12. Jones Aircraft is a large contractor with many defense contracts. Some of th
ID: 2762423 • Letter: 1
Question
12. Jones Aircraft is a large contractor with many defense contracts. Some of the contracts are fixed price and some are cost type. The contractor issues work to the shop for each contract by General Order (GO) referencing the contract by number but not any other details. In this case, GO-101 is a fixed price contract, and GO-102 is a cost reimbursement contract. Todd, the shop foreman had the responsibility to tell workers in his group to which GO they should charge the work being done that day. Todd had no idea what contract type was connected to any GO. Todd found, after a while, that when he charged more time to GO-102 and less to GO-101, he had many fewer complaints when his department’s performance review with top management came around each month. He continued this process and everything was fine for him and his department at program review. Harry, the VP Controller, noticed the pattern and complimented Todd on his department’s performance, although he knew that some fixed price effort was being charged to the cost type contract. This practice was in effect, knowingly increasing profit for the company by lowering costs on the fixed price contract, and increasing costs on the cost reimbursement contract. Harry also was the management official that certified all of the cost invoices the company submitted for reimbursement. A DCAA floor auditor discovered this situation, and brought it to the attention of his Resident Auditor. The Resident Auditor immediately took steps to stop the process in Todd’s shop, and ordered Jones Aircraft to make the appropriate cost adjustments to the two contracts. He then reported this to his Legal advisor (JAG) and suggested that Fraud had been committed. Answer the following questions: 1. What is your opinion of the cost accounting system that allowed a supervisor the authority to tell the person working on the part, which has a shop ticket with a GO number on it, which GO to charge on his/her time card? 2. Was Todd guilty of fraud? 3. Was Harry guilty of fraud?
Explanation / Answer
1. The cost accounting system followed lacks any reasonable basis for cost allocation as Todd arbitrarily charged the cost to either GO 102 ( for most cases ) and GO 101 . This is not an accepatble system of cost accounting. Either Todd must be given a clear instruction regarding the types of contracts which has to be assigned and the types of jobs relevant for each type of contract.
Otherwise, any responsible manager having the knoweldge of the contract types must allocate the job costs to contracts. This will ensure proper cost allocation and correct billing.
2. Though Todd was not aware of the fraud but as he got lesset questions during department's perofrmance review , he kept on overcharging reimbursement contracts in place of fixed price contracts. So Todd is guilty of a fraud as he did wrong charging of costs knowingly , although for a different reason.
3. Harry was having full knowledge of the happenings but he abetted the fraud as it was generating additional profit for the company. As Harry was encouraging the overcharging , he is definitely guilty of fraud.
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