Free Response to Motion [Dispositive] - District Court of Federal Claims - federal

Case 1:08-cv-00142-NBF

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DEFENSE CONTRACT AUDIT AGENCY

AUDIT REPORT NO. 2191-2001S42000002
September 19, 2002
PREPARED FOR: Commander

ATTN: AMS AM-AC-SM-PA/G.Wilson U.S. Army Aviation and Missile Command Redstone Arsenal, AL 35898-5280
PREPARED BY:

European Branch Office CMR 443, Box 1500 APO AE 09096 Telephone No. (49) 611-380-7509 (DSN 314-338-7509) FAX No. (49) 611-380-7507 (DSN 314-338-7507) E-mail Address dcaa-fao2191 @ dcaa.mil Report on Postaward Audit of Contract No. DAAH01-96-G-0001/ D.O. No. 0004 ACO: Contract No. DAAH01-96-G-0001/D.O. No. 0004 Saudi Logistics and Technical Support P.O. Box 2229 Jeddah, 21451 Kingdom of Saudi Arabia

SUBJECT: REFERENCE:
CONTRACTOR:

REPORT RELEASE RESTRICTIONS: See Page 16 CONTENTS: Subject of Audit Executive Summary Scope of Audit Results of Audit Contractor Organization and Systems DCAA Personnel and Report Authorization Audit Report Distribution and Restrictions Appendixes Pa~e 1 1 2 2 14 15 16 17

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Audit Report No. 2191-2t~01S42000002

SUBJECT OF AUDIT As part of our continuing pro~am of evaluating contractor compliance with 10 U.S.C. 2306a and implementing regulations, we examined Saudi Logistics and Technical Support's (SALTS) cost or pricing data related to the pricing of Contract No. DAAH01-96-G-0001fD.O. No. 0004. The purpose of the examination was to test whether the price, including profit, negotiated in that pricing action was increased by a significant amount because the contractor furnished cost or pricing data that was not accurate, complete, and current as required by the cited statute.

In its Certificate of Current Cost or Pricing Data, dated February 29, 2000, the contractor certified the data as of February 28, 2000, the date of ageement on price. The firm-fixed-price contract provides for Patriot Prime Power Sets (Buy 2). The cost or pric.ing data are the responsibility of the contractor. Our responsibility is to express an opinion on whether the cost or pricing data submitted during the negotiation of Contract No. DAAH01-96-G-0001/D.O. No. 0004 complied with the requirements of 10 U.S.C. 2306a.
EXCUTIVE SUMMARY

Our examination disclosed that SALTS overstated subcontract costs as a result of failing to disclose the impact of its actual incurred exchange rates on proposed subcontract costs. The audit baseline and recommended adjustment are summarized as follows: Audit Baseline Recommended Price Adjustment SIGNWICANT ISSUES: 1. SALTS did not provide the most current cost or pricing data in regards to the actual exchange rate data it was incurring in purchasing the foreign currency to pay Lechmotoren (subcontractor), even though this was significantly different from the exchange rate that the proposed subcontract costs were based on. We recommend a subcontract cost adjustment of $5,054,953. 2. The remaining recommended price adjustment of $2,324,229 results from applying overhead, G&A expense, and profit rates to the overstated amount proposed for the Lechmotoren subcontract costs. 3. SALTS does not concur with our recommended price adjustment. $38,492,41! $7,379,182

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Audit Report No. 2191-2o01S42000002 SCOPE OF AUDIT We conducted our examination in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the examination to obtain reasonable assurance about whether the data and records reviewed are free of material misstatement. An examination includes: evaluating the contractor's internal controls, assessing control risk, and determining the extent of audit testing needed based on the contrdl risk assessment; examining, on a test basis, evidence supporting the amounts and disclosures in the data and records evaluated; assessing the accounting principles used and significant estimates made by the contractor; evaluating the overall data and records presentation; and determining the need for technical specialist assistance. The criteria used to evaluate the cost or pricing data included the public law contained in FAR Subpart 15.4. We have not performed a detailed examination of SALTS' estimating system to ensure that forward pricing proposals and the final certified contract price are based on accurate, complete, and current cost or pricing data. Our audit scope reflects our assessment of control risk and provides a reasonable basis for our opinion. RESULTS OF AUDIT In our opinion, the cost or pricing data submitted by the contractor was not compliant in all material respects with the requirements of 10 U.S.C. 2306a because the data was not accurate, complete, and current as of the date of agreement on price. The negotiated subcontract costs were overstated as a result of SALTS failing to disclose the impact of its actual incurred exchange rates on proposed subcontract costs.
The results of our examination follow:

