KBR Contracts Are ‘Majority’ of Fraud Referrals

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By Tony Capaccio

May 4 (Bloomberg) — Billings from KBR Inc., the Army’s largest contractor in Iraq, constitute the “vast majority” of 32 cases referred by government auditors for criminal investigation, the Pentagon’s top auditor said today.

April Stephenson, head of the Pentagon’s contract audit agency, told the Wartime Contracting Commission that in the agency’s history, “I don’t think we are aware of a program, a contract or a contractor that’s had this number” of referrals.

KBR, then a unit of Halliburton Co., won a contract in December 2001 to provide worldwide support for U.S. troops’ housing, food, laundry and fuel services. The contract’s value grew to $31.7 billion, with most of the work being done in Iraq and Kuwait.

The referrals for potential fraud started in February 2004, almost a year after the U.S.-led invasion of Iraq, with the most recent referral in March, Stephenson stated. The cases include billing for unallowable costs, accepting bribes, falsification of time cards and subcontractor over-billings for laundry, guard services and dining facilities, she said.

Stephenson didn’t stipulate how many of the 32 cases stemmed from KBR’s Army logistic contract or from follow-on work it has been awarded since that contract ended in 2007.

KBR’s Response

Heather Browne, spokeswoman for KBR, said in an e-mailed statement that the company “in no way condones or tolerates illegal or unethical behavior,” and “when KBR has discovered wrongdoing of any sort by an employee, we have swiftly reported it to the government.”

The two-year contracting commission was established by Congress in the fiscal 2008 budget to investigate potential contracting abuses in Iraq and Afghanistan.

Over half of the 32 referrals “address suspected irregular conduct by subcontractors,” said Stephenson, head of the Defense Contract Audit Agency.

KBR’s system for monitoring subcontractors’ costs has been repeatedly criticized as inadequate by Pentagon auditors — most recently in an audit DCAA completed last week, Stephenson said.

Pentagon auditors since 2003 have found “various instances where KBR awarded purchase orders and subcontracts to other than the contractor with the lowest bid” and the company “did not provide adequate justification for the award to the higher- priced subcontractor,” she said.

The audit agency “found many examples where KBR did not take aggressive action to obtain sufficient data” from subcontractors “to ensure the lowest possible prices for the taxpayer,” she said.

‘Unprecedented’ Referrals

Stephenson, in an interview after the hearing, said it’s “unprecedented to have that many” referrals “on a particular program. If you look at the programs we have across the agency, having one referral is significant.”

“But to have something in the category of ‘majority of 32’ is really unprecedented,” she said, referring to the initial logistics contracts.

The problems with KBR’s cost accounting and its management of subcontractors were also “unprecedented,” Stephenson said.

“It’s the cost issues, it’s the systems issues, it’s the systemic issues,” she said. “We don’t get into the ‘quality’ aspects of what they do and I understand they do that quite well. It’s the referrals, the number of deficiencies that continue in the system — year after year,” she said.

“It seems as though it takes a significant period of time to get these deficiencies corrected and that’s worrisome,” she said.

Last week’s DCAA audit examined KBR’s purchasing systems, including subcontractor controls — a large part of the logistics contract — and found it to be “inadequate,” she said. “Some of the same problems” disclosed in audits several years ago “still existed,” she said.

Houston-based KBR was spun off in 2007 from Halliburton, the world’s second-largest oilfield-services company. KBR rose $1.27 to $17.17 at 3:15 p.m. in New York Stock Exchange composite trading.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aMU8u4SgHniI&refer=home

To contact the reporter on this story: Tony Capaccio in Washington atacapaccio@bloomberg.net

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