Boeing Should Lose $271 Million in Rocket Billings, Audit Says

Boeing Co. should lose as much as $271 million in government payments for satellite launch services because the No. 2 U.S. defense contractor violated federal accounting rules, the Pentagon’s audit agency said.

The Defense Contract Audit Agency, in a July 23 report, said the Pentagon should require Boeing to reimburse $72 million that was previously paid, agency director Patrick Fitzgerald said in an e-mail statement.

Fitzgerald said the Defense Contract Management Agency, which monitors contractor performance, also should notify the joint Boeing-Lockheed Martin Corp. United Launch Alliance that the government won’t pay another $199 million in “unallowable” pending support costs. Boeing was notified of the finding on July 28 and doesn’t agree, a company spokesman said.

The auditors reviewed whether Chicago-based Boeing improperly billed the Air Force in a 2006-2008 contract for labor, management, quality control and support costs that had been incurred between 1998 and 2006 in the Delta IV rocket program.

Boeing was “in non-compliance” with federal accounting standards that require billings to take place during the year when the costs were incurred, Fitzgerald said.

Boeing spokesman Joseph Tedino, in an e-mail statement, said “the costs at issue were legitimate costs of the Delta program,” which the government acknowledged by agreeing in 2006 to pay for those items. “Boeing believes its 2006 agreement was appropriate, and that the United Launch Alliance’s recovery of the costs is fully compliant” with government accounting standards, Tedino said.

November Decision

Debra Bingham, a spokeswoman for the Defense Contract Management Agency, which is reviewing the audit recommendations, said that the agency’s Boeing manager in Huntington Beach, California, plans to render a final decision in November.

The official will review the audit agency’s analysis and recommendation, as well as Boeing’s rebuttal, she said.

Boeing and Bethesda, Maryland-based Lockheed Martin, the largest defense contractor, established the United Launch Alliance in December 2006 to consolidate the military launch business. Boeing’s Delta IV and Lockheed Martin’s Atlas V rockets are the primary methods for launching U.S. military satellites.

The audit was undertaken after the U.S. Government Accountability Office and the Pentagon’s inspector general last year uncovered problems with 14 audits of various programs and 62 pricing agreements at government locations in California.

‘Flawed Audit’

In Boeing’s case, a regional manager for the audit agency approved “a flawed audit that could have allowed Boeing to recover” the $271 million, Inspector General Gordon Heddell said in Sept. 23 testimony to Congress.

The regional manager, who wasn’t identified by the inspector general, overturned a draft audit conclusion that Boeing shouldn’t be paid anything because the company was in “potential violation of accounting standards,” Heddell said.

The regional manager failed to meet government “standards for independence and objectivity,” and “engaged in conduct that was inconsistent with established leadership standards for senior officials,” Heddell said.

Fitzgerald in his e-mail said his audit agency was “acting aggressively to correct issues” that involve “very sophisticated accounting systems.”

Boeing rose $1.55 yesterday to $69.69. The shares have risen almost 29 percent so far this year, the best performance in the 30-member Dow Jones Industrial Average.

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

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