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assistance can, even in a small measure, be a substitute for the necessary action that can be taken only by the Chinese Government. Yet this program can accomplish the important purpose of giving the Chinese Government a respite from rapid economic deterioration during which it can move to establish more stable economic conditions. Without this respite the ability of the Chinese Government to establish such conditions at all would be doubtful. The achievement of even this limited objective is of such importance as to justify the proposed program of aid.

I recommend, therefore, that this program be given prompt and favorable consideration by the Congress.

HARRY S. TRUMAN. THE WHITE HOUSE, February 18, 1948.

O

CONTRACT SETTLEMENT ACT OF 1944

LETTER

FROM

THE COMPTROLLER GENERAL OF THE UNITED STATES

TRANSMITTING

A REPORT OF THE ACTIVITIES OF THE GENERAL ACCOUNTING OFFICE UNDER SECTION 16 OF THE CONTRACT SETTLEMENT ACT OF 1944

FEBRUARY 26 (legislative day, FEBRUARY 2), 1918.—Referred to the Committee

on the Judiciary and ordered to be printed

COMPTROLLER GENERAL OF THE UNITED STATES,

Washington, February 24, 1948. The PRESIDENT PRO TEMPORE OF THE SENATE.

MY DEAR MR. PRESIDENT: Transmitted herewith is copy of a report of the activities of the General Accounting Office under section 16 of the Contract Settlement Act of 1944. A copy of the report is being sent, with letter of today, to the Speaker of the House of Representatives. Respectfully,

LINDSAY C. WARREN, Comptroller General of the United States.

COMPTROLLER GENERAL OF THE UNITED STATES,

Washington, February 24, 1948. To the Congress:

In order that the Congress may be kept informed as to the results of the activities of the General Accounting Office under section 16 of the Contract Settlement Act of 1944, it is deemed proper at this time to supplement and bring up to date my report sent to the Congress July 10, 1947 (printed as S. Doc. No. 75, 80th Cong., 1st sess.).

I have previously stated, and I reiterate it here at the outset, that the Contract Settlement Act of 1944 divested the General Accounting Office of the means adequately to protect the Government in the settlement of terminated contracts. In the mentioned report, there were reviewed briefly my recommendations made prior to the enactment of the statute, when I strongly urged that an independent audit of proposed settlements before they became final was imperative to protect the Government, because of the vast sums to be spent, of the overgenerosity of the contracting officers as a group who were to be entrusted with the spending, and of the likelihood of fraud where there was no such prior independent audit. It was pointed out, also, that, nevertheless, the Contract Settlement Act excluded the recommended safeguards and, in important effect, confined the function of the General Accounting Office to determining from inadequate records, after settlements had become final, whether they had been induced by fraud. Such function was shown to be relatively futile in the face of the laxity on the part of contracting agencies and war contractors invited by the act and of the curbs and restraints imposed on the General Accounting Office. Unfortunately, to a great extent the purpose of those advocating enactment of the statute-to write the General Accounting Office out of contract settlements—has been accomplished. The General Accounting Office was made largely ineffectual to afford any real protection to the Government.

FRAUD CASES CERTIFIED

Regardless of the handicap under which the General Accounting Office of necessity has had to function under the Contract Settlement Act of 1944, many instances of apparent fraud and overliberal settlements have been uncovered. As of December 31, 1947, the General Accounting Office has examined 6,701 settlements covering payments to war contractors in the aggregate amount of $906,893,398.26 for the termination of 16,072 contracts, subcontracts, and/or purchase orders. Careful analysis of the evidence disclosed in such examination has convinced me that at least 145 of the settlements (more than 2 percent of those examined) involving improper payments totaling nearly $4,000,000 (slightly less than one-half of 1 percent of the total payments made) were induced by fraud. In conformity with section 16(b) of the Contract Settlement Act, I have so certified, together with the facts relating thereto, to the Department of Justice, to the Office of Contract Settlement, and to the contracting agencies concerned.

Brief statements of the facts relating to 79 of the said settlements were included in the report of July 10, 1947. There are summarized hereinafter the pertinent factors in the 66 other settlements-involving improper payments to 18 war contractors in the aggregate amount of at least $3,130,190.22-certified in accordance with the provisions of the act since the date of said report.

1. One contractor included in its termination claim excessive charges in the respective amounts of $185,285.11, $273,622.02, $113,039.98 and $2,353,743, for raw materials and purchased parts, perishable tools, overhead (loss on sales), and general and administrative expense With respect to the first two amounts, disposal credits representing respectively, 50 and 23.294 percent of the costs paid by the Govern ment were offered and accepted upon the contractor's representation: that the said sums were the reasonable values of the inventories ir its other work. An analysis by representatives of the Genera Accounting Office of the contractor's records disclosed that the inven tory included in the first item was usable without any loss in othe

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work. Major portions thereof already had been used before final settlement, additional purchases had been made at even higher prices, and the rate of usage generally was such as to indicate beyond reasonable doubt that the contractor sustained no loss. What has been said with reference to the first item appears to be applicable, also for he same reasons and to the same extent, to the second item. The tools included in this item were retained for use, and there is nothing to show that their usefulness was limited in any manner. Moreover, all of the involved inventories were well known to be in critically short supply at the time, and, apparently, no real effort was made to return them to suppliers at equitable prices or to realize for the Government the best prices obtainable therefor as required by the joint termination regulation.