Audit Baseline Recommended Price Adjustment

$ 38,492,411 $7,379,182

The results of our examination are detailed in the Exhibit beginning on page 4. The government sustained a loss in the form of interest on overpayment which resulted from the contractor's failure to comply with the Truth in Negotiations Act (10 U.S.C. 2306a). We will provide the interest calculation upon request from the ACO.

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Audit Report No. 2191-2~01S42000002

ADDITIONAL P,.EMARKS: We coordinated factual matters relating to our recommendations with Mr. Greg Wilson, Administrative Contracting Officer (ACO), U.S. Army Aviation and Missile Command (AAMCOM). We furnished Mr. Wilson copies of our draft audit findings to ensure that a mutual understanding of the facts and issues was reached.

We discussed the results of our examination with Mr. Ernest Hanks, SALTS Financial Specialist, in an exit conference held on April 25, 2002. In response to our findings, SALTS provided a response, which appears as Appendix 2 (page 18) of this report. Details regarding SALTS' response and our audit rejoinder are incorporated into the explanatory notes of our exhibit. In summary, SALTS does not concur with our reco~-rmaended subcontract price adjustment. We request that a representative from our office be provided the opportunity to review and comment on any data received after report issuance that pertains to our report and to assist in resolution of our recommendations. We also request that the contracting office advise us of the disposition of our audit recommendations, as required by FAR 15.407-1 (d).

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Audit Report No. 2191-2o01S42000002

EXHIBIT

SAUDI LOGISTICS AND TECHNICAL SUPPORT COMPANY (SALTS) ~DDAH, SAUDI ARABIA AUDIT BASELINE AND RECOMMENDED PRICE ADJUSTMENT
CONTRACT NO. DAAH01-96-G-0001, DELIVERY ORDER NO. 0004

Cost Element Subcontract Costs ODC Total Direct Costs FMS Overhead Subtotal G&A Expense Total Costs Profit Totat Price

Audit Baseline (Note 1) $24,165,813 1,407,059 $25,572,872 2.703,465 $28,276,337 5,050.426 $33,326,763 5,165.648 $38,492.411

Recommended Aff~ustment $5,054,953 $5,054,953 468.594 $5,523,547 952,260 $6,475,807 903.375 $7.379.182

Notes 2 3 4 5

Explanatory Notes 1. Audit Baseline

We used the proposed costs from SALTS' proposal, dated November 30, 1999, as our audit baseline. Although the government negotiated the subcontract cost down to $23,682,497, it was based on a judgTnental reduction of two percent and was not based on reductions to any specific cost elements or any more current cost or pricing data submitted by SALTS.
2. Subcontract Costs a. Summary of Conclusions:

