promises made to the Committee in the Part 2 Hearing, infra.
The IG stated that he has oversight responsibility for all Department of Defense programs and activities, and to carry out this vast responsibility he is authorized to utilize and coordinate all of the audit, investigative and inspection organizations and resources of the DOD. Although he has an organization of approximately 1,000 people "to promote economy and efficiency as well as to prevent and detect fraud and abuse in a Department of 3 million", the IG must rely upon the resources of the 19,000 auditors and investigators of various accounting agencies in the DOD. It is the interrelation between these agencies which has become the focal point for the refusal by Westinghouse to comply with the subpoena.
The IG has all encompassing oversight responsibility for DOD programs and activities. To carry out this assignment, part of his duties include an evaluation of the "quality and breadth" of each organization that is guided and supervised by the IG. Pursuant to these oversight activities, when the IG uncovers "weaknesses and vulnerabilities" in the practices of the office of the IG or any other DOD auditing agency, the IG is then required to take measures to "reduce these vulnerabilities". (Sherick Affidavit, Document 1, page 1).
In June and July, 1983, the IG initiated a review of certain activities of the DCAA, the largest auditing agency in the DOD. He was thereafter periodically advised as to its progress by review of James H. Curry, the Assistant Inspector General for Audit Policy and Oversight. One area which was covered was the question of the availability to DCAA of certain records by DOD contractors. The records under question included: Board of Director meeting minutes; certain communications between a company and its outside public accounting firm; certain "audit trail" documents, and the reports of the internal audit staff of the contractors.
In each year between at least 1976 and 1983, Westinghouse presented information to the DCAA relating to the costs incurred by its internal audit activity involving defense contracts. A certain proportion of these costs were charged to the government and it approved the payment of these costs. For example, in 1983 the government was billed for and paid the sum of $554,000 as its allocated portion of internal audit costs. Following review and discussion of the allowability and allocability of such costs, the DCAA, each year, recommended approval of those costs for payment by the government until August, 1984. Prior to August, 1984 the audit costs of the respondent were approved on the basis of records other than internal audit reports and without DCAA's access to those reports (Stipulation, Document 31 and the Muhlberg Affidavit).
The evidence in the instant case, consisting of affidavits, exhibits and testimony is primarily concerned with: the IG's review and recommendations of June and July, 1983 regarding DOD auditors' access to contractor records; the request by DCAA through two August 1984 memoranda for the issuance of a subpoena; and the motivation for the issuance by the IG of the September, 1984 subpoena directed to the respondent for the production of internal audit report documents from January 1, 1982 through October 1, 1984 of DOD contracts of the corporation.
Curry testified that the purpose of the IG's July, 1983 review of DCAA audit procedures was in response to allegations about certain areas of weakness therein, such as the access by DCAA to records, the handling of suspected fraud, the reporting procedures on savings and the relationship between the investigators and auditors. The final report concerning this review was issued on March 4, 1984 (Exhibit C-1, admitted February 26, 1985).
Curry stated that the primary function of any audit is to determine "the adequacy of the internal controls of the activity that's being subject to audit". (Document 18, page 26). The purpose for the request of the internal audit reports of a contractor would be to evaluate the efficiency of their internal systems and controls. Therefore, as a preliminary consideration prior to a DCAA audit "the first thing they have to know is the adequacy of the internal controls" (Document 18,
In connection with the preparation of the DCAA report concerning their access to contractors' records, the DCAA personnel visited 28 field offices and determined to what types of documents the government auditors had access. Of 23 major defense contractor locations, where there was internal audit department functions, 6 of the contractors' locations were not providing DCAA with "complete access", which included the reports from their internal audit departments (Document 18, pages 23 and 29).
Subsequent to the compilation of this report, 4 of the contractors agreed to provide access to their internal audit reports, so as of the time of his deposition Curry stated that 21 out of 23 of the defense contractor locations investigated were providing DCAA with access to their internal audit reports.
Of the corporations providing DCAA access to internal audit reports, some of them may not have provided all of their internal audit reports to the DCAA. However, Curry testified that he knew of no instance where an internal audit report requested by the DCAA was denied by any of the 21 contractor locations providing access. In addition, a survey on July 20, 1984 of over 200 contractor locations indicated that the DCAA was obtaining access to internal audit reports at all except 16 of them (Document 18, page 44).
The IG issued a Memorandum on September 19, 1983 providing that the DOD audit and investigative agencies which are under his control may request the issuance of an IG subpoena in support of audits and investigations conducted by them, where that audit or investigation is in furtherance of a statutory function of the IG and within the scope of the IG's statutory power. This memorandum was issued by the IG to all relevant auditing segments of the DOD, the "effective organization" of the IG, including the Army Auditing Agency, Navy Audit Agency, Air Force Audit Agency, DCAA, and the Criminal Investigative Divisions of the Army, Navy and Air Force. The memorandum was admitted as respondent's Exhibit S-2 and it outlined the policy of the office of the IG with regard to audits, investigations and the issuance of subpoenas. In explaining the policy the IG testified:
"I'm not in the business of issuing subpoenas. What I am in the business is of investigating and auditing and inspecting. And if I feel that an inspection that they have under way is of vital interest to the Department of Defense, and comes within my function, and is one in which I should give it priority, I will pick up that investigation and incorporate it as part of my function and responsibility. I will designate it as such and carry it out, using one of those service organizations, if they're already involved in that subject . . . ." (Sherick testimony, Tr. page 131)