oversight

Settlement of Noncompliance Cases Involving Cost Accounting Standards at Northrop Corporation

Published by the Government Accountability Office on 1977-03-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          DOCUMENT RESUME
02479 - [A1732718] (Restricted)

(Settlement of Noncompliance Cases Involving Cost Accounting
Standards at Northrop Corporation]. March 1, 1977. 2 pp.

Report to Brig. Gen. M. W. Baker, Commander, Headquarters,
Department of the Air Force: Air Force Contract Management Div.
Kirtland AFB, NM; by J. T. Hall, Jr., Regional Manager, Field
Operations Div.: Regional Office (Los Angeles).

Issue Area: Accounting and Financial Reporting (2800).
Contact: Field Operations Div.: Regional Office (Los Angeles).
Budget Function: Miscellaneous: Financial Management and
    Information Systems (1002).
Authority: A.S.P.R. 3-1212.

          A determination was made of wheth'er the administrative
contracting offices of the Air Force Plant Representative
Office, Northrop Corporation, took timely and appropriate action
in settling reported cases of contractor noncompliance with cost
accounting standards. Findings/Conclusions: The administrative
contracting officer indicated noncompliance on two Air Force
contracts in the preparation of cost performance report.; (CPR)
for aircraft sales to Saudi Arabia. Specifically, propov.ed labor
and related expenses were accounted as direct, rather than
indirect, costs. Air Force legal counsel determined that
noncompliance was unwarranted and should not be issued. The
contractor was then informed by the administrative contracting
officer that direct charging of preparation costs was acceptable
to the Saudi Arabia effort. If the Saudi Arabia requirement had
been negotiated with Northrop on a separate Air Force contract,
the costs of the CPR would have been accounted for as an
indirect expense, in line with the company's normal procedures.
Recommendations: The Air Force should reconsider this matter,
and should advise GAO of any action taken. (DJM)
                              UNITED STATES GENERAL ACCOUNTING OFFICE
                                              REGIONAL OFFICE.                            C&A     d>
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                  Brigadier General M. W. Baker
C)\      -       C(ommander, Headquarters
             ,    Air Force Contract HManagement Division
                 -KXirtland Air Force Base
6 4               New Mexico 87117

                  Dear General Baker:
                       The Los Angeles Regional Office has recently completed a survey
                  of the settlement of noncompliance cases involving Cost Accounting
                  Standards (CAS) at the Air Force Plant Representative Officec-Northrop
                  Corporation, Hawthorne, California.           The objective of the survey was
                 -to determine whether the administrative contracting officer (ACO) took
                  timely and appropriate action to settle reported cases of contractor
                  noncompliance with CAS during 1975 and 1976.

                        We found that timely and appropriate action had been taken by
                  the ACO in processing noncompliance cases in accordance with the
                  requirements of the Armed Services Procurement Regulation 3-1212.
                  One case, however' was settled on the basis of direction from higher
                  headquarters, which we believe requires reconsideration by your staff.
                  The details of the noncompliance case is presented as follows:

                      The ACO had requested that the resident Defense Contract Audit
                 Agency determine whether expenses incurred in the preparation of cost
                 performance reports (CPR's) for F-5E/F aircraft under Foreign '1illtary
                 Sales contracts for delivery to Saudi Arabia were recorded in a manner
                 consistent with applicable CAS requirements. The auditor advised the
                 ACO on ,iay 7, 1976, that the contractor was in noncompliance with CAS
                 402, Consistency in allocating Costs Incurred for the Same .Purpose.
                 The noncompliance involved two Air Force contracts in which proposed
                 labor and related expenses for preparation of CPR's was estimated as
                 direct costs. The contractor's established practice was to account
                 for such expenses as indirect costs.

                      The ACO made an initial determination of noncompliance on Nay 17,
                 1976. In commenting on 'this matter, the contractor stated that the
                 CPR's in question were special requirements directed by the Air Force
                 and were in addition to the cost reports provided on other contracts.
      ___e,   __o,   JAe   Ad   COOL    -w-


                                                              MAR 1 1977
  Sinc, the contracts in question
                                   required splitting one CPR into
  reports, the contractor felt justified                           two
                                          in proposing and accounting
  f3r the expenses of the second
                                  set of reports as direct costs.
         Subsequently, the ACO prepared
   compliance and submitted it to         a draft determination of no.-
                                    the AFCMD Staff Judge Advocate
   recomnmendation and guidance.                                     for
  Air Force Systems Command StaffThe matter was then referred to the
                                     Judge Advocate. The ACO was advised
  by Systems ConmAnd on October
                                  7, 1976, that the noncompliance
  unwarranted and should not be                                      was
                                  issued. The basis
  was that CPR's relating'to   aircraft sales to Saudifor  the decision
                                                         Arabia were
  specifically required by the contracts
  The ACO promptly notified the              to serve a peculiar purpose.
                                  contractor that direct charging
  the CPR preparation costs was                                     of
                                  acceptable for the Saudi Arabia
  provided that the CAS Disclosure                                  effort,
                                      Statement was revised and consistently
  followed.

      File documentation obtained from
                                         your resident contract administra-
 tion personnel at Northrop strongly
 serve the same purpose, that is,     supports  the 'iew that the CPR's
                                   to enhance Air Force management
 capability in the identification
 If the Saudi Arabian requirements and analysis of program problems.
                                    had been negotiated with Northrop
on a separate Air Force contract,
been accounted for as an indirect the costs of the CPR would have
                                    expense in accordance with the
company's normal procedures.
                               We would appreciate it if your
would reconsider this matter and                                staff
                                  advise us of any action taken
planned.                                                          or

     We would like to take this opportunity
courtesy and cooperation provided            to acknowledge the
                                  by your resident staff during
this survey. A copy of this letter
                                    is being provided to the Regional
Tanager, Defense Contract Audit
Plant Representative, Northrop, Agency, Los Angeles, and Air Force
                                for information purposes.

                                       Sincerely yours,



                                       J. T. Hall, Jr.
                                       Regional !Ianager
cc:      Regional Manager, DCAA, Los Anrt
                                       .es
         AF'PR, Northrop