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Defense audit finds contract issues
March 11, 2004

By Lisa Sanders, CBS.MarketWatch.com
Last Update: 4:20 PM ET March 11, 2004

DALLAS (CBS.MW) -- Shares of Halliburton closed 6 percent lower Thursday after the Pentagon's comptroller said an audit of the company's work in Iraq found problems with the way costs are estimated.

Speaking to the House Government Reform Committee, Comptroller Dov Zakheim said the Defense Contract Audit Agency found "significant deficiencies in KBR's estimating practices related to the award of subcontract costs." Kellogg, Brown & Root, known as KBR, is Halliburton's (HAL: news, chart, profile) engineering and construction arm and is responsible for the work in the Middle East.

He said those problems provided the impetus for the DCAA review, which is investigating whether KBR overcharged the U.S. government for gasoline delivered into Iraq. The agency found possible overpricing in the amount of $61 million, he said.

"KBR has been responsive to reported contract findings and has agreed to work on improving its contract performance," Zakheim said in a prepared statement. He said Halliburton is innocent until proven guilty.

Pentagon officials testified that Vice President Dick Cheney, the former CEO of Halliburton, had no influence on contract awards or oversight of contracts.

Earlier Thursday, Halliburton said it has delivered fuel to Iraq at the "best value, the best price, and the best terms and in ways completely consistent with government procurement policies."

"Of course, cost estimates change because the scope of the work requirements are dynamic and ever changing and it would be inappropriate for anyone to imply otherwise," said KBR CEO Randy Harl in a press release.

Shares of Halliburton fell $1.73, or 5.8 percent, to close at $28.24 after hitting an intraday low of $27.61. Volume of 18 million was more than four times the stock's daily trading average.

Earlier Thursday, the stock swooned on a report that the Pentagon has asked the Justice Department to help in its investigation of the company.

The Wall Street Journal, citing unnamed sources, quoted a Justice Department official as saying the agency expects to get involved in the probe of overcharges for gasoline delivered to Iraq.

Earlier this week the company said its liquidity could be hurt by additional investigations into its work in Iraq.

On Wednesday, a U.S. congressman claimed he had new information to support allegations that the oil-service company overcharged the U.S. government.

Rep. Henry Waxman told Democrats on the Government Reform Committee that his new information came, in part, from the DCAA.

Waxman, a California Democrat, has been a persistent critic of Halliburton.

Citing the DCAA, the General Accounting Office and the Defense Energy Support Center, Waxman said that there were "significant" and "systemic" problems with the way Halliburton estimates and supports costs. He also reported discrepancies between the Defense Center Energy Support's costs for fuel from August to December 2003 and what Halliburton charged the U.S. taxpayers.

Harl countered: "Releases of partial reports are inappropriate because the true and complete story cannot be conveyed." KBR added that the release of the information could violate federal policy.

Lisa Sanders is a Dallas-based reporter for CBS.MarketWatch.com.