Memorandum report on the overhead audit of Arkel-Talab Cargo Services, Ltd.

Audit report covers the FY ended 2/25 and is based on document review. Arkel-Talab Cargo Services is one of six interrelated companies that derive 85% of their revenue from USAID/S and host government contracts; at the time of the audit, it had nine active contracts primarily for the transport of emergency food to drought-stricken areas of Sudan. Arkel-Talab"s accounting system was found to be adequate for recording and reporting U.S. Government costs, with three exceptions. (1) The accuracy of financial data was not determined, since financial statements for the year ended 2/25/85 were unavailable; the latest available statements were for the year ended 2/29/84. (2) The system should be fully automated to effectively handle the voluminous financial data; the high volume of contracts and related data and nature of the transactions strained the manual system, and postings to the general ledger were in arrears until 11/85. (3) The system did not segregate entertainment expenses (an unallowable cost) from travel expenses. Arkel-Talab and its affiliate, Arkel Cargo Logistics Overseas, had serious financial difficulties in 1984, including bank overdrafts, cash flow shortfalls, and a weak current ratio. The company"s financial manager attributed these problems to the departure of the Chevron Corporation as a customer. It is recommended that: (1) an overhead rate of 20% be adopted, rather than the proposed rate of 22%, due to the existence of some unallowable costs included in the indirect account balances; and (2) USAID/S reassess its relationship with this contractor, especially for large contracts such as food distribution or road maintenance; if unable to find alternate contractors, USAID/S should protect U.S. interests by reviewing Arkel-Talab contracts with the Regional Legal Advisor prior to finalization.