We recommend an adjustment of $5,054,953. This is computed by subtracting the negotiated reduction in subcontract costs of $483,316 ($24,165,8!3 - $23,682,497) from the overstated proposed subcontract costs of $5,538,269 (see Schedule on page 10). As required by FAR 15.403-4, Requiring Cost or Pricing Data, SALTS issued its certification of current cost or pricing data on February 29, 2000, which states the cost or pricing data were accurate, complete, and current as of February 28, 2000. At the time of certification, SALTS did not provide actual incurred exchange rate data relating to the foreign currency purchased to pay Lechmotoren (subcontractor), even though this was significantly different from the rate that had been proposed. The foreign currency data, if provided, would have shown that the cost to SALTS in U.S. Dollars was significantly less than proposed. During negotiations, SALTS failed to disclose
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the actual exchange rate data and the actual subcontractor cost to the government negotiator. In our opinion, the exchange rate information and the impact that it had on subcontract costs were factual relevant data, and were cost or pricing data. SALTS, therefore, failed to provide the most current, accurate, and complete cost or pricing data to the government at the time of negotiations. b. Basis of Proposed Cost: Subcontract costs are based on one subcontractor, Lechmotoren. The Government negotiator relied on a Not-to-Exceed (NTE) proposal for $24,165,813 between Lechmotoren and SALTS dated September 17, 1999. The subcontract proposal was for a fixed price subcontract. In addition, the Federal Republic of Germany's Bundesamt far Wehrtechnik performed an audit on the subcontractor's proposal. The negotiated price, of the subcontract represented a two percent reduction from the NTE price. Terms from the subcontractor's proposal include the following: ~A! pa)~,rnents to be made to Lechmotoren under this contract shal! be made in U.S. Dollars (USD) or Deutsche Mark 0DM). Prices are based on an exchange rate 1 USD = 1.50 DM. c. Audit Evaluation:
The exchange rates SALTS experienced prior to negotiations in its forei~ currency transactions ranged from 1 USD = 1.841 DM to 1.93 DM. As stated above, the contractor's proposed subcontract costs were based on using a rate more favorable to SALTS of 1 USD = 1.50 DM. SALTS failed to update the proposed Lechmotoren subcontract cost to reflect the current exchange rates it was experiencing and disclose this to the government at negotiations, as required by FAR 15.403-4.

At the time of negotiations, the contractor did not disclose the exchange rate data that would have put the government on notice of the significant subcontract cost under run. At the time of negotiations, SALTS had received Lechmotoren's invoices totaling 15,589,728 DM or 43 percent of the NTE amount of 36,248,719 DM. Using the proposed exchange rate, the 15,589,728 DM equals $10,393,152. However, using the applicable exchange rates that SALTS was actually experiencing at this time and which were not disclosed, the 15,589,728 DM equaled $8,349,439. The difference of $2,043,713 ($10,393,152 - $8,349,439) cxn be seen in the schedule to this report starting on page 10. SALTS failed to update the proposed subcontract costs to reflect the current exchange rate at the time of negotiations and the under run it was incurring. As stated above, the cost impact at the date of negotiations was $2,043,713. We also computed the cost impact for the period from the negotiation date to the end of the contract, which resulted in additional questioned costs of $3,494,556 (see Schedule beginning on page 10). The recommended adjustment of $5,054,953 is computed by subtracting the negotiated reduction in subcontract costs of $483,316 from the $5,538,269 ($2,043,713 + $3,494,556). In our

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Audit Report No. 2191-2u01S42000002

EXI-I1-BIT

opinion, negotiated subcontract costs were overstated because SALTS failed to disclose its most current, accurate, and complete cost data related to its actual exchange rates. To support our recommended subcontract costs adjustment, we address the five elements of defective pricing as follows: (1) The Data Meets the Def'mition of Cost or Pricing Data Information that SALTS was experiencing sig-nificantly different exchange rates from what the proposed subcontract costs were based on represent cost or pricing data. (2) The Data was Reasonably Available SALTS was aware of the difference between the exchange rate used to propose subcontract costs and the actual exchange rates SALTS was experiencing prior to negotiations.
(3) The Data was Not Disclosed

SALTS did not disclose prior to or at negotiations the actual exchange rates it was experiencing and the impact this had on the proposed subcontract costs.
(4) The Government Relied on Defective Data

The ACO relied on SALTS' proposal which included the defective subcontract costs. As discussed in paragraph b on page 5, the subcontract cost was based on an exchange rate of 1 USD = 1.50 DM.
(5) The Contract Price was Significantly Impacted

In our opinion, negotiated subcontract costs were overstated by $5,054,953 because SALTS failed to disclose its actual incurred cost data for the Lechmotoren subcontract costs. d. Contractor's Reaction: Contractor Comment on the Audit Baseline used: SALTS disagees in using the proposed subcontract costs as the audit baseline and not the negotiated subcontract costs. The negotiated reduction to the subcontract was NOT simply "judg-mentat", but was based on comments by the PCO indicating audit-recommended questioned costs of 25%, which included currency exchange rates applied.

