B-119072, AUG 24, 1954

B-119072: Aug 24, 1954

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DEPARTMENT OF THE AIR FORCE: REFERENCE IS MADE TO YOUR LETTER OF FEBRUARY 16. QUESTIONED THE LEGALITY OF THE PROPOSED PAYMENT ON THE BASIS THAT THE AUDITING SERVICES INVOLVED WERE INCIDENT TO THE ANNUAL AUDIT OF THE CONTRACTOR'S RECORDS. WERE NOT CONSIDERED TO BE "NECESSARY OR REASONABLY INCIDENT TO" THE WORK OF THE INSTANT CONTRACT. THE QUESTIONED ITEM WAS COLLECTED BY OFFSET FROM AMOUNTS OTHERWISE DUE THE CLAIMANT. ALL OF THESE FUCTIONS ARE CLAIMED TO BE BENEFICIAL NOT ONLY TO THE CONTRACTOR. IT IS CLAIMED THAT THE AUDITING FEES PROPERLY ARE REIMBURSABLE AS A PART OF THE OVERHEAD EXPENSE ALLOCABLE TO THE CONTRACT. INSOFAR AS THE MATTER OF REIMBURSEMENT FOR PROPER ITEMS OF COST IS CONCERNED.

B-119072, AUG 24, 1954

PRECIS-UNAVAILABLE

FIRST LIEUTENANT F.R. BOUDRIA, DEPARTMENT OF THE AIR FORCE:

REFERENCE IS MADE TO YOUR LETTER OF FEBRUARY 16, 1954, FINKK-E-167, TRANSMITTING FOR ADVANCE DECISION RECLAIM VOUCHER FWB-4319, FOR $3,741.26, IN FAVOR OF THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, ASSIGNEE FOR CONSOLIDATED VULTEE AIRCRAFT CORPORATION. THE VOUCHER COVERS AUDIT FEES AND EXPENSES PAID TO THE ACCOUNTING FIRM OF ARTHUR YOUNG AND COMPANY, AND INCLUDED AS A PART OF THE CONTRACTOR'S OVERHEAD EXPENSE FOR THE YEAR 1949 UNDER COST-PLUS-A-FIXED-FEE CONTRACT NO. W33 038 AC-7, DATED JULY 22, 1944, AS AMENDED.

THE DIVISION OF AUDITS, GENERAL ACCOUNTING OFFICE, QUESTIONED THE LEGALITY OF THE PROPOSED PAYMENT ON THE BASIS THAT THE AUDITING SERVICES INVOLVED WERE INCIDENT TO THE ANNUAL AUDIT OF THE CONTRACTOR'S RECORDS, AND HENCE, WERE NOT CONSIDERED TO BE "NECESSARY OR REASONABLY INCIDENT TO" THE WORK OF THE INSTANT CONTRACT, NOR PROPERLY ALLOCABLE TO THE CONTRACTOR'S 1949 OVERHEAD EXPENSE. THE QUESTIONED ITEM WAS COLLECTED BY OFFSET FROM AMOUNTS OTHERWISE DUE THE CLAIMANT.

IN A FORMAL STATEMENT ACCOMPANYING THE INSTANT RECLAIM VOUCHER, THE CLAIMANT CONTENDS THAT THE SERVICES RENDERED BY THE ACCOUNTING FIRM MENTIONED INCLUDED EXAMINATION OF THE CONTRACTOR'S ACCOUNTS AND SUPPORTING RECORDS; RECONCILING AND CHECKING OF ITS BANK BALANCES; ANALYSIS OF ITS INCOME AND EXPENSE ACCOUNTS, AND ALSO, ITS SYSTEM OF INTERNAL CONTROL; THE CONTRACTOR'S ADHERENCE TO ACCEPTED ACCOUNTING PRINCIPLES AND POLICIES, AND A GENERAL REVIEW OF THE COST REIMBURSEMENT CLAIMS OF THE COMPANY. ALL OF THESE FUCTIONS ARE CLAIMED TO BE BENEFICIAL NOT ONLY TO THE CONTRACTOR, BUT TO THE GOVERNMENT AS WELL, IN THAT THEY DISCLOSE INEFFICIENCY IN THE CONTRACTOR'S ACCOUNTING METHODS AND PROCEDURES, POSSIBLE OVERCHARGES, NONFEASANCE, OR LACK OF PROPER INTERNAL CONTROL IN THE MANAGEMENT OF THE CONTRACTOR'S BUSINESS. HENCE, IT IS CLAIMED THAT THE AUDITING FEES PROPERLY ARE REIMBURSABLE AS A PART OF THE OVERHEAD EXPENSE ALLOCABLE TO THE CONTRACT.