The item of $113,038.98 was the pro rata share charged to the terminated contract of the contractor's loss on sales of perishable tools and nonproductive inventory currently included in overhead. The losses on the tools previously had been disallowed as costs during the life of the contract because they were not related to the contract work, because unjustifiably low prices were obtained, because the sales had not been approved by the Government, and because in some instances the same or identical tools had been repurchased at higher prices. Moreover, the examination disclosed that all involved items were in excess of the reasonable quantitative requirements of the contract and, consequently, were for exclusion in any event from the termination claim pursuant to the mentioned regulation.

The item of $2,353,743 was made up of pro rata shares of 28 of the contractor's ledger accounts, totaling $2,645,104, which were not allocable—under the said regulation, the terms of the contract, and established cost-plus-a-fixed-fee decisions--to the terminated work, plus $23,087 for income accounts improperly excluded from credit, less $314,448 of unidentified general and administrative costs excluded by the contracting agency from the settlement. None of the charges included in the claim was applicable to the terminated work. For example, legal expenses incurred in connection with the acquisition of a loan company, postwar planning expense, write-offs of deferred costs for a period prior to the date of the contract, losses on sales of productive inventory, write-downs of inventory values, provisions for contingencies, premiums on life insurance designating the contractor as beneficiary, excessive advertising costs, taxes which the contractor was not obligated to pay, and many other similar costs were in direct contravention of the joint termination regulation, of recognized decisions, or of sound accounting practices.

The amount deemed to have been fraudulently obtained is the sum of $2,925,689.11. (Certified to the Department of Justice September 9, 1947, B-60490.)

2. Another contractor-manufacturing optical elements under a War contract-apparently indicated that its termination claim was on the inventory basis when, in truth and in fact, it was based on an estimated percentage of completion. Aside from the impropriety of such representation, the contractor at first demanded advance payment based on quantities of finished articles far in excess of those actually completed and on purported costs of work in process far in excess of the contract price for the articles undelivered. It duplicated in its claim quantities properly allocable to—and paid for by the Government under the claim of a subcontractor. Also, although the contract price included compensation for 30 percent spoilage and the termination claim was for a percentage of such price, no allowance was made in the work in process claim for any spoilage at all. The amount deemed to have been fraudulently obtained in the termination settlement is the sum of $26,068.96.

Apart and aside from the fraudulent termination claim, there were disclosed in the examination by the General Accounting Office irregularities in the inspection and acceptance for the Government of major portions of the work completed before termination. Records were found of payments by the contractor to Government inspectors actively engaged on the contract work. Convincing evidence was found, also, indicating that improper or possibly even fraudulent approval was given by said inspectors to products of the contractor for which the Government had paid substantial sums. While these latter disclosures were incidental to the examination made of the termination settlement they, too, were brought to the attention of the Attorney General for appropriate action. (Certified to the Department of Justice December 2, 1947, B-61563, B-64532.)

3. The subcontractor referred to in the preceding case submitted its termination claim on the inventory basis directly to the contracting agency concerned and, in the settlement consummated on the basis thereof, was paid the sum of $47,793.01. As was the case with the prime contractor, the claim was misrepresented, being, in truth and in fact, on the basis of estimated percentage of completion. Moreover, aside from that falsification, the subcontractor --whose claim, like that of the prime contractor, was limited by the 30 percent spoilage provision-made no allowance for spoilage of work in process already compensated for in any payment based on the contract price. Further, in one instance at least, reimbursement was had for work in process in excess even of the number of units called for under the subcontract. The amount fraudulently obtained, by misrepresentation of the basis of the claim and of the costs and quantities apportioned to the terminated work, is the sum of $7,877.21. (Certified to the Department of Justice July 25, 1947, B-61563, B-64532.)

4. One firm, incorporated for the purpose of obtaining from the Governments of the United States and of its allies orders for the manufacture of an ordnance vehicle purportedly designed by its president, was awarded a contract for the development, engineering, and manufacture of 17 such vehicles at a total cost to the Government of $665,000. Actual production was to be completed within approximately 5 months by a major subcontractor on the cost-plus-a-fixed-fee basis, from plans and designs of the firm. Only two vehicles were delivered within a year and both were rejected as not meeting the contract specifications. The contract was suspended and considered terminated. Although the procuring agency determined that termination was for default, upon review by higher authority a tripartite settlement agreement was entered into whereunder the three parties severally released each other of any claims under the contract in consideration of reimbursement by the Government of all costs incurred and of payment by the Government to the firm of $62,500 in lieu of profit and damages and in payment for an unrestricted license to produce and use the invention.

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