REORGANIZATION OF THE EXECUTIVE DEPARTMENTS

THURSDAY, APRIL 1, 1937

JOINT COMMITTEE ON GOVERNMENT ORGANIZATION,

Washington, D. C.

The joint committee met, Senator Robinson presiding.

The CHAIRMAN. The committee will please come to order. I understand that Mr. Taber suggested, near the close of the hearings yesterday I being necessarily absent at that time-that Mr. Meriam proceed with any statement he wishes to make.

Senator BYRNES. Without interruption by the committee.
The CHAIRMAN. Is that correct?
Representative TABER. That is right.

STATEMENT OF LEWIS MERIAM AND DANIEL T. SELKO-Resumed

Mr. MERIAM. We have one correction in the report that was discovered on audit, and Mr. Selko will present that. Then there are two points that I think should be cleared up in the statement that we submitted the first day in the three parallel columns. Mr. Selko will present those too.

Mr. SELKO. The first correction is a correction in the report itself. We have discovered an error of fact in the statement appearing at page 79 on our report. Owing to the haste with which the report was prepared for the printer we were not able to catch the error until after Monday's hearing. The figure "26,000" appearing near the top of page 79 should read "8,000".

Then Mr. Brownlow called our attention to a statement in the comparison we presented on Monday which he feels does not present accurately the recommendations of the President's committee. He referred to item 8 in column 2, which he says should read, "Audit made continuously", instead of "periodically by Auditor General responsible to Congress." With the permission of the committee, therefore, we should like to make that change in the table we presented.

It should not be inferred, however, that the differences between recommendations of the President's committee and the Brookings Institution are reconciled on account of this change. On the contrary, the Auditor General as proposed by the President's committee would be without power to suspend or disallow payments since the final settlement of accounts would be made by the Treasury Department. The Auditor General as proposed by the Brookings Institution would have power to make suspension and disallowances, as does the present Comptroller General, and would therefore provide for the final settlement of accounts independent of the executive officers of the Government.

Our attention has also been called to a phase of our report which was not entirely clear from the comparison just referred to, that is, with regard to the purpose and contemplated functions of our proposed division of budgetary accounting mentioned in item 1, column III. I should like to read a statement which I have prepared with the purpose of clarifying that point.

The Federal system of financial administration has as its basis a twofold purpose. That purpose is to provide for (1) the essential implements of centralized budgetary and administrative management, and (2) an independent review of the financial acts of administrative officers as the basis for final audit and settlement of their accounts.

As Mr. Meriam brought out in his statement on Monday, two types of control are recognized by Federal legislation on financial administration: (1) Budgetary control, and (2) accounting or auditing control. Budgetary control involves regulating the methods of carrying out orders and checking up on administrative results. It requires the analysis of expenditures by appropriations, by expenditure objects, and by accounting periods to see that orders are being faithfully executed; also that the interests of efficiency and economy are being served, and that budget deficiencies are prevented. In this latter connection it will be recalled that the Antideficiency Act of 1906 prohibits any executive department or other Government establishment from exceeding its appropriations and contract authorizations in any one year, and that Executive Order No. 6166 transferred to the Director of the Budget the responsibility for preventing budget deficiencies through control of the monthly rate of expenditure of agencies of the executive branch.

Budgetary control is not automatic and cannot be exercised simply by reference to financial information. It is implemented, however, and rendered more effective by proper accounting records and by periodic reports based on such records.

Our study of the system of financial administration in the Federal Government has led us to the conclusion that the existing budgetary system can be measurably improved by enabling the Bureau of the Budget to avail itself of information which is currently recorded in the accounts of administrative officers. We do not propose the establishment of a large bookkeeping unit in the Bureau of the Budget. Our study leads us to conclude that all the necessary information for a highly effective system of centralized budgetary control can be obtained by requesting available information from the administrative books in the form of standardized reports to be renderd at regular periods. We do propose the expansion of the existing Division of Estimates in the Bureau of the Budget to enable that division to compile current information from those reports relating to (1) the liability of the Government currently accruing under each appropriation title, and (2) the rate at which appropriations are being obligated by the spending agencies.