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Audit Report No. 2191-2t~01S42000002
Contractor Comments on Subcontract Costs:

EX~_BIT

1. SALTS payments to Lechmotoren under the NTE contract and prior to the USG negotiations were not final and were subject to adjustment based on the final negotiations between SALTS and Lechmotoren as the subcontractor proposals submitted over a two-year period during 1997-1999 all stated that the proposed exchange rate of DM 1.5/$1 was subject to negotiation in reaching a~eement on the final price. With a remaining 57 percent of the subcontract left to go, it was NOT "apparent to SALTS that there would be a significant under run of subcontract costs." Future currency rates' could not be predicted, and an open-ended subcontract left much doubt as to the final subcontract costs. 2. Negotiation data was available and disclosed to the PCO. Besides the NTE Proposal, the PCO had the results of 3 audits to help with his negotiation - 1 German audit on the Subcontract cost (which, in the PCO's words, questioned 25 percent of the subcontractor costs), ! DCAA audit on the other direct costs and applied indirect rates to all costs, and 1 DCAA audit (FPRA Audit) on the indirect rates. The PCO had more audits at his disposal than any other past negotiation with SALTS. He had much more to rely on than only "an NTE Proposal for $24,165,814". SALTS believes that the currency conversion/fluctuation issues had been identified in the negotiations in the 25 percent government/German agency audit negotiation issues. 3. SALTS did NOT "have knowledge at the time of negotiation that Lechmotoren was going to bill the 36,248,719 DM and not the $24,165,813." SALTS in the negotiations had to be mindful of reaching a~eement that would provide adequate funds for SALTS to cover any final settlement with the subcontractor as a result of the subcontractor caveat in Lechmotoren's proposal regarding settlement of a final exchange rate and the currency to be used. 4. Regarding straight-lining the currency rate at 1.93 after the date of negotiation, we feel this is very unreasonable. Due to the very significant volatility of the exchange rates during that time period and to the fact that it was impossible to predict the future exchange rate, SALTS would have never a~eed, at that time, to apply a rate of only 1.93 since it would have exposed the Company to very high risk. The risk and volatility of the currency was considered in determining the contract price. No one could have predicted with any certainty whether the exchange rate would have gone against SALTS. The future exchange rate was simply unknown as of the date of negotiation. SALTS negotiated fully, openly and in good faith in reaching ageement on the negotiated amount, and strongly disagees with any finding of defective pricing. e. Auditor's Response:
In regards to SALTS' comments on the audit baseline, we have adjusted the questioned costs to reflect the two percent reduction to negotiated subcontract costs. Regarding SALTS' comments that the ACO (contractor referred to as PCO in their response) indicated the German audit questioned 25 percent of the subcontract costs, the ACO stated that during negotiations it 7

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was discussed that the German audit report cited approximately 25 percent of negotiable areas. The negotiable areas noted in the German audit were general areas and were not based on specific information provided by SALTS. SALTS' first and third paragraphs in response to subcontract costs discuss how subcontractor negotiations were not completed, the final price was unknown, and SALTS did not know whether the 36,248,719 DM or $24,165,813 was going to be billed. Although subcontractor negotiations were not completed at the time of prime negotiations, SALTS did have knowledge of the subcontract cost under run resulting from the difference between the actual exchange rates experienced and the proposed exchange rates. Supplying this information to the government negotiator would have had a significant impact on negotiated subcontract costs. Also, based on the difference between SALTS' certified proposal and actual incurred subcontract costs and exchange rates at the time of negotiation, there was evidence of a significant under run. Even if SALTS was unsure as to the total billed subcontract costs, SALTS still had an obligation to inform the ACO of the most current cost or pricing data at the time of negotiations. K the most current cost or pricing data were made availabl.e, the ACO would have been able to make a more informed decision as to the negotiation of subcontract costs. Regarding SALTS' second paragraph in response to the 25 percent questioned subcontract costs, as discussed above, the ACO and the German audit referred to this as 25 percent of negotiable areas. The other two audits discussed by SALTS had nothing to do with subcontract costs and, therefore, are not applicable to the questioned costs in this report. SALTS' response included comments that the volatility of future exchange rates could have rest~lted in a significant impact on the final subcontract costs. In our opinion, the risk in future exchange rates being volatile was minimized because only six months remained on the contract. Also, the exchange rates in t999 and early 2000 were stable with the exchange rate at the beginning of 1999 being 1 USD = 1.68 DM and at the time of negotiations in February 2000 the exchange rate making a steady climb to 1 USD = 2.01 DM. SALTS' response included comments on the fairness of straight lining the 1.93 exchange rate to compute the defective pricing amount for the period after negotiation. It should be noted that the 1.93 exchange rate existed in December 1999 and was not the most current exchange rate at the time of negotiations. As a result, we revised our adjustment using the exchange rate of 2.01 which existed at the time of negotiations. See the Schedule beginning on page 10 for our rationale of using the exchange rate of 1 USD = 2.01 DM. 3. Overhead We found no evidence of defective pricing in relation to the negotiated FMS overhead rate. Our recommended overhead adjustment is due to application of the negotiated FMS overhead rate to the defective base costs. For simplicity, we used one, rate for 1999 and 2000. This rate is based on dividing the total negotiated FMS overhead costs ,of $2,322,287 by the total negotiated direct costs of $25,051,636, or 9.27 percent. The adjustment is computed as follows:

