Mr. GULICK. It was done in the A. A. A.

Representative TABER. Oh, no.

The CHAIRMAN. Mr. Gulick, you were asked in the beginning, and this morning you made references to it, to state succinctly and summarily your understanding of the high points of difference between the plan of the President's committee and the plan of the Brookings Institution. Your discussion has impliedly related to important features of those differences, but what I should like to have you do is to name, in the order of their importance, or as nearly so as you can, the differences, so the committee may be able to determine what the issues are between the two viewpoints.

Mr. GULICK. Senator, there is just one issue, and that is the issue of the point at which there should be a division between this step 3, execution of the Budget, and step 4, audit of the execution of the Budget. The Brookings Institution wishes to bring into the audit a phase of fiscal control, so that there will be an officer independent of the Executive who will say "Yes" and "No" with regard to the interpretation of fiscal measures. It is the position of the President's committee, first, that you cannot draw that power of the interpretation of the fiscal measures out of the executive agencies without making administrative inefficiency, without obliterating the responsibility of the Executive and without violating the fundamental principles of the division of powers.

Second, under the Brookings Institution program, the maintenance of the general controlling accounts would be in the independent agency, the independent audit and control agency. It is the position of the President's committee that the basic accounts, the operating accounts, the control accounts of a government, and the accounting system, must be set up by the Executive, that they are indispensible tools of management, that you cannot run a business unless you do that job, and that therefore those powers are now erroneously divided between the Treasury and the Comptroller General's office, with great confusion. The accounting system of the Government has not been brought up to date. We do not have a single unified accounting system for this Government because, in 1921, the duties and powers which are necessary to establish such a uniform system were in part, left with the Treasury and in part carried to an independent office. We maintain that that cannot be set up by an independent office and that this division is unworkable.

In the third place we maintain that the transfer of the control functions to the audit agency absolutely destroys the independent audit. I have argued that so many times that it is no use going over it again, but I do want to mention just one illustration.

The CHAIRMAN. That is on the theory that if the auditor controls there will be no effective audit, because naturally he would confirm his control?

Mr. GULICK. He confirms his own decisions. I want to give just two illustrations on that.

Representative TABER. Would not his decision be predicated upon his audit?

Mr. GULICK. That is the theory. I want to give you, sir, two illustrations and let you decide for yourself. The first one is the correction of the bid in the inspection station buildings at North Troy, Vt. This is the Comptroller General's opinion A-70187. In this

case the low bidder to whom the contract was awarded made the claim that there had been an error in the submission of his bid. Now in all such cases all of the documents are transferred to the Comptroller General's office and the Comptroller General makes the determination as to whether that was an innocent error and whether the bids shall be increased or not. In this case the Comptroller General allowed the bidder to raise his figures more than $22,000. Representative COCHRAN. Now, Mr. Gulick, right there, I looked into that. The answer was that wide discretion was given to the Comptroller General in matters of that character by the Supreme Court of the United States.

Mr. GULICK. All right. Under the provisions of law he has the power to settle that.

Representative COCHRAN. Did not he save the Government money in the end by doing that?

Mr. GULICK. I don't know.

Representative COCHRAN. He saved the Government money.

Mr. GULICK. But this case was never reported to the Congress. You see, the settlement was made by the Comptroller, he permitted an additional payment to the contractor of $22,000. That was never reported to the Congress. It does not appear in any report, except as the case is covered in this opinion. No one has audited that because it was made by the auditor. In other cases if the Comptroller General makes a settlement and then himself makes an audit, and himself develops the report, and himself certifies that that report is accurate, I think you can see that there is a combination of functions that is impossible.

Representative COCHRAN. I would like to have the record show that when the contract was finally awarded and revised by the Comptroller General that the Government saved $6,000, because if it had been given to the next lowest bidder his bid would have been $6,000 more than the amount of the award authorized.

Senator BYRNES. In a matter of that kind would you prevent a man from doing this, from making a bid which was cetrain to be the lowest bid, and then afterward going to the Comptroller General to raise the bid and because he would then know what the other fellows' bids were and he could just raise his own bid to $6,000 less than Mr. Brown or Mr. Smith. If the Comptroller has this power. Do you think that could be done?

Mr. GULICK. Yes: that could be done.

Senator BYRD. Has it been done?

