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NSIAD-97-186R 1 (1997-06-17)

handle is hein.gao/gaobaclmr0001 and id is 1 raw text is: GAO United States General Accounting Office Washington, D.C. 20548 National Security and International Affairs Division B-277249 June 17, 1997 The Honorable Tom Harkin United States Senate The Honorable Peter A. DeFazio The Honorable Christopher H. Smith House of Representatives Subject: Defense Industry Restructuring: Clarification of Cost and Savings Issues Over the past 3 years, we have issued a series of reports on reimbursements to defense contractors for restructuring subsequent to their business combinations. On June 10, 1997, you asked our office to address several questions related to those reports. This letter responds to your request, and a list of our reports on restructuring appears at the end of this letter. OUR RESPONSES TO QUESTIONS (1) Can DOD's claim that savings are resulting from its policy of reimbursing contractors for merger-related restructuring costs be verified by reviewing the accounting records of the merging companies? What is the difference between a cost avoidance and savings? The savings from restructuring activities are generally in the form of future cost avoidances, which are not recorded in a contractor's accounting records. Defense contractors are required to maintain accounting records showing the actual amount and nature of costs charged to government contracts, but these records do not reflect costs that would have been incurred had an action-such as restructuring-not occurred. Consequently, restructuring savings have to be estimated using assumptions about what costs would have been had a merger or an acquisition not occurred. The Department of Defense (DOD) has defined cost avoidances, in discussing the impact of acquisition reform efforts, as cost reductions resulting in GAO/NSIAD-97-186R Restructuring Savings

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