It's been a long time — 18 years, to be exact — since the CFO at a high-profile defense contractor resigned because of a dog. But Peter Stockton remembers it like it was yesterday.

In the spring of 1985, Stockton, then chief investigator for the House Energy Commerce Committee's subcommittee on oversight and investigation, was in the middle of a $2 billion fraud case against General Dynamics for cost overruns on the 688 attack submarine. The evidence was mounting: Stockton says audiotapes had the company's CEO and chairman talking about stock manipulation and "how he was going to screw the Navy." The Securities and Exchange Commission also subpoenaed 45 boxes' worth of records from General Dynamics.

But it was the subcommittee's subpoena of one overhead claims voucher that started a firestorm of controversy and ultimately forced out the company's CFO and CEO. The voucher showed that a vice president at General Dynamics had boarded his dog at a kennel when the executive flew off to a board meeting — and then charged the expense to the U.S. government. Recalls Stockton: "There was just an outcry over that [overhead abuse] issue."

These days, with U.S. troops slugging it out in Iraq, there's scant attention given to the accounting practices of DOD contractors. In fact, the only question being asked of munitions makers right now is whether their products work as advertised.

Even then, the U.S. government doesn't appear overly eager to shine a light on black-box projects. In late February, for example, a judge tossed out a seven-year-old suit against TRW alleging that the defense contractor falsified 1996 test results of its antimissile defense system. The reason for the dismissal? Reportedly, government attorneys argued that documents requested by TRW for its defense could jeopardize national security.

The veil of secrecy that shrouds many black-box projects appears to extend to the accounting for some of those projects as well. A number of government agencies oversee the bookkeeping on defense projects. But in an audit of spending for fiscal year 2000, the Pentagon's Inspector General's Office found $1.1 trillion in bookkeeping entries that could not be tracked or justified.

Moreover, it's nearly impossible to determine how much information defense oversight agencies share with the Securities and Exchange Commission, the regulatory body charged with vouchsafing the accounting of publicly traded companies. And given the heightened role of defense contractors in President Bush's war on terrorism — and the growing importance of the military-supply chain in the ongoing struggle in Iraq — some critics wonder if the SEC would have the temerity to launch a rear-guard assault on a Department of Defense contractor.

Dina Rasor is one of those asking that question. Rasor, head of the military reform project of the National Whistleblower Center, doubts that the SEC will investigate DOD contractors while shots are being fired in the Middle East. "Right now," she says, "it's probably hard for the SEC to go after defense contactors because we're on a war footing."

Since September 11, 2001, the commission has filed one civil suit against defense contractors. The lawsuit, against Patriot Missile-maker Raytheon, alleged that Raytheon CFO Frank Caine had violated Regulation Fair Disclosure. In January, Raytheon management indicated that the commission had launched an informal investigation regarding accounting practices and revenue recognition at the company's Raytheon Aircraft subsidiary — a non-DOD business. In announcing the probe, Raytheon management asserted that it believes the company's accounting practices are appropriate.

So far, nothing has come of the informal Raytheon investigation. Given the war in Iraq, Stockton's not sure anything will. "You really don't want to take on a contractor in the midst of [a war]," asserts Stockton, who now serves as senior investigator at the non-profit Project On Government Oversight (POGO). "I think it raises the patriotism flag."

There's No Accounting for Waste
Of course, an SEC investigation can show that a company's done nothing wrong — and right now, that's the assumption in the Raytheon probe. As of press time, the company had not received a Wells notice, or any other indication that the SEC might be looking to ratchet up its investigation.

The odds are good there won't be any ratcheting up, either. Historically, the SEC has not been particularly aggressive in going after defense contractors. Take the General Dynamics case. Two years after the Congressional hearings on the company closed, Stockton went to the SEC's offices to look at the 45 boxes of documents the commission had subpoenaed from the defense manufacturer. What he found shocked him. "When we went down to the SEC to look at the files," Stockton recounts, "they hadn't even opened their boxes."

This seeming lack of interest in defense contractor cases appears to be rule at the SEC, rather than the exception. A search of the SEC database reveals that, since 1999, the SEC has filed only three complaints against military suppliers: the Raytheon Reg FD case and complaints against two minor defense contractors.

• 1
• 2
• 3
• next »