This proposal to improve budgetary control would in no way impair the effectiveness of accounting control. The Auditor General would have full authority to prescribe the forms and procedures which he requires for the audit and final settlement of accounts. Under our plan, however, the concurrence of the Director of the Budget would be required in the subsidiary records prescribed for

the executive agencies in order that all information necessary for effective budgetary control might be contained in proper form in the administrative accounts.

Representative COCHRAN. I would like to ask a question on this budgetary control. You say now that the information is not available to the Director of the Budget as to the amount that has beer allotted to a certain office for expenditures. That is, he cannot get the information immediately. Do you want to infer that?

Mr. SELKO. No; I would not infer that. It is available at any time on request from the administrative officer.

Representative COCHRAN. Well, every Monday morning cannot you go to the records in the Treasury Department and find out just how much money is left in any given account?

Mr. SELKO. I am unable to answer that question offhand, but I do not believe so; no, sir.

Representative COCHRAN. I understand that in the Treasury Department the Treasury knows just exactly how much money is left, say, for instance, for the Bureau of Labor Statistics. They can tell right now, if you call up, how much has not been expended.

Mr. SELKO. They can tell you how much cash, which is appropriated to the Bureau of Labor Statistics, has not been disbursed from the Treasury, but they could not tell you offhand, if I am informed correctly, as to the exact amount of the obligations outstanding against the appropriation to the Bureau of Labor Statistics. Representative COCHRAN. Well, when the obligation is made do they send a copy of it immediately to the Treasury?

Mr. SELKO. No, sir.

Representative COCHRAN. They do not?

Mr. SELKO. Not to my knowledge; no, sir.

Representative COCHRAN. Now, in reference to this budgetary control, there is one other thing that has always impressed me, and that is the amount of purchases that have been made by an executive officer in the last 30, 40, or 50 days of the fiscal year. In other words, if Congress has appropriated $200,000 for certain supplies and they have not needed those supplies, and they have not spent that money but only a portion of it, on the 30th of June that reverts to the Treasury, and I have always been impressed by the actions of the executive officers of putting in requisitions for supplies regardless of whether or not they were needed, so that they would be sure to spend that appropriation. Did you ever give any thought to that? Mr. SELKO. Yes, sir; I have thought about that.

Representative COCHRAN. Don't be afraid to express your opinion. Mr. SELKO. My opinion is that there should be a careful check-up on unused inventories in order that they might be subtracted from the next year's appropriation. I feel that that control could be exercised through the Bureau of the Budget very effectively.

Representative COCHRAN. In your investigation did you discover the situation that I have just called to your attention?

Mr. SELKO. We made no detailed investigation of that situation; no, sir: and have no way of telling how much the unused inventories would be.

Representative COCHRAN. But it has come to your attention sufficiently to know that the practice exists?

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Mr. SELKO. The argument has come to my attention, I mean the statement has come to my attention just as you presented it; yes, sir.

The CHAIRMAN. You may proceed, Mr. Meriam.

Mr. MERIAM. I have a memorandum which I should like to present. In compliance with the congressional resolutions under which we have worked, our objective has been to recommend the cheapest, most rapid, and efficient system of financial administration that we could devise, which would meet the three major requirements of good administration. These three essentials, as we see them, are:

(1) Adequate, detailed accounts in the operating units, such as the bureaus and the field establishments, so designed that the officers responsible for these subsidiary units can have the necessary detailed data for efficient direction. In our judgment, the economy and the efficiency of the Government depend in large measure on economy and efficiency in the subsidiary operating units.

(2) Adequate financial records, based on summary reports from the departments and subsidiary units, kept in the Budget Bureau, to enable the President to exercise general managerial control over the entire executive branch of the Government.

