Halliburton Contracts Face New Scrutiny

Pentagon auditors have found that Halliburton Co. cannot properly document more than $1.8 billion worth of work done under its contracts in Iraq and Kuwait, Army officials said Wednesday.

The latest setback for the Houston oil services company came in an audit by the Defense Contract Auditing Agency, which also found that the firm’s system for generating cost estimates used in negotiations with the government was “inadequate.”

The agency recommended that government contracting officials demand fixes within 45 days and seek more detailed information during negotiations with Halliburton, which has contracts worth as much as $18.2 billion in Iraq to feed and house troops and restore the country’s oil infrastructure.

Army contracting officials said they were studying the auditors’ recommendations but had not decided how to proceed, leaving open the question of how the audit would affect the bottom line of Halliburton, which was run by Vice President Dick Cheney from 1995 to 2000.

“What the final outcome will be, I can’t speculate. It’s under review now,” said Dan Carlson, a spokesman for the Army Field Support Command in Rock Island, Ill., which oversees Halliburton’s largest contract in Iraq and Kuwait.

The cost estimate system is used to come up with a price that the government agrees to pay Halliburton as it performs work in Iraq. Later, auditors try to reconcile the estimates with actual costs and determine whether the government has paid too much or too little.

It is important because the government does not want to pay too much to a contractor and have to seek reimbursement later. The audit found that Halliburton’s estimating systems suffered from “a lack of current, accurate and complete cost and pricing data.”

Halliburton defended its system and said it disagreed with the results of the audit, which were first reported Wednesday in the Wall Street Journal.

Company officials said they were working with the government to address issues raised in the report, including the inadequate accounting for work done under the so-called Logcap contract, which supplies logistics aid for U.S. troops.

The $1.8 billion amounts to about 42% of the $4.3 billion the company has billed to the U.S. government under the contract. In the past, the company has acknowledged that its work in a war zone has made paperwork difficult.

Halliburton said it did not expect its financial liquidity to be affected by concerns about the estimating system, or by the possibility that the government could withhold as much as 15% of its payments because of problems with arriving at fixed prices within the contract.

The Pentagon audit “is just an opinion,” said Wendy Hall, a Halliburton spokeswoman. “The [auditing agency] is advisory only. They do not have the authority to make final decisions.”

Democrats wasted little time in seizing on the news. Throughout the presidential campaign, Democrats have sought to link Halliburton’s contracting problems to Cheney and the Bush administration.

Halliburton faces numerous investigations, including an FBI inquiry into whether two of its employees received up to $6.3 million in kickbacks and whether the company improperly billed for $186 million in meals never served at dining halls in Iraq.

Last week, the company agreed to pay a $7.5-million fine to the Securities and Exchange Commission to settle an investigation of an accounting practice that appeared to boost the company’s revenue while Cheney was chief executive.

And a federal grand jury in Texas has launched a criminal inquiry into whether Halliburton violated U.S. sanctions against doing business in Iran by working through a foreign-owned subsidiary registered in the Cayman Islands.

Tad Devine, a senior advisor to Democratic presidential candidate John F. Kerry, said polling and focus groups showed that the Halliburton issue resonated, especially with swing voters in battleground states such as New Mexico.

“They believe that this administration, the president and the vice president have favored special interests at the expense of public interests,” Devine said. “The Halliburton issue has become a real flash point.”

Administration and Bush campaign officials said the Kerry campaign was directing attention away from more substantive issues.

“That’s the same old political attacks that they’ve been waging for a long time,” said Scott McClellan, a White House spokesman. “You have someone who cannot stand on his own record and is trying to do anything to divert attention away from his record, which is out of the mainstream.”

Times staff writer Maura Reynolds in Albuquerque contributed to this report.