INSOFAR AS THE MATTER OF REIMBURSEMENT FOR PROPER ITEMS OF COST IS CONCERNED, ARTICLE 3(B) OF THE CONTRACT PROVIDES THAT THE "ALLOWABLE ITEMS OF COST WILL BE DETERMINED BY THE CONTRACTING OFFICER" IN ACCORDANCE WITH REGULATIONS CONTAINED IN T.D. 5000. SPECIFICALLY, ARTICLE 3(B)(5) OF THE CONTRACT PROVIDES FOR REIMBURSEMENT FOR EXPENDITURES MADE BY THE CONTRACTOR FOR "NECESSARY ACCOUNTING SERVICES IN CONNECTION WITH THE PERFORMANCE OF THIS CONTRACT *** AS THE CONTRACTING OFFICER MAY APPROVE." AMONG THE ITEMS OF COST WHICH EXPRESSLY ARE EXCLUDED FROM ALLOWANCE BY SECTION 26.9 (G)(4) OF T.D. 5000 ARE THOSE ACCOUNTING FEES WHICH ARE RELATED OR INCIDENT TO "REORGANIZATIONS, SECURITY ISSUES, CAPITOL STOCK ISSUES AND THE PROSECUTION OF CLAIMS AGAINST THE UNITED STATES."

NOT ONLY WERE THE AUDITING FEES IN QUESTION APPROVED FOR REIMBURSEMENT BY THE CONTRACTING OFFICER AS A PROPER ITEM OF OVERHEAD EXPENSE ALLOCABLE TO THE WORK OF THE CONTRACT, BUT THE ACCOUNTING FIRM OF ARTHUR YOUNG AND COMPANY HAS CERTIFIED THAT ITS INVOICE FOR SERVICES RENDERED IN CONNECTION WITH THE AUDIT AND EXAMINATION OF THE CONTRACTOR'S RECORDS FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1948, INCLUDED NO FEES OR EXPENSES INCIDENT TO THE PREPARATION OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION, NOR DID IT INCLUDE ANY FEES INCIDENT TO THE PREPARATION OF THE FEDERAL INCOME TAX RETURNS OF THAT COMPANY. FURTHERMORE, THE RESIDENT AUDITOR FOR THE PROJECT HAS APPROVED THE CLAIMED EXPENDITURES AS BEING NECESSARY "IN CONNECTION WITH THE PERFORMANCE OF THE SUBJECT CONTRACT."

INASMUCH AS THE AUDITING FEES INVOLVED HAVE BEEN APPROVED BY THE DESIGNATED OFFICIAL AS AN ITEM OF EXPENSE PROPERLY REIMBURSABLE UNDER THE TERMS OF THE CONTRACT, AND SINCE THE RECORD IN THE CASE OTHERWISE CONFIRMS THE CONTRACTOR'S POSITION THAT THE AUDITING SERVICES WERE NECESSARY AND REASONABLY INCIDENT TO PERFORMANCE OF THE WORK OF THE CONTRACT, THIS OFFICE NEED NOT FURTHER OBJECT TO THE PROPOSED PAYMENT, IF OTHERWISE CORRECT. SEE JAMES GRAHAM MANUFACTURING COMPANY V. UNITED STATES, 91 F. SUPP. 715; UNITED STATES V. MASON & HANGER COMPANY, 260 U.S. 323, 326.

THE VOUCHER IS RETURNED HEREWITH.