An analysis of the Bell Helicopter Contract Fraud with the United States

Government procurement is a huge, growing industry, making fraud within the procurement system a serious issue (Fickey, 2009). To safe guard against a rise in government procurement fraud cases, Congress established the Federal Acquisition Regulation and Department of Defense Supplement that outlines rules regarding bidding, accounting standards, profit policy, and other matters (Karpoff, Lee, & Vendrzyk, 1999). One of the regulations imposed by the Department of Defense on government contractors is the requirement of audits to be preformed by the DOD’s auditing agency. The majority of procurement fraud cases arise out of the DOD’s audits into the contractor’s accounting records (1999). One case worth mentioning is the case of Bell Helicopter Textron, Inc., a Texas based company, and the United States government. In 1988, Bell Helicopter entered into an $88 million settlement with the United States ending a four-year long investigation by the Department of Justice for fraudulently overcharging the government on helicopter spare parts (Isikoff, 1988). The investigation arose when Pentagon auditors discovered accounting and inventory irregularities in the company’s financial records. Throughout the investigation, Bell Helicopter was also accused of covering up these irregularities by shredding documents, changing computer entries, and covering up evidence of deliberate overbillings to the government (1988). Not only was Bell Helicopter accused of overbilling the government, throughout the investigation, they were also suspected of a kickback scheme and double billing inventory scheme. After the Defense Contract Audit Agency and the General Accounting Office had identified Bell Helicopter’s overbilling, the government was still awarding contracts to the company. It is believed that a kickback scheme was occurring when Bell Helicopter later hired the government representative as their manager for government marketing. During the investigation, there was evidence of Bell Helicopter billing the government for newly make parts, when the parts were currently a part of their inventory or previously paid for by commercial contractors (Isikoff, 1988). Prosecutors settled with Bell Helicopter believing that the extensive cover-ups Bell Helicopter officials engaged in would be too difficult to explain to the jury. The prosecutors also were unable to recover the original records due to the company destroying those records and altering hundreds of the computer entries related to their inventory (1988). Bell Helicopter has not acknowledged any wrongdoing throughout the investigation or preceding the settlement. The punishment Bell Helicopter received is similar to those of other fraud cases with government contractors. Many believe that the punishments are too small to deter fraud (Karpoff, Lee, & Vendrzyk, 1999). This is evident in that Bell Helicopter again settled with the U.S. government again in 2010, for a similar overbilling scheme (USDOJ, 2010). The government has the ability to impose fines, suspend or debar companies from government contract bidding, file criminal charges, and require full reimbursement be paid. Under the False Claims Act, anyone who commits fraudulent claims against the United States government could face up to five years in prison (Sauer, 2010). However, in most cases, only fines are imposed on contractors that engage in fraudulent activity with the U.S. government. Under the Anti-Kickback Act of 1986, Bell Helicopter could have been charged criminally for providing something of value, such as a managerial job at the company, to the government official who was awarding the company government contracts after the overbilling scheme was identified (Roberts, 2010). One theory on why the punishments against government contractors are so small is that the government is apprehensive against disciplining government contractors that are the main suppliers of critical products (1999). Since the government continued to engage in contracts with Bell Helicopter after the 1988 settlement and Bell Helicopter was ranked as the Pentagon’s 14th largest contractor with a little over a billion dollars in defense work, it could be concluded that the government is following the “slap on the wrist” punishment style with this contractor. Even if the government took a few years to catch on to the fraudulent overbilling being committed by Bell Helicopter, the company officials appear to have been aware of it, even though they will not admit to any wrongdoing. The company should have been following regulations put into place by the government and also accounting agencies. Separation of duties and fraud assessments should have been preformed within the company to make sure there were no signs of fraudulent activity. Knowing that most employees will not “whistle blow” on their employers, it is still surprising that there were no other fraud detection tests put in place that would allow for the company to uncover this fraud before government auditors. This leads me to believe that the company was aware of their fraudulent activity and it was not their “flawed accounting system,” (Isikoff, 1988). Since the government plays such a large role in the procurement process and dealing with government contractors, I would suggest a stricter action plan for future cases. In this case, I believe that the theory that the government will not impose harsh punishments on contractors that are the government’s sole suppliers of a product is evident in the Bell Helicopter case. If the government wants to take a stand against the continuing rise in procurement fraud, I believe they need to impose harsher punishments and make it publically known when a contractor has these punishments imposed on them. In the future, I also suggest the government put more funding into their auditing agency so that these types of overbilling frauds are discovered earlier. For contractors such as Bell Helicopter, I would suggest putting more detection tests and internal controls in place, however I do not believe that the company was unaware of their fraud. I think that the company, as a whole was benefitting from the fraud, so they continued to carry it out until someone outside of the company noticed. For this, I would suggest the government make it easier and provide incentives to people who successfully identify fraudulent activity within their organizations. Government procurement fraud is only going to continue to rise until there are stricter punishments to deter contractors from engaging in this type of activity.

References
Fickey, J. (2009). FRAUD IN THE BIDDING PROCESS: THE LIMITED REMEDIES AVAILABLE TO CONTRACTORS. Public Contract Law Journal, 38(4), 913-933.
Karpoff, J. M., Lee, D., & Vendrzyk, V. P. (1999). Defense Procurement Fraud, Penalties, and Contractor Influence. The Journal Of Political Economy, (4), 809. doi:10.1086/250080
Isikoff, M. (1988). Helicopter Maker Will Repay U.S.; Sources Say Bell To Give $ 90 Million Back in Settlement. The Washington Post, Retrieved from www.lexisnexis.com/hottopics/lnacademic
Sauer, B. J. (2010). DETERRING FALSE CLAIMS IN GOVERNMENT CONTRACTING: MAKING CONSISTENT USE OF 18 U.S.C. § 287. Public Contract Law Journal, 39(4), 897-917.
United States Department of Justice. (2010). Bell Helicopter Textron Inc. to Pay Total of $16.5 Million for overcharging the United States [Press Release]. Retrieved from http://www.justice.gov/opa/pr/2010/May/10-civ-617.html
Roberts, R. N. (2010). MANDATORY CONTRACTOR CODES OF ETHICS AND DEFENSE PROCUREMENT INTEGRITY. Journal Of Public Procurement, 10(2), 247-274.