Agency Comments

B-258172

with defending against stockholder derivative lawsuits. However, its

research concluded that such costs are unallowable under the FAR cost

principle on reasonableness of costs (FAR 31.201-3) when the lawsuit is

based on contractor wrongdoing. As a result, DCAA addressed this situation

by issuing audit guidance, on April 13, 1995, that now specifically deals

with these costs. The guidance requires auditors to question costs incurred

to defend against stockholder lawsuits related to contractor wrongdoing.

(See app. I.)

From October 1988 through December 1994, there were 72 cases involving

procurement fraud--30 criminal and 42 civil--associated with firms on

DOD's Top 100 Contractor list.2 Criminal fines, awards, and restitution

amounts approximated $1.03 billion. (See app. II.)

It is not apparent that claiming reimbursement for stockholder derivative

legal costs is a common practice. Of these 72 procurement fraud cases,

only 13 associated with 8 companies involved stockholder lawsuits. The

legal costs of the stockholder lawsuits for the eight companies totaled

approximately $15 million; $6,232,150 was being claimed under defense

contracts by four of these contractors. (See app. III.)

reviewed a draft of this report and concurred with its findings. (See

DOD

Agency Comments

app. IV.)

We updated the list of defense procurement fraud cases through

Scope and

information provided by (1) the DOD Inspector General's Criminal Division,

Methodology

the Department of Justice, the Securities and Exchange Commission, and

DCAA and (2) a literature search. This information covered cases from

October 1988 through December 1994.

To develop a list of stockholder derivative lawsuits, we reviewed those

contractors on DOD's list of top 100 contractors that had criminal

procurement fraud convictions or had agreed to settlements in civil

actions for procurement fraud. We established which of the 100

contractors had stockholder lawsuits and reviewed the legal costs

associated with these suits.

DOD maintains a list of the top 100 contractors with the largest defense contracts based on dollar

amount of their contracts. DOD's Office of the Inspector General, Criminal Division, semiannually

compiles a list of contractors, based on DOD's top 100 contractors list, that were convicted of

procurement fraud.

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GAO/NSIAD-95-166 Defense Contracting