(3) Adequate control accounts, necessary to prevent illegal or irregular payments, kept in an agency independent of all operating and spending agencies, and under an independent auditor who shall audit all accounts prior to final settlement and have power to suspend or disallow any illegal or irregular payments.

We believe that one unified system of bookkeeping and accounting can be devised which will meet these three essentials without duplication and overlapping. We recognize that in financial administration it is essential that both the responsible operating officer and the auditor who checks the expenditures of operating officers for legality and regularity examine the original expenditure documents and supporting statements and keep the necessary accounts to enable them to certify that

(1) The expenditure is authorized by law.

(2) If the Congress has passed laws governing such expenditures, or if administrative regulations governing such expenditures have been adopted in pursuance of law, the expenditure has been made in compliance with these laws or administrative regulations.

(3) The expenditure is within the appropriation or the appropriation limitation.

(4) All the facts and factors entering into determining the amount of the expenditures are correct, and the amount to be settled and entered on the control books is correct.

Because of the size of the National Government, its wide geographic distribution, and the hundreds of thousands of individual transactions that take place in a year, we regard unnecessary duplication of work in the examination of the original expenditure documents as a serious waste of public funds, a waste that can do no one any particular good, unless it be the employees who are paid salaries for doing unnecessary work. To prevent this unnecessary work we would have the expenditure documents go at the earliest possible moment to the representative of the independent auditing office, there to be examined in detail for final settlement.

For five reasons we are unable to favor having the control books, the examination for final settlement and final settlement itself made in the Treasury Department with a subsequent postaudit after settlement by an independent auditor representing the Congress.

(1) The Treasury Department is itself an operating agency making large expenditures for personnel, supplies, and construction. The Treasury would be passing upon and settling the Treasury's own

accounts.

(2) In general, the legality and regularity of all administrative officers' expenditures would be settled finally on the basis of examination by dependent, not independent, officers. The administrative auditors would be auditing themselves.

(3) If the Congress gives to the administrative officers the power to settle accounts finally, the Congress will be bound by the acts of its duly authorized agents, and its power to recover moneys illegally or irregularly spent will be almost entirely eliminated. It cannot recover on the bonds of the officers for the accounts will already have been finally settled.

(4) The proposal for a postaudit by a congressional auditor after final settlement has been made by administrative examiners means either

(a) A superficial audit that may not catch gross irregularities; or (b) A thorough, comprehensive audit, which means the reexamination of the thousands of expenditure documents and the keeping or checking of the books to determine the accuracy of the entries and the fact that the expenditure did not exceed the balance of the appropriation or the appropriation limitation. A real postaudit after settlement will result in the employment of several thousands of persons who will be duplicating the work of the administrative auditors and doing it after illegal or irregular accounts have already been settled, when the Government has no effective way of recovering moneys already spent.

For these reasons we believe that a thorough comprehensive postaudit after final settlement would be an ineffectual means of preserving genuine control over the legality of expenditures; and it would add enormously to the costs. We are therefore opposed to a system which provides final settlement prior to independent audit and we recommend final settlement only after comprehensive independent audit.

Now, are there any questions on that, sir?

The CHAIRMAN. Mr. Meriam is ready to submit himself to questions. Does any member of the committee desire to question him? Senator BYRNES. Mr. Chairman, I do not desire to ask any further questions of Mr. Meriam, but I would like to ask at this time to have printed in the record the recommendations of the Brookings Institute on this subject to various States. I do not think it would be very voluminous. It is really condensed. I ask to have printed only those recommendations from the various State reports as to this particular point.

The CHAIRMAN. Will you indicate what it is that you desire printed, Senator?

Senator BYRNES. Mr. Chairman, you were not here yesterday, but I asked yesterday as to the opinion of the Brookings Institution with reference to preaudit and postaudit in reports made to various States.