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)



                              COMPTROLLER     GENERAL     OF THE        UNITED   STATES
                                            WASHiNGTON.    D.C.     20548


     / 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
           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                 *


            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
                FROM SPECIAL BANK ACCOUNT                                     6

            I   Section   504,   Public     Law 91-441,       October   7,
                  1970                                                       11


     DCAA       Defense   Contract      Audi?%gency


        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.

       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
      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-


       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

                  -      .

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    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      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.


        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

          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