Report raises questions about Defense and Global Crossing, WorldCom
GAO's findings, released Tuesday, put an end to seven months of speculation about exactly what Defense officials told Global Crossing about the second round of competition to run the Defense Research and Engineering Network (DREN), a high-speed Internet connection for more than 6,000 scientists. But the GAO decision raises questions about the Defense Information Systems Agency's eagerness to do business with both Global Crossing and telecommunications giant WorldCom at a time when each firm had serious financial problems.
Global Crossing initially won the DREN contract in July 2001, but DISA rescinded the award amid protests by losing bidders that Global Crossing couldn't meet the requirements of the contract.
In April of this year, after a second round of competition, DISA awarded the contract to WorldCom, which last month announced it had concealed $3.9 billion in expenses in what experts are calling the biggest case of corporate fraud in United States history.
GAO's comments are contained in its denial of a protest by Global Crossing that DISA unjustly excluded the company from competition after it filed for bankruptcy. Global Crossing's bankruptcy, its plummeting market value and its mounting debt, combined with investigations of the firm and its accounting practices by the Securities and Exchange Commission and the FBI, turned the company into a financial liability, GAO found.
But prior to the bankruptcy filing, during the second DREN competition, DISA determined that Global Crossing had made the best proposal, and an agency contracting officer prepared to tell the company it would win the contract. However, in December 2001, she learned about Global Crossing's faltering financial status from news reports and other sources, including information about a major drop in the firm's credit rating, GAO reported. The contracting officer asked the Defense Contract Management Agency, which routinely inspects potential contractors' finances, to audit Global Crossing's financial capabilities to ensure that the company was still a safe choice.
In that audit, the Defense agency reviewed a vast array of financial information, such as Global Crossing's net worth and the ratios of its debt to assets and equity. Those ratios were "satisfactory and [fell] between the median and low range of industry standards," the agency found. The audit recommended an award to Global Crossing, but cautioned that the firm's low cash liquidity and massive long-term debt might require future financial reviews.
On Jan. 14, the DISA contracting officer notified Global Crossing that it would win the DREN contract.
But on Jan. 23, two days before the expected official announcement of the award, DISA received a letter from Global Crossing stating that the company would "announce a material development with respect to its financial condition and suggested that the agency may want to delay award until after that announcement," GAO found. On Jan. 28, Global Crossing filed the fourth-largest bankruptcy in U.S. history.
The next day, the DISA contracting officer asked for another financial audit, according to the GAO report. While the second review examined much the same information as the first, the new review found that Global Crossing "was in a 'critical plus' financial condition and had a 'high' financial risk," said GAO.
"Poor financial performance, unfavorable trends of key financial indicators and legal consequences associated with bankruptcy and possible liquidation exposes the government to significant risks in entering into any contracts with Global Crossing," the second audit found.
DISA then disqualified Global Crossing. The company protested to GAO, arguing that DISA had evaluated the same information and come up with two different assessments of its financial condition. DISA officials, however, defended their change of mind, saying that Global Crossing's bankruptcy filing, which occurred in the period between the two reviews, was sufficient reason for the government not to enter into a contract with the firm. GAO, in denying the protest, supported that contention.
According to the GAO decision, the second financial audit found troubling signs that Global Crossing was spiraling downward. The firm's sales trend was "unfavorable," it found, as multiple competitors clogged a market saddled with overcapacity and declining prices. "[Global Crossing] has been unprofitable throughout its existence," the audit said. "Their balance sheet is weak with long-term debt that doesn't appear to be manageable. Operating cash flow is not sufficient to meet the current cash requirements and pay down debt."
All of this information was public and known to DISA officials prior to Global Crossing's disqualification. Industry analysts, executives at competing firms and other observers have long questioned why DISA ever made an award to Global Crossing when its bleak financial outlook was readily apparent.
DISA officials have yet to detail their reasons for favoring Global Crossing, other than to say the company offered the best solution at the lowest price. Global Crossing significantly underbid its competition, so much so that many observers questioned, after the first competition, whether the company fully grasped the requirements of the contract and what it would cost to complete them.
DISA's subsequent decision to award the DREN contract to WorldCom is also raising questions.
After Global Crossing's bankruptcy, the DISA contracting officer called for an audit of WorldCom, whose proposal was next in line for the award. On March 19, the auditors recommended DISA give the contract to WorldCom "based on a satisfactory finding of financial capability," GAO found.
But eight days earlier, the SEC had opened an investigation of WorldCom's accounting practices, requesting documents on a vast array of topics, including customer billing disputes, questionable sales commissions paid to employees and loans WorldCom made to its executives and directors. On March 12, WorldCom confirmed that the investigation was taking place, an event that was widely reported in the press.
Telecommunications industry analysts also had already sounded alarms about WorldCom's financial health. The company was clearly in trouble, yet DISA proceeded with the audit's recommendation, and on April 4 announced it had awarded the contract to the firm.
According to the audit, "Satisfactory financial performance, generally favorable trends of key financial indicators and very unlikely chance of bankruptcy does not expose the government to significant risks in entering into any contracts with [WorldCom]."
Under federal regulations, contracting officers have wide latitude in determining a company's ability to do business with the government. Their decisions aren't overturned unless a losing bidder can prove that a judgment was made unreasonably or in bad faith. Global Crossing failed to prove that, GAO found.
The logic behind GAO's decision in the DREN dispute suggests that WorldCom's dismissal from the contract is all but inevitable. "The long distance telecommunications industry is in a general state of economic distress and all of the offerors responding to [DREN] have financial indicators that reflect distressed circumstances," GAO found. "However, the record shows that Global Crossing's indicators reflected the worst financial position of all the offerors."
Given that WorldCom's dire financial position now eclipses that of Global Crossing, it's difficult to imagine how DISA could continue operating with the company.
A DISA spokeswoman has said that that agency will make a decision on whether to continue with WorldCom "soon."
Meanwhile, Global Crossing has again protested the contract's award to WorldCom, saying that recent efforts the company has made in the past months to restructure itself warrant another look at its offer. Defense has yet to respond.