Mr. GULICK. I do not know, but if it were done, Senator Byrd, there would be no officer of the United States Government who would investigate and report on it, because the investigating and reporting officer is the man who made the allowance, and what we maintain is that the power to make allowances of that sort must be placed in the hands of an officer who does not have the duty of investigating and reporting as to what was done.

Senator BYRD. You do not charge that that ever has been done, though?

Mr. GULICK. No.

Representative MEAD. If it were done, don't you suppose that the department in charge of the activity would make its audit and bring

that to the attention of the Congress, so that there is no danger of drifting into that sort of administration?

Mr. GULICK. I suppose the department that had its appropriation charged grossly in excess would complain, but they have no responsibility for that; the matter has been settled by the auditor; the question is closed. It is just the question of the propriety of having the power of making that kind of settlement in the hands of the officer who is the only officer who is responsible for reporting on the regularity of decisions that have been made.

Representative COCHRAN. Mr. Gulick, you referred again to the accounting system as having no uniform system. Now Mr. Buck, who represented your committee, made a statement here similar to that, and I pressed him for further information. I asked him where that existed and he named several places. I said, "Well, where is the worst place?" He said the worst place was in the Treasury Department.

Mr. GULICK. Now wait a minute.

Representative COCHRAN. Yes; he did. I was here when he said it, I was sitting right alongside of him. There is one thing I would like to clear in my mind, without going into the relative merits of your system, and that is: How you can reconcile your recommendation and then have your representative come in here and say you are going to put it into the Treasury Department where the worst system exists.

Mr. GULICK. The committee would certainly not take the position that the worst accounting in the Government of the United States is found in the Treasury.

Representative COCHRAN. You do not, but Mr. Buck did.

Mr. GULICK. I think whatever Mr. Buck may have said would be qualified by himself in any full statement and that he would leave no such impression. I read that testimony.

The CHAIRMAN. What Mr. Buck actually said-because I looked it up-was that in the Treasury Department the accounting was badly scattered and that from that standpoint it was a bad set-up. That is almost his exact language.

Representative COCHRAN. I asked him if it would not be beneficial to set up a committee of some kind to get a uniform accounting system and bring it right up to date in all our governmental agencies, and he said that might be helpful. Do you agree with that?

Mr. GULICK. Yes; I think on that point there is no difference between our position and the position of Brookings Institution.

Representative COCHRAN. That is one of the most essential things that we can do, and do immediately.

Mr. GULICK. Yes; and, Mr. Cochran, is it not true that under the existing law the responsibility for working out a satisfactory accounting system is divided between the Treasury and the General Accounting Office in such a way that it is not possible for anybody to sit down with the existing powers, duties, and division of work and work out a system? I think that confusion is there and it crept into the Budget and Accounting Act in 1921, because attention at that time was directed to the budget phases and not to the accounting and audit phases of the picture.

Representative TABER. In what respect does the legislation that you propose cure that situation?

Mr. GULICK. It places full responsibility in the hands of the Treasury to work out a satisfactory and modern system of accounting, and by placing that responsibility in one place it makes it impossible for the officers of the Government to take the position: "Well, it is not really our problem, it belongs, in part, to somebody else and we cannot do anything under the existing provisions of law.” Representative BEAM. Referring to the remarks of Congressman Cochran relative to the Treasury supervision, under your set-up, as I inferred from your testimony, the minute that you were to establish a certain independent agency you would establish a sort of a prerogative and a responsibility in the Treasury Department?

Mr. GULICK. Yes; that is the position.

Representative KNIFFIN. Mr. Gulick, is it possible to create an agency of an independent audit that is purely independent of both the executive and the legislative branches of the Government?

Mr. GULICK. The independent audit, as we conceive it, should be established under an officer whom we would call the Auditor General, whose reports are made currently not only to the Treasury officers to encourage them to establish their controls but also to the Congress, and we feel that Congress should have a special committee to deal with these reports as they come in.

Representative KNIFFIN. Yes; I understand that part of it.

Mr. GULICK. So that in actual operation the Auditor whom we suggest is an arm of the legislative body.

Representative KNIFFIN. Without going into the question of preaudit or postaudit, can there be a uniform system of audit that is wholly independent of the legislative or executive branches of the Government?

Mr. GULICK. In operation, the independent audit will be independent of both the executive and the legislative branches, but the actual use of that material which is brought together by the auditor will be primarily through the committees established by the Congress.

