Global Policy Forum

Pentagon Questions Halliburton on


By Neil King Jr.

Wall Street Journal
August 11, 2004

Pentagon auditors have concluded that Halliburton Co. hasn't adequately accounted for more than $1.8 billion of work in Iraq and Kuwait, a finding that is likely to increase pressure on the government to withhold hundreds of millions of dollars in payments to the company.

The amount, disclosed in a Pentagon report, represents 43% of the $4.18 billion that Halliburton subsidiary Kellogg Brown & Root has so far billed the Pentagon for its work feeding and housing troops in the region. A move to withhold substantial payments to KBR could create new headaches for Halliburton, whose KBR unit filed for bankruptcy-court protection under the weight of billions of dollars of asbestos claims. Houston-based Halliburton warned shareholders in June that a move by the Pentagon to withhold substantial payments or demand refunds could "adversely affect our liquidity."

Efforts by the Pentagon to reclaim funds also could potentially disrupt the many services KBR provides to U.S. troops and other personnel in Iraq and Kuwait. Army officials threatened earlier this year to begin withholding up to 15% of KBR's billings for its services to troops, citing smaller KBR billings that weren't properly documented. But the Pentagon has given the company two waivers saying progress was being made. However, the latest Pentagon audit report underscores that KBR's billing problems remain widespread and could pressure Army officials to begin withholding substantial sums from the company.

KBR officials disputed the report's conclusions, saying that they have worked within the same Defense Department system without a hitch for years. They also voiced confidence that any outstanding differences will be worked out and said they doubted that the Pentagon would move to withhold substantial payments.

"The fact that we have negotiated and continue to negotiate proposals proves that our estimating system is valid," said one KBR official. "This is the same system that the company has used for more than 10 years."

As with all such large and undefined contracts, KBR is paid by the Pentagon for work under way, but must then provide detailed records later to support those costs. Companies are expected to accurately estimate their costs as they perform various jobs. The Pentagon report concludes that KBR neither estimated accurately, nor was able to adequately support costs after the fact.

The latest Pentagon audit, dated Aug. 4 but not publicly released, represents the most serious critique to date of the problems KBR has faced in properly billing for work in Iraq and elsewhere. The audit found that KBR's "internal control policies" are "inadequate for providing verifiable, supportable, and documented cost estimates that are acceptable for negotiating a fair and reasonable price." Pentagon officials said that no defense contractor has had its estimating system ruled "inadequate" in years.

The 60-page audit report has stirred deep concern within the Pentagon, in part because Halliburton has emerged as such a persistent political issue in the presidential race. Vice President Dick Cheney ran Halliburton through the late 1990s, and the Kerry campaign has frequently accused the Bush administration of doing multiple favors for the company. Halliburton, for its part, claims that Mr. Cheney's former role as chief executive is irrelevant, but it opens the company up to politically motivated charges.

Pentagon officials also worry that the financial disputes could impede KBR's work in Iraq, where the company provides everything from showers to bunkrooms and hot meals for nearly all U.S. troops. According to some Pentagon officials, the administration may face a decision in coming months on whether essentially to forgive many of the unsupported expenses that KBR has incurred in Iraq. The logic, one Pentagon official explained, would be that KBR was called upon to do a job that no one else was prepared to perform and did it well, despite an array of accounting problems. "The Army would then be asked to waive certain costs as being part of the war effort," the official said.

The new audit, along with several other disputes set to come to a head in coming weeks, is the latest twist in a yearlong series of struggles between KBR and Pentagon auditors over cost overruns and questionable accounting, most of it for work in Iraq and Kuwait.

Federal procurement rules specify that a contractor can't receive payment for more than 85% of its work until it has submitted all the necessary paperwork and agreed to a set of final prices with the government. In the case of KBR, Army officials have twice extended a deadline -- first in March and then in June -- for when the company was supposed to provide all the necessary cost information for its logistical work in Iraq as well as other locales. The latest deadline is set to expire this Sunday, after which the Army has threatened to withhold payments on 15% of the more than $4 billion to cover potential losses.

Such a step could entail withholding payment of as much as $600 million, though KBR officials say they are confident that the Army will again extend the deadline. The Army said it is now considering whether to grant an extension. Since most of the $4.18 billion has already been paid, any withholding would likely come out of future payments.

KBR officials have argued with the Pentagon that many of the deficiencies pointed out in the audit sprang from the unusual circumstances surrounding its Iraq work. KBR, which has lost 42 employees and subcontractors to attacks in Iraq, has had to feed, house and look after more than 140,000 U.S. troops and other personnel in a war zone. The Defense Department, meanwhile, has ordered KBR to perform innumerable chores on the fly, only to come back and critique the company for accounting lapses.

KBR has a separate contract to help restore the oil fields in southern Iraq. As part of that work, the Pentagon asked the company to haul hundreds of millions of gallons of fuel into Iraq from Kuwait and Turkey from June 2003 through early this year, a job that has provoked widespread accusations of overpricing. The two contracts together have resulted in KBR billing the Pentagon more than $6.3 billion.

Halliburton faces other challenges, including a more than $4 billion asbestos-litigation settlement currently being wrapped up. In the past few weeks, Halliburton has gained bankruptcy-court approval for the reorganization plan of several of its units, including KBR -- the parent corporation is not under bankruptcy-law protection -- that will provide the structure for a trust fund to pay all current and future claims. Insurers have agreed to contribute, and Halliburton already has set aside the remaining cash and stock required to complete the deal.

Earlier this month, Halliburton also agreed to pay $7.5 million to settle charges stemming from a Securities and Exchange Commission investigation into some of its accounting practices, though some shareholders immediately added additional complaints to a civil lawsuit accusing Halliburton of widespread accounting fraud and failure to disclose crucial financial information about the company.

For its work in Iraq, Pentagon auditors and KBR officials have gone back and forth for months over two billing disputes in particular. The first surrounds charges of more than $900 million going back to early last year for dozens of dining facilities used to feed U.S. troops and other officials. Auditors say that more than a third of those costs may be unjustified.

The second dispute involves payments made to Kuwaiti suppliers of fuel delivered to Iraq. Auditors now are said to be questioning the justification for $180 million in costs charged for fuel from Kuwait, though it will be up to the Army Corps of Engineers to decide whether KBR will have to reimburse any of the money.

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