Last updated July 16, 2007 10:13 p.m. PT
Boeing has been stung by internal theft before
By ANDREA JAMES
P-I REPORTER
Information technology controls are meant to do a lot more than stop hackers and kill computer viruses -- especially because corporate fraud comes from within. And internal fraud can happen to any size firm -- even to a Fortune 50, tech-savvy company such as The Boeing Co.
Two recent cases illustrate the point.
In 2006, two former Boeing employees were sentenced to a year in prison for stealing nearly $300,000 from the aerospace giant.
Former supply chain management director Robert Rice and his subordinate, Lisa Hernandez, made a series of purchases -- including a $52,000 BMW, artwork, jewelry and vacations -- that they charged to the company starting in 2004. And Boeing paid for the items.
How?
Rice had authority to approve expenses on employee charge cards that are used to buy things outside of the normal supply chain, according to the U.S. Attorney's Office in St. Louis. (Rice and Hernandez worked in that city.)
Rice created a shell company in Nevada called Leantraining and set himself up as a faux vendor. Hernandez would submit charges to Rice, who approved the expenses as "training materials."
The two also altered receipts and records to cover up the scheme, according to court documents.
Boeing discovered the fraud after someone made an internal complaint, the company said.
"Following discovery of Mr. Rice's activities, Boeing tightened processes and controls around applications and usage of company purchasing cards, increased the frequency of audits, and implemented several additional fixes as recommended by the Defense Contract Audit Agency," Boeing said in a statement to the Seattle P-I.
In a case that surfaced last week, King County prosecutors charged a former Boeing employee with 16 counts of unlawfully accessing a computer to steal company information, which prosecutors said later appeared in newspaper articles.
According to charging documents, Gerald Eastman, 45, a former quality-assurance inspector in Tukwila, took more than 320,000 pages of confidential Boeing documents. A company vice president estimated that had even a small portion of the documents fallen into the wrong hands, the financial damage to Boeing could have ranged from $5 billion to $15 billion, court documents said.
In its case summary, prosecutors said that the files were not encrypted or password-protected and that Eastman "had to exploit a weakness in Boeing's computer system" to retrieve the files. A Boeing spokesman said security has been tightened since the incident. Eastman is set to be arraigned Tuesday.
Boeing is a large enough company -- it had $61.5 billion in annual revenue last year -- that a theft of $300,000 doesn't make a large dent. (The theft represents 0.0005 percent of revenue.) Even so, companies seek to prevent fraud by monitoring their computer systems, and the Sarbanes-Oxley Act of 2002 made it mandatory for all public companies to do so.
That requirement has been challenging and expensive for companies, and many executives said auditing costs exceeded the perceived risk.
Now that public accounting firms have to sign off on a company's computer systems as well as its financial statements, such firms could charge for more hours of auditing at rates of hundreds of dollars per hour.
Many firms complained that it didn't make sense, for example, to spend $500,000 on controls that would prevent $300,000 in theft. Also, it's unclear whether tighter technology controls alone could have prevented Rice and Hernandez's theft, because experts say it's easier to defraud a company if two people are in on the scheme.
But experts say the information technology component of the law is critical because it seeks to protect the data that back up financial statements.
Material misstatements because of computer control failures are rare, but not impossible, according to the Institute of Internal Auditors, an industry group.
"Risks come from everywhere, but IT is part of the risk profile because information technology is inherent in almost every process," institute President Dave Richards said in a 2007 webcast addressing controls. "It is the workhorse of transaction processing."
Auditors have the job of examining the protective mechanisms within a company's computer systems. Those mechanisms, called IT controls, include things such as making sure databases are backed up, that passwords are secure, and that employees do not have unnecessary access to sensitive data.
"All data is maintained in systems. If the systems aren't controlled, then how can you rely on the accuracy of the data?" said Adam Shnider, director of technology risk management for the Seattle office of Jefferson Wells, an audit firm. "How can you rely on the data, period?"
Soundoff

Southwest gave free training to FAA manager

By Alan Levin, USA TODAY
May 8, 2008


WASHINGTON — The manager of the federal office that oversees Southwest Airlines accepted thousands of dollars in free pilot training from the carrier under an arrangement that violates rules of conduct, the Federal Aviation Administration said Wednesday.

The training program had been approved by regional officials and had been in place for years. The FAA has halted the program because it violates its rules, according to spokeswoman Diane Spitalieri. The FAA would not comment specifically on the supervisor's training because the matter is "under investigation," Spitalieri said.

FAA manager Bobby Hedlund, who was promoted last year to head the Southwest office, received months of training in 2005 that qualified him to fly the Boeing 737, according to recent testimony before Congress from three current and former FAA officials. Southwest received a proposed $10.2 million fine in March for safety violations.