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Audit Report No. 219!-2u01S42000002

Description Amount Defective Base Costs $5,054,953 Negotiated Combined FMS O/H Rate 9.27% Defective FMS O/H Costs $ 468.594
4. G&A Expense

We found no evidence of defective pricing in relation to the negotiated G&A expense. Our recommended G&A expense adjustment is due to application of the negotiated G&A expense to the defective base costs. For simplicity, we used one rate for 1999 and 2000. This rate is based on dividing the tota! negotiated G&A expense of $4,719,264 by the total negotiated costs before G&A of $27,373,923, or 17.24 percent. The adjustment is computed as follows: Description Defective Base Costs Negotiated Combined G&A Rate Defective G&A Expense
5. Profit

Amount $5,523,547 17.24% $ 952.260

We applied the negotiated profit rate of 13.95 percent to the recommended adjustments, as shown below: Description Defective Base Costs Negotiated Profit Defective Profit Amount $6,4.75,807 13.95% $ 9'03.375

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COMPARISON OF SALTS CERTIFIED SUBCONTRACT COST WITH AD~STED SUBCONTRACT COST USING ACTUAL AND CURRENT EXCHANGE RATES

$ Amount
$ Amount Based On

Lechmotoren Invoice No.

Subcontractor Invoices in (DM)

Using 1.50 Exchange Rate

Actual Incurred Exchange Rates

Difference

(a)
991081 991080 991112 991066/67 991146 991145/47 991182 991246 991245 991249/50/51 991248 991247 991280 991281 991321 991320 SubtotN DM 1,692,707 1,041,103 838,355 98,539 !,057,942 120,282 682,050 1,287,035 803,751 224,683 1,057,942 412,982 1,287,035 803,751 1,607,502 2,574.069 DM 15.589.728

(b)
$ 1,128,471 694,069 558,903 65,693 705,295 80,188 454,700 858,023 535,834 149,789 705,295 275,321 858,023 535,834 1,071,668 1,716,046 $10,393.152

(c)
$ 917,379 563,978 454,147 53,380 574,543 65,335 370478 699095 436584 122.044 574656 224325 699095 424.860 834,026 1.335,514 $8,349,439 $ Amount Based On Current Exchange Rate

(d)

Negotiations SALTS Subcontract Data Prior to

$2,043,713

Subcontractor Amount in if)M)

$ Amount Using 1.50 Exchange Rate

Difference

(a)
Subcontract Data After Negotiations Subtota! DM 20,658,991

(b)
$13,772.661 $24.!65.813

(c)
$10.278,105 $18,627,544

(d)
$3,494.556 $5,538,269 483.316 $5,054,953

Total Costs DM 36.248.719 Negotiated Subcontract Reduction (e) Recommended Adjustment (e)

