation, Burbank, California Lockheed-California Company, Burbank, California Lockheed Aircraft Service Company, Ontario) California Lockheed Electronics Company, Plainfield, New Jersey These other locations periodically charge costs asso- ciated with their work on the C-5A aircraft to the Lockheed- Georgia Company according to established billing procedures. Although there were charges totaling $3,094,031 from other locations of Lockheed for work on the C-5A aircraft program, they were more than offset by intercompany credits of $7,505,352. Those credits represent the excess of the amount pc%id for delivered items plus progress payments for undelivered iterns, compared with the amount reimbursable un- der the terms of the current contract. Effective Flay 31, 1971) the contract between Lockheed and the Air Force for C-SA aircraft was converted from 3 fixed-price incentive contract to a fixed loss, cost reimbursement contract. LABOR COSTS Labor costs totaling $4,793,S9G, for 9G4,OOl direct labor hours, xc’crc paid to Lockhccd i‘rom the special bank ac- iOLli:t til~DLIgi1 JLl~l~ 30 f I Xl. Those costs :ind hours wore charged to specific C-5A aircraft work orders. costs for indirect labor were charged to the C-SA aircraft program through overhead allocations. OVERHEAD EXF INSES Overhead expenses totaling $6,916,967 were paid from the special bank account during June 1971 on the basis of provisional overhead rates previously negotiated. Actual overhead rates are to be negotiated as of December 26, 1971, the end of the company’s fiscal year. Lockheed and the Air Force negotiate provisional over- head rates for use in cost reimbursement contract billings. During negotiations of 1971 rates, concluded in March 1971) costs which were unallowable under provisions of section XV of the Armed Services Procurement Regulation were excluded in establishing the provisional overhead rates. The provisional overhead rate also was reduced to ex- clude those costs which are unallowable under Public Law 91-441. Such cost.5 amounted to about $801 ,000 for the pc- riod ended June 30, 1971. DEFENSE CONTRACT AUDIT AGENCY The audit by DCAA at the Lockheed-Georgia Company in the past generally has been directed toward reviewing ac- counts payable, payroll accounting systems, inventory ac - counting systems, etc., on a cyclical basis. Through these audits DC.c\A’s objective is to gain insight into Lockheed’s accounting processes and to determine the adequacy of the company’s sys tern of management controls r DCAA has developed special audit procedures for review- ing Lockheed f s vouchers requesting withdrawals from the fund for deposit in the special bank account and for audit- ing payments from the bank account. CHAPTER 3 . GENERAL ACCOUNTING OFFICE AUDIT OF PAYMENTS FRObl SPECIAL BANK ACCOUNT Dur r-eview was made at the Lockheed-Georgia Company, Marietta, Georgia; Lockheed Aircraft Corporation and Lockheed-California Company, Burbank, California; and Lockheed Xircraft Service Company, Ontario, California. I$e reviewed the DCAA audit of payments from the special bank account for material costs and other charges and tested the work performed. In addition, we selected transactions shown on s-withdrawal vouchers and traced the amounts to such documents as purchase orders, receiving reports. vendors ’ invoices, and work orders, to determine the accuracy and propriety of the amounts paid. We also examined into the reasonablene ss and correctness of the procedures used in al- locating the cost of common usage materials. We examined costs incurred on the C-5A aircraft pro- gram by Lo zkheed companies in California and charged to the Georgia Cczpany. Our review ?;a; directed at testing the ac- curacy an& allowability of labor, material, and overhead costs incurred in intercompany billings. Our a-edit of labor costs incurred by Lockheed included: (11 a rev:Lew of internal procedures and controls established to ensure zhat labor costs were accurately distributed to contracts 2nd other programs, (2) a revicl:r of labor audits by DCXB an- ,-I Lockheed’s internal auditors, and (3) tests to de terminc x=,-hcther labor costs appeared reasonable and ap- pl icable ifc xhe C-511 aircraft program. In 0Lir review of overhead, \<e examined Air Force and Lockheed pr-ocedures used in estimating and negotiating pro- visional o;..-crhead rates. Ke also examined into the reason- nblcncss cli provisional overhead rates and the costs elimi- nated to cs~ply with Pclblic Law 91-441. Our TE’E’~CI\: rc\-ezl cd no payments to Lockheed for the period endl;?h: June 30, 1971, that were contrary to the pro- 1,isions og i’ublic I,:\ 91-441. Since payments to Lockheed . c._ were made during the last 2 weeks of June 1971, we had only a limited time to make our audit. Therefore we are contin- uing our examination and will include further comments on the results of our audit in subsequent reports. .-. -._ - .-_. ..-LPD . . ..- ___- __-l_l __. r _x-I.I.. . - _ APPENDIX I SECTION 504
Audit of Payments From Special Fund to Lockheed Aircraft Corporation for C-5A Aicraft Program During Period Ended June 30, 1971
Published by the Government Accountability Office on 1971-08-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)