FAA inspectors often receive training to stay abreast of changing technology and airline operations, but the training is mostly done at the FAA's expense. The free training highlights the continuing cozy relationship between Southwest and some of the government officials who oversee it, said Robert Naccache, who worked in the Southwest office until he retired last year.

"This is the most flagrant conflict of interest that I have ever witnessed in my 20-year career in the federal government," Naccache said during a hearing last month.

His testimony was buttressed by Michael Mills, the FAA's former Southwest manager, and Bobby Boutris, one of two federal whistle-blowers who first raised concerns about Southwest.

The training Hedlund received would cost a private citizen $15,000 or more, according to the officials and flight schools. It also would enhance a résumé, opening doors for employment at airlines or other private aviation firms. The FAA officials who testified at the hearing called the arrangement a conflict of interest.

The FAA and Southwest have been heavily criticized since a House Transportation Committee hearing April 3 revealed safety breakdowns and attempted retribution against inspectors who enforced the rules.

Hedlund did not return several phone calls seeking comment.

Southwest confirmed that Hedlund had attended courses at the airline but characterized the training as part of his routine duties. "We certainly don't agree" that there are any ethical questions with the training, airline spokeswoman Beth Harbin said.

FOR IMMEDIATE RELEASE
Contact Nick Schwellenbach, 202-347-1122

Internal Boeing Documents Support Whistleblower's Allegations:
Aircraft Quality Control Problems Cited

Washington, D.C. - Internal Boeing documents obtained by the Project On Government Oversight show that the allegations of a former Boeing quality control inspector facing criminal charges have merit. Quality control problems at Boeing increase the likelihood that defective aircraft parts end up on planes and flaws in the manufacturing of planes remain uncorrected. This can potentially threaten public safety and drive up the cost of aircraft maintenance. These documents are linked at the bottom of this release.
Gerald Eastman, the former Boeing inspector, is facing a second trial of criminal charges for disclosing Boeing information to the press. His first trial last month resulted in a mistrial when jurors could not agree on whether Eastman committed "computer trespass." Mr. Eastman claims that his involvement with the press stemmed from the lack of corrective actions taken by Boeing and the government in response to his disclosures of wrongdoing to them.
An internal Boeing memo sent to Boeing employees in October 2000 stated that misuse of "production stamps" or "roller-stamping" can result in negative consequences for the company and the individual misusing their stamp. Roller-stamping is the misuse of production stamps to stamp work on critical parts and assemblies as complete and fully inspected when there has only been a cursory inspection, if one at all, of the part or assembly in question. Eastman's central claim is that he had perceived widespread "roller-stamping" and Boeing did little to curtail the practice.
"These documents show that Eastman clearly had a reasonable basis for his belief roller-stamping was occurring," according to Nick Schwellenbach, POGO investigator. "It's one thing to break company policy on releasing documents and getting fired, it's another matter to file criminal charges. Who do the prosecutors work for?"
The Boeing memo came months after the Federal Aviation Agency conducted a special technical audit of Boeing that concluded that there were systemic quality control problems. The 2000 FAA special technical audit found "in some cases, manufacturing planning was not adequate, requirements were not followed, inspections were not specific, or personnel were not knowledgeable about requirements." Thus, "parts, assemblies, and installations are released through the system that do not conform" to approved designs. Also, in 2000, the FAA proposed "a record $1.24 million in civil penalties against Boeing for inadequate supplier oversight and for failing to quickly report cracked parts on two older jetliners," according to a news report (James Wallace, "FAA Audit Rips Boeing Over 100 Production, Design Problems Detailed; Company Plans Corrective Action," Seattle Post-Intelligencer, August 11, 2000.).
Years later, roller-stamping was still occurring when Eastman acted on his concerns.
Boeing certainly was aware of the practice because a Boeing document dated January 2004, states that, "There appears to be a systemic issue within BCA [Boeing Commercial Aircraft] involving parallel process breakdowns of mechanics and inspectors involved in assembling and inspecting aircraft, assemblies and parts." The 2004 document also states that the FAA examined 55 issues at Boeing between 2002 and 2003 and found that "24% of these issues have involved instances where the mechanic and inspector created and accepted nonconforming conditions"—i.e. roller-stamping.
In further support of Eastman's claims, other Boeing employees became whistleblowers when they reported that Boeing supplier Ducommun was regularly supplying non-conforming parts to Boeing, according to the whistleblowers' False Claims Act lawsuit obtained by POGO. Now-former Boeing employees Taylor Smith, Jeannine Prewitt and James Ailes were then retaliated against by management because Boeing allegedly did not want to deal with the repercussions of their findings.
###
For additional information:
Boeing Commercial Airplane Group memorandum, "Use of personal stamps in our production system," October 31, 2000. Link: http://pogoarchives.org/m/tr/boeing-stamps-20001031.pdf
Federal Aviation Administration, "Special Technical Audit of Boeing Commercial Airplane Group," December 1, 1999, through February 11, 2000. Link: http://pogoarchives.org/m/tr/faa-boeing-audit-20000211.pdf
Boeing Airplane Program Systemic Issues Chartered Team 1, "Investigation of 'Dual Failures,'" January 2004. Link: http://pogoarchives.org/m/tr/dual-failures-report-20040122.pdf
United States of America ex rel Taylor Smith, Jeannine Prewitt and James Ailes vs. The Boeing Company and Ducommun, Inc., Federal District Court of Kansas. Filed on March 11, 2005. Link: http://pogoarchives.org/m/tr/boeing-second-amended-complaint.pdf
Founded in 1981, the Project On Government Oversight is an independent nonprofit which investigates and exposes corruption and other misconduct in order to achieve a more accountable federal government.