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Explanatory Notes

a. The subcontractor, Lechmotoren, invoiced these costs. The 15,589,728 DM represents the amount of costs Lechmotoren invoiced SALTS before negotiations. The remaining 20,658,991 DM represents the amount Lechmotoren invoiced SALTS after negotiations. b. This column shows the U.S. Dollar equivalents of Lechmotoren costs using the proposed exchanged rate of ! USD = 1.50 DM. The total from column (a) of 36,248,719 DM equals $24,165,813 using the proposed exchanged rate. c. The $8,349,439 represents the USD equivalent at the time SALTS paid Lechmotoren for various invoices before negotiations. The $10,278,105 (20,658,991 Dlvl/2.01) represents the USD amount based on the actual exchange rate at the time of negotiations. See Note d. below for an explanation of using this exchange rate to compute the adjustment for the period after prime negotiations. d. If SALTS had provided current actual incurred exchange rate data, we believe that the amount negotiated in the prime contract for the Lechmc,toren subcontract would have been significantly less. To estimate the impact of SALTS trot furnishing current, accurate and complete data, we divided the subcontract cost into two phases. The first phase was the portion performed and paid for by SALTS up to the point of negotiations with the government. The second phase is the portion performed after prime contract negotiations. For the first phase (up to the point of negotiations), 43 percent of the subcontract had been performed and billed to the prime contractor, SALTS. We compared 43 percent of the proposed subcontract value to SALTS' actual recurred cost for the subcontract. This resulted in an adjustment of $2,043,713, as computed above. For the second phase, we estimated the impact that disclosure of current, accurate, and complete exchange rate data would have had on the subcontract cost after the point of prime negotiations. As of the negotiation date, the remaining period of performance of the subcontract was approximately six months. Our adjustment of $3,494,556 is based on using the current exchange rate at the time of negotiations, 1 USD = 2.01 DIM. in our opinion, using the current exchange rate to compute the impact of SALTS not providing actual exchange rate data at the time of negotiation is reasonable based on facts presented below. It should be noted that initially, we used an exchange rate of 1 USD = 1.93 DM to compute our adjustment. However, we revised our position to 1 USD = 2.0! DM based on more accurate information that was available prior to negotiations. DCAA normally uses DRI-WEFA to forecast exchange rates. However, we did not use the forecasted exchange rate from DRI-WEFA to compute the phase two impact because we considered it to be outdated. A~: the time of negotiations, the latest available DRI-WEFA forecast was from the 4~ quarter 1999, which was based on economic data from June 1999. As a result, the DRI-W-EFA forecast for 2000
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Audit Report No. 2191-2uolS42000002

would not have included economic data for the eight months (Ju]y 1999 through February 2000) prior to negotiations. For informational purposes, the exchange rate forecast from DRI-WEFA was I USD = 1.683 DM, which is sig-nificantly different from the actual exchange rate at the time of negotiations of 1 USD = 2.0I DM. The remaining period of performance on the oontract was only six months. In our opinion, using DRI-WEFA information that did not include the most recent eight months of economic data to forecast the remaining six months of the contract was not reasonable. The proposed exchange rate of 1 USD = 1.50 DM or the DRI-WEFA forecasted rate of 1 USD = i.683 DM, would have required a drastic devaluation of the USD to be reasonable. For example, the exchange rate would have had to have an average decline frotu I USD = 2.01 DM to 1 USD = 1.00 DM over the next six months to make the proposed rate reasonable. A similar decline would have had to result for o the r~ ~ ~,~ rate to be ~ ~,RI-%rE, ~ ~,~ason~b!e. !t should[ be noted that we examined more up to date economic data presented by the Confessional Budget Office (CBO). Reports from the CBO from January and February 2000 did not cite any significant changes in the strengh of the USD for FY 2000. Prior to negotiatiqns, the USD to DM exchange rate was stable with a trend showing the USD getting stronger. With this data, there could have been justification to use a higher exchange rate than 1 USD = 2.01 DM to compute the adjustment. We have summarized the USD to DM exchange rate below starting with January 30, 1999 through the negotiation date of February 28, 2000. It should be noted that after the date of negotiations, the trend continued to t USD to 2.30 DM before it declined to 1 USD = 2.15 DM at the end of the contract. Historical Exchange Rates

Feb-99

May-99 Date

Aug-99

Dec-99

Mar-00

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Audit Report No. 2191-2u01S42000002

It should be noted that by the time the DRI-WEFA forecast included all economic data through December 1999 (2nd quarter 2000), DR~-WEFA was forecasting a rate of 1 USD = 1.942 DM for 2000. e. The recommended subcontract adjustment is based on subtracting the negotiated reduction in subcontract costs of $483,316 ($24,165,813 - $23,682,497) from the overstated proposed subcontract costs of $5,538,269.