Representative KNIFFEN. As I understood you in your fiscal administration and the four steps that comprise it, your auditor becomes responsible to someone before he gets through auditing? Mr. GULICK. No; the only responsibility of the auditor is to the Congress, the independent auditor, and that arises from the presentation of his report and from the use of that material by the congressional committees in quizzing the administrative officers with reference to the regularity of their work.

Representative VINSON. That would not preclude the control

office?

Mr. GULICK. No.

Representative KNIFFIN. I am inclined to agree with that view, that there should be a Division of Control and Audit, but how can that be accomplished so that in the final proposition you have just a uniform, efficient auditing system that is independent enough so it is nothing more than an audit?

Mr. GULICK. Well, that has been set up in a number of States. It is an audit in the hands of an independent officer who reports to legislative bodies.

Representative KNIFFIN. And who confines his activities to auditing only?

Mr. GULICK. Who confines his activities to auditing only. That is really the situation in business enterprises that hire Haskins & Selles, or Price, Waterhouse, or somebody to come in.

Senator BYRD. Mr. Gulick, is not part of the confusion which now exists due to the fact that a number of Government agencies by law are not subject to check by the Government Accounting Office?

Mr. GULICK. Yes.

Senator BYRD. I want to insert in the record, Mr. Chairman, a statement furnished to me by the National Emergency Council, which shows that the Federal Reserve banks are not subject to audit under the law, that is, by the Comptroller General, the Federal Reserve Board, the Reconstruction Finance Corporation, the Reconstruction Finance Mortgage Co., the Inland Waterways Corporation, the Corporation of Foreign Security Holders, the Gorgas Memorial Institute, the Panama Railroad Co., the joint-stock land banks, the Federal land banks, the Federal intermediate credit banks, the Federal home-loan banks, the Federal credit unions, the national farm-loan associations, the Home Owners' Loan Corporation, the Federal Savings and Loan Insurance Corporation, the Federal Deposit Insurance Corporation, the Regional Control Credit Corporation, the War Finance Corporation, and the Tennessee Valley Associated Cooperatives, Inc.

I would like, Mr. Chairman, to insert the statement furnished by the National Emergency Council into the record.

The CHAIRMAN. Very well, it may go into the record. (The matter referred to is as follows:)

I. LIST OF AGENCIES, INCLUDING GOVERNMENT CORPORATIONS, WHOSE ACCOUNTS ARE NOT SUBJECT TO AUDIT BY THE GENERAL ACCOUNTING OFFICE, TOGETHER WITH A BRIEF STATEMENT OF THE REASONS THEREFOR

Federal Reserve Bank.-The capital stock of the Federal Reserve banks is all owned by member banks. Necessary expenses of the banks are paid from earnings. No Federal funds are involved and therefore the accounts are not considered as subject to audit by the General Accounting Office.

Federal Reserve Board. To meet its expenses and to pay the salaries of its members and employees the Board, under the authority of section 10 of the Federal Reserve Act as amended, makes semiannual assessments upon the Federal Reserve banks in proportion to their capital stock and surplus. The Attorney General in 1914 ruled that such assessments were "public moneys" and that the Board was a "board" or "establishment" within the meaning and intent of section 7 of the act of July 31, 1894. Such moneys were accordingly deposited into the Treasury to the credit of a special fund and accounted for, and audited, by the General Accounting Office up to and including the fiscal year 1933. The Banking Act of 1933 (48 Stat. 167), amending section 10 of the Federal Reserve Act as amended, provided in part that

**

Board shall determine and prescribe the manner in which its obligations shall be incurred and its disbursements and expenses allowed and paid, and may leave on deposit in the Federal Reserve banks the proceeds of assessments levied upon them to defray its estimated expenses and the salaries of its members and employees, whose employment, compensation, leave, and expenses shall be governed solely by the provisions of this Act * and rules and regulations of the Board not inconsistent therewith; and funds derived from such assessments shall not be construed to be Government funds or appropriated moneys.

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Since the enactment of the above amendment the Federal Reserve Board has rendered no accounting to the General Accounting Office and, accordingly, no audit has been made of the expenditures made by the Board.

Reconstruction Finance Corporation.-The act of January 22, 1932, creating the Reconstruction Finance Corporation, provides that "The board of directors