Cooking the Books Is Smelly
Air Force Secretary Verne Orr noted the other day that “national support for building military strength has been severely battered by public perception that we pay too much for the goods and services we acquire.” Indeed it has. As part of an Administration effort to win back public confidence, the Justice Department is currently investigating more than 30 cases of fraud by major defense contractors.
The only real cure is a change in the corporate climate that encourages fudging of the books to get more money from the government. Unfortunately, it appears that tough action--including heavy fines and jail for responsible persons--will be needed to persuade top managers of big defense firms that the problem is real and must be corrected.
A federal grand jury recently indicted General Electric Co. on charges that it defrauded the Air Force of $800,000 on a Minuteman nuclear missile warhead contract by charging cost overruns to other government projects. Two days later the Pentagon reacted by suspending GE’s eligibility for new government contracts and the renewal of existing ones.
GE, which has denied the charges, is the nation’s 10th-largest corporation and one of the biggest defense contractors. The company makes engines for B-1 bombers and F-16 fighter jets, propulsion units for Navy ships and components for dozens of other weapon systems.
If convicted of the fraud charges, GE faces a fine of up to $1.08 million. That’s a lot of money, but it is peanuts compared to the company’s multibillion-dollar revenues from defense work. Clearly other deterrents are necessary.
The law provides for the effective blacklisting of companies that defraud the government. About 1,000 companies, in fact, are currently on the government’s list of suspended and ineligible contractors.
The fact is, however, that large defense contractors are so vital to the design and production of complex weapon systems that the Pentagon cannot live without them. Thus, while small firms are frequently barred from defense work for cheating the government, GE is the first giant of the defense industry that has been subjected to such treatment even temporarily.
GE can be taken off the list whenever the Air Force decides that the company is taking proper steps to prevent repetition of the alleged conduct in the future. That decision may not take long, because of the company’s importance as a supplier of key military items.
GE’s guilt or innocence remains to be decided in court, but in the case of big defense contractors that are found guilty of cheating the taxpayers, punishment should reach beyond the corporation as such to the individuals who planned, committed or tolerated illegal acts.
The law provides for fines up to $10,000 and five years in prison for false statements to a government agency. In most such cases, however, corporate executives blame overzealous subordinates for “mistakes in judgment,” and nobody is prosecuted.
The message must go out that cooking the books on federal contracts is not fun and games, punishable with a slap on the wrist when caught, but an act of thievery that can land culpable corporate executives of high or low rank behind bars. When and if that message sinks in, fewer defense contractors will indulge in creative accounting at taxpayer expense.