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Audit Report No. 2191-2u01S42000002 CONTRACTOR ORGANIZATION AND SYSTEMS

1.

Or,~anization

SALTS is a sole proprietorship incorporated under the laws of Saudi Arabia. SALTS is engaged in the supply of electronic and electro-mechanical spares, equipment, and repair and return of spare parts. SALTS also provides technical manpower under technical support contracts, configuration management, and English langzlage instructors. SALTS reported annual sales in FY 2000 of $75 million. SALTS employs 73 personnel, of which, 23 work direct on FMS contracts and 23 are indirect FMS employees. The remaining 27 personnel perform work on commercial contracts and within the G&A expense poo!. 2. Accounting System We have not performed a detailed accounting system review of SALTS' accounting system. SALTS has a calendar year accounting period and maintains an accounting system on the accrual basis. Adjusting entries are made at the end of each month and at the end of the year. SALTS prepares financial statements on a semiannual and annual basis. The sole proprietorship is audited biannually by Dr. A1 Amri and Company. SALTS maintains a job order cost accounting system which is fully integrated in the overall accounting system, wherein contract delivery orders are assigned individual job order numbers to which direct costs are identified. The indirect costs are identified with and accumulated under individual departments, which in turn are identified to the various indirect cost pools. The indirect expenses are recorded and billed to projects usin.g ACO provisionaIly approved rates. SALTS has two indirect cost pools, overhead and G&A. The overhead pool represents the indirect expenses associated with the Patriot Program Office and the Riyadh Computer Center. SALTS maintains separate cost centers and general ledgers for Riyadh and leddah operations. The G&A pool relates to costs incurred by SALTS' home office located in Jeddah, Kingdom of S audi Arabia. 3. Estimating System We have not performed a detailed estimating system review of SALTS' estimating system. Accordingly, we have assessed contro! risk as high, as it relates to SALTS' estimating system. We found no estimating deficiencies during this audit.

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Audit Report No. 2191-2o01S42000002 DCAA PERSONNEL Primary contacts regarding this audit: Mark Guenther, Senior_.Auditor Dave Welker, Technical Specialist Arturo Fraga, Supervisory Auditor Other contacts regarding this audit report: Dan Altemus, Branch Manager (49) 6I 1-380-7509 (DSN 3 I4-338-7509) Randy Wilks, Procurement Liaison Auditor (256) 842-9435 European Branch Office Procurement Liaison Auditor FAX No. (49) 611-380-7507 (DSN 314-338-7507) (256) 876-3300 E-mail Address dcaa-fao2191 @ dcaa.m31 General information on audit matters is available at http://www.dcaa.mil. AUDIT REPORT AUTHORIZED BY: Telephone No. (49) 611-380-738 ! (DSN 314-338-738 I) (49) 611-380-7515 (DSN 314-338-7515) (49) 611-380-7509 (DSN 314-338-7509)

DAN ALTEMUS Branch M~mager DCAA European Branch Office

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Audit Report No. 2191-2001S42000002

AUDIT REPORT DISTRIBUTION A~ REST~CTIONS
DISTRIBUTION Commander ATTN: AMS AM-AC-SM-PA/G.Wilson U.S. Army Aviation and Missile Command Redstone Arsenal, AL 35898-5280

E-mall Address greg.wilson @ redstone.army.mil

US Army Aviation and Missile Command ATTN: AMSMI-AC-BM-A! DCAA PLA Liaison Office Building 5303, Room 3131 Redstone Arsenal, AL 35898-5280 Saudi Logistics and Technical Support P.O. Box 2229 Jeddah, 21451 Kingdom of Saudi Arabia (Copy furnished through ACO) RESTRICTIONS

dcaa-pla-amcom @ dcaa.mil

Information contained in this audit report may be proprietary. It is not practical to identify during the conduct of the audit those elements of the data which are proprietary. Make proprietary determinations in the event of an external request for access. Consider the restrictions of 18 U.S.C. 1905 before releasing this info~-mation to the public.

