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Defense Contractor Cost Accounting Fraud Research Paper

Defense Contractor Cost Accounting Fraud Research Paper

Lockheed Martin Corporation

(ticker symbol LMT, traded on the New York Stock Exchange)

Under the False Claims Act, the U.S. federal government brought civil claims against Lockheed Martin Corporation, one of the world’s largest defense contractors, with the charge of contributing to the inflated amounts paid by the government because of failing to adequately oversee subcontractor, TMI’s charging practices and by mishandling information revealing these practices. The inflated costs of the tools were passed to the U.S. government through the various contracts between the government and Lockheed.

The accusation aroused from a pricing scheme by Tools & Metals Inc. (TMI), a subcontractor of Lockheed Martins. The two company was under a sole-source integrated supply contract. Under this contract, Lockheed Martin only purchased the company’s perishable tools for the manufacture of airplanes, such as the Defense Department’s F-16, F-22, and other military needs in Fort Worth, San Diego, and Marietta.

After, the president of TMI admitted the fraudulent invoicing during the period of 1998-2004, he was sentenced to prison, and ordered to pay $20 million fines.

To settle the allegations that Lockheed Martin Corporation overcharged the government on the perishable tools, the company agreed to pay $15.85 million to the U.S. government.

  1. Cost Accounting Standards

Due to the pricing scheme of TMI, the government paid Lockheed Martin Corporation more than it was necessary. The established prices were incorrect due to Lockheed Martin’s lack of overseeing its subcontractor’s invoicing. Please see below the Electronic Code of Federal Regulations regarding the Department of Defense contracts. Based on this information it is clear that Lockheed Martin violated the contracts with the government by charging more than the real market price was.

5416.203 – Fixed Priced Contracts with economic price adjustment.

(a)(S-90) Adjustments based on established prices. Established prices may reflect industry-wide and/or geographically based market price fluctuations for commodity groups, specific supplies or services, or contract end items.

(c)(S-90) Adjustments based on cost indexes of labor or materials. These price adjustments may also be based on increases or decreases in indexes for commodity groups, specific supplies or services, or contract end items.

Based on the electronic code of federal regulations the fixed price contracts were violated for Cost Accounting Standards. The Department of Defense’s code for fixed price contracts is 5416.2. Under this code, 5416.203 is the code for fixed-price contracts with economic price adjustment.

(S-90) A fixed price contract with economic price adjustment may also be used to provide for price adjustments authorized in this section.

5416.203-4 Contract clauses

(S-90) When the contracting officer determines that an existing EPA clause is not appropriate, the contracting officer may develop and use another EPA clause in accordance with 5416.203-1 (a)(S-90) or (c)(S-90). Established prices and cost indexes need not reflect changes in the costs or established prices of a specific contractor. The established price or cost index may be derived from sales prices in the marketplace, quotes, or assessments as reported or made available in a consistent manner in a publication, electronic database, or other form, by an independent trade association, Governmental body, or other third party independent of the contractor. More than one established price or cost index may be combined in a formula for economic price adjustment purposes in the absence of an appropriate single price or cost index.

  1. Cost Accounting Systems

Use the following list of details of a cost accounting system to describe the details that you found for your company.

1.   Wharton Research Data Services (WRDS)

Using COMPUSTAT—North America annual disclosures and any other relevant resources, explain the detail of annual report disclosures related to cost accounting variables. WRDS log in instructions will be posted at Titanium. Include in the appendices for your research paper WRDS printouts.

2.   FASB Codification

Using the FASB codification log in instructions posted at Titanium, explain in your own words any violations of generally accepted accounting principles (GAAP).

3.   Wharton Research Data Services (WRDS)

Analyze the disclosures of your defense contractor available from WRDS. Log-in instructions for WRDS will be posted at Titanium. You must include in the appendix of your paper copies of relevant disclosures downloaded from WRDS. Within the body of your paper, you must explain the disclosures and refer to appendix numbers.

4.   SAP ERP

Log-in instructions will be posted at Titanium. For cost accounting issues related to your defense contractor, find and explain relevant SAP ERP transaction codes. You must include in your appendix copies of SAP ERP screens that you generated. In the body of your paper, you must explain the details used by SAP ERP for each accounting issue. You will not be entering any transactions into SAP ERP.

5.   Conclusions

To what extent, if any, has your defense contractor been involved in systematic fraudulent behavior?


Seper, Jerry. “Lockheed Martin to Pay Back Government for Subcontractor Scheme.” The Washington Times. 23 Mar. 2012. Web. 22 Nov. 2015.

Include complete references using a major citation style (such as Chicago). Do NOT use or reference elementary sources, such as Wikipedia, encyclopedias, newspapers, or magazines. Use only the highest quality evidence, such as peer-reviewed academic articles available at CSUF’s Library.

Many Web sites compare citation styles, such as:

6.   Appendices

You must include outputs you generated from WRDS and from SAP ERP. Label each appendix with a separate number or letter, such as: Appendix 1, Appendix 2, or Appendix A, Appendix B. In the body of your paper, refer to each appendix by label.


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