Special Counsel Shut Down Probe of Siegelman Case Last Year
By Ben Evans
The Associated Press
Wednesday 07 May 2008
Washington - The U.S. Office of Special Counsel last year shut down a previously undisclosed investigation into the federal prosecution of former Alabama Gov. Don Siegelman, according to an internal memo made public Wednesday.
The investigation was being conducted by a task force formed at the agency a year ago to pursue high-profile political investigations in Washington, most notably whether the White House played politics in firing U.S. attorneys. It began gathering information on the Siegelman case in September and was planning to request documents from the Justice Department in October before Special Counsel Scott Bloch ordered the case closed, according to the Jan. 18 draft memo, made public by the Project on Government Oversight, a watchdog group.
The investigation was one of many that the task force had taken up, and the memo shows that Bloch frequently differed with investigators about which cases to pursue.
For example, he asked the task force to broaden its investigations into the fired prosecutors and into whether federal agencies received political briefings from the White House to boost GOP electoral fortunes. But he shut down an investigation into whether the Justice Department was hinging its hiring decisions on job applicants' political affiliations.
An attorney for Bloch, who himself is under a federal investigation, declined comment. But a person familiar with the origins of the POGO draft document said the decision to not pursue Siegelman or other cases stemmed mostly from a shortage of time and resources. The person spoke on condition of anonymity because of the ongoing investigation.
Siegelman, a Democrat, said the memo suggests further political interference in his case and reiterated his call for the Justice Department to appoint a special prosecutor to take up the matter.
"The question is who told them to shut it down," Siegelman said Wednesday when told of the memo. "Why would you start an investigation and let it proceed and then shut it down? The logical conclusion is that somebody intervened and told them to shut down the investigation."
Siegelman has long claimed that Republicans engineered his prosecution on bribery and other corruption charges to kill his chances for re-election, a claim repeatedly denied by federal prosecutors. His attorneys requested earlier this year that the Justice Department appoint a special prosecutor to investigate whether White House appointees in Washington, including former Bush adviser Karl Rove, influenced the case. Rove also has denied any involvement.
The Special Counsel's office is an independent agency charged with investigating unlawful political activity by government employees and ensuring that government whistle-blowers are not subjected to reprisals.
The January memo is a summary of the task force's activities and recommendations since it was formed in May 2007. It says investigators expressed concerns about closing the Siegelman investigation before completing it. But the task force was "directed to not further investigate this case and to wait for further instructions."
The memo says the task force still considered the case open and was requesting authorization to continue.
"I'm stunned by all this," said Vince Kilborn, one of the former governor's attorneys. "If an ongoing government investigation was shut down, I would say it's potential obstruction of justice."
FBI agents raided the office and Bloch's home this week in an investigation into whether he destroyed evidence potentially showing he retaliated against staffers who opposed his policies.
Siegelman, who served one term as governor after being elected in 1998, was convicted in 2006 on bribery and other charges and sentenced to more than seven years in prison. He was recently released on bond pending appeal.

Associated Press writer Lara Jakes Jordan contributed to this report.

To Whistleblower Support,

I am writing to let you know that the Senate Democratic Policy Committee will be holding a hearing on Monday, May 12 at 2:00 p.m. This hearing may be of interest to you and your readers. Three individuals will testify about whether Bush Administration reconstruction and anti-corruption failures have undermined our troops and the U.S. mission in Iraq . The witnesses include two former Bush Administration officials and a retired two-star general.

This hearing is open to the public. Please let me know if you have any questions.

Holly

Holly Teliska
Policy Analyst
U.S. Senate Democratic Policy Committee
http://democrats.senate.gov/dpc/
p: 202-224-7013
f: 202-224-3432

419 Hart Senate Office Building
Washington, D.C. 20510