Under the provisions of Title 32, Code of Federal Regulations, Part 290.7(b), DCAA will refer any Freedom of Information Act requests for audit reports received to the cognizant contracting agency for determination as to releasability and a direct response to the requestor. 3. Do not use the information contained in this audit report for purposes other than action on the subject of this audit without first discussing its applicability with the auditor.

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Case 1:08-cv-00142-NBF Document 21-2 Audit Report No. 2191-2(}01S42000992

Filed 08/22/2008

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SALTS' WRITTEN ~SPONSE

Guenther, Mark
From: Sent: To; Cc: Subject: Mr. Guenther, ehanks [[email protected]] Monday, May 20, 2002 8:12 AM Guenther, Mark Soliman AI Na]aj; Troy "Vesper; Fahd AI HamOan SALTS response on Audit Repor~ No. 2191-2001S42000002, DAAH01-96-G-O001 Ord~:r 0004

Please find below the Company's response to the s~ject audit report -- for inclusion in the audit report:
Contractor Comment on the Audit Baseline used. SALTS disagrees in using the proposed subcontract costs as the audit baseline and not the negotiated subcontract costs The negotiated reduction to the subcontract was NOT simply ,'judgi,lea%tal"0 but was based on coraments by the PCO indicating audit-recommended ¢~estioned costs of 25% which included currency exchange rates applied. Contractor Comments on Subcontract Costs.

I). S~J~TS payments to Lecbdnotore~ under the NTE c~)ntract and prior to the USG negotiations were not final and were subject to adjustment based on the ~inal negotiations between SALTS and Lechmotoren ~s the s~co~tractor proposals submitted over a two-year period during 1997-1999 all stated that the proposed exchange rate of DM 1.5/$1 was subje::t to negotiation in reaching agreement on the final price. With a rem, lining 57% of the subcontract left to go, it was NOT "apparent to Si~TS that there would be a significant under run of subcontract costs." Fut~re currency rates could not be predicted, and an open-ended subcontract l,~ft much doubt as to the final subcontract costs.
2) Negotiation data was available and disclos~d to the PCO. Besides the NTE Proposa!, the PCO had the results of 3 audits to help with his negotiation - i German audit on the Subcontract cost (which, in the PCO's words, questioned 25% of the subcontractor co:~ts), 1 DCAA audit on the other direct costs and applied indirect rates to al! costs, and ! DC~ audit (FPRA Audit) on the indirect rates. The P~O had more audits at his disposal than any other past negotiation with S~-LTS. He had much more to rely on than only "an NTE Proposa! for $2.:,165,814". SALTS believes that the currency conversion/fluctua:;ion issues had been identified in the negotiations in the 25% governm~nt/Gei-man agency audit negotiation issues.

3).S~.LTS did NOT "have knowledge at the time of negotiation that Lechmotoren was going to bi!l the 36,248,719 DM and not the $24,165,814.,, SALTS in the nego£iations had to be mindful of reaching agreement that would provide adequate funds for SALTS to cover any final settlement with the subcontractor as a result of ~he subcontractor caveat ~n Lechmotoren's pro}~osal regarding settlement of a final exchange rate and the currency to be u:~ed. 4] Regarding straight-lining the currency ra':e at 1.93 after the date of negotiation, we fee! this is very unreasonablc Due to the vezq¢ significant volatility of the exchange rates duri:zg that time period and to the fact that it was impossible to predict the future exchange rate, SALTS would've never agreed, at that time, to app.y a rate of only 1.93 since it would~ve exposed the Company to rer2¢ high risk. The risk and volatility of the currency was considered in .[etermining the contract price. No one could have predicted with any :ertainty whether the exchange rate would've gone against S~J~TS. The f~zture exchange rate was simply unkno~rn as of the date o~ negotiation.

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