COMPTROLLER GENERAL REPORTS TO CONGRESS

ON AUDITS OF DEFENSE CONTRACTS

TUESDAY, MAY 11, 1965

HOUSE OF REPRESENTATIVES,

MILITARY OPERATIONS SUBCOMMITTEE

OF THE COMMITTEE ON GOVERNMENT OPERATIONS,

Washington, D.C.

The subcommittee met, pursuant to recess, at 10 a.m., in room 2247, Rayburn Office Building, Hon. Chet Holifield (chairman of the subcommittee) presiding.

Present: Representatives Chet Holifield, William S. Moorhead, William J. Randall, Fernand J. St Germain, and Frank J. Horton. Also present: Herbert Roback, staff administrator; Douglas Dahlin, attorney; Paul Ridgely and Robert J. McElroy, investigators. Mr. HOLIFIELD. The subcommittee will be in order.

Mr. Campbell, we welcome you and your associates from the General Accounting Office.

This subcommittee, by statute and rule of the House and practice, works very closely with the General Accounting Office. We have enjoyed excellent working relationships through many years of cooperative efforts in the interest of Government efficiency and economy. We look upon GAO as our strong right arm in making investigations and in affecting improvements.

My acquaintance with Mr. Campbell goes back about 10 years, when he came into the Federal Government as a member of the Atomic Energy Commission, and later was appointed to the post of Comptroller General. I want you to know, Mr. Campbell, that I have the highest respect for your abilities and your dedication to the proper discharge of your duties in the protection of the Government's interest. I am confident, too, that if these hearings disclose issues or procedures on the part of the General Accounting Office, as well as the executive agencies or the contractors, which warrant change or adjustment in legislation or practice, you will cooperate with this committee in a spirit of mutual helpfulness and concern for the best interests of the Government. I happen to be one who believes that efficient Government and fair dealing with contractors are not necessarily incompatible, and if this hearing can contribute toward increasing that compatibility, then I beleve we will be well rewarded for our efforts.

General Campbell, you have a prepared statement and I suggest that you proceed with it at this time.

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STATEMENT OF HON. JOSEPH CAMPBELL, COMPTROLLER GENERAL OF THE UNITED STATES; ACCOMPANIED BY ROBERT F. KELLER, GENERAL COUNSEL; WILLIAM A. NEWMAN, JR., DIRECTOR; AND CHARLES M. BAILEY, DEPUTY DIRECTOR, DEFENSE AUDIT AND ACCOUNTING DIVISION

Mr. CAMPBELL. Thank you, Mr. Chairman, members of the subcommittee.

We appear before you today, at your request, to discuss a number of matters concerning our review and report responsibilities in the area of Government contract administration.

Since a fairly large percent of the total expenditures for the Government are made under contracts for supplies and services, a considerable amount of our effort is devoted to the examination of the administration of contracts. In the Department of Defense alone negotiated procurement contract actions amount to approximately $24 billion a year, and procurements by National Aeronautics and Space Administration, Atomic Energy Commission, General Services Administration, and other agencies add significantly to this total. The sheer volume of Government contract activity makes it extremely important for the Congress to have sources of information independent of the executive branch in order to appraise this activity.

The activities of the General Accounting Office in the contract field and its contract audit reports and decisions provide, we believe, an important source of such information. The General Accounting Office employs about 2,000 professional accountants and auditors and 100 attorneys. Approximately 20 percent of the audit effort is devoted to the review of Government activities conducted under contracts. Considering the magnitude of Government-negotiated procurement, this audit effort is so small that it can cover only a very small fraction of the program. During the 812-year period ended December 31, 1964, we submitted about 237 reports to the Congress on deficiencies noted in our reviews of contract administration. These reports have pointed out excessive or erroneous payments totaling about $124 million and have resulted in collections of more than $66 million. In addition to actual cash collections, our reports have resulted in a strengthening of the Armed Services Procurement Regulation, particularly in negotiation and administration relating to both prime contracts and subcontracts, and have promoted an increased awareness by administrative personnel of their individual responsibilities and of pitfalls that may be encountered in the use of authority to negotiate contracts. Our reviews also contributed substantially to the amendment of the Armed Services Procurement Act to require more emphasis on advertised competitive procurement and, in cases of negotiated contracts, to require "truth in negotiating" through the submission of current, accurate, and complete cost and pricing data on which to base negotiations. We believe that this is a record of which we can be justly proud, but we do not feel that the improvements effected thus far have covered all the areas that warrant attention or improvement.

However, before mentioning these areas, I will address myself to the points outlined in your letter of April 27, 1965. In this connection, we believe it appropriate to briefly summarize our statutory authority and responsibility to review and report on the Government agencies'

administration of Government contracts, including contractors' and subcontractors' activities thereunder.

There are a number of statutory provisions bearing on the authority and responsibility of the General Accounting Office to audit. As they concern the audit of Government contracts, three are most significant. The first of these, section 312 of the Budget and Accounting Act, 1921 (42 Stat. 25), directs the Comptroller General to investigate all matters relating to the disbursement and application of public funds. Specifically it states:

The Comptroller General shall investigate, at the seat of Government or elsewhere, all matters relating to the receipt, disbursement, and application of public funds, and shall make to the President when requested by him and to the Congress at the beginning of each regular session, a report in writing of the work of the General Accounting Office, containing recommendations concerning the legislation he may deem necessary to facilitate the prompt and accurate rendition and setlement of accounts and concerning such other matters relating to the receipt, disbursement, and application of public funds as he may think advisable. In such regular report, or in special reports at any time when Congress is in session, he shall make recommendations looking to greater economy or efficiency in public expenditures.

The word "application" was added to the bill by an amendment offered on the floor of the House, its stated purpose being to insure that the Comptroller General concern himself with whether the money was economically and efficiently applied as well as with the proper maintenance of accounts.

The second significant statute is the Budget and Accounting Procedures Act of 1950 (64 Stat. 832). This act cleared the way for modernizing many fiscal procedures in the Government. Part II of title I of this act, which is known as the Accounting and Auditing Act of 1950, spelled out the policies of the Congress with respect to auditing. Section 111(d) of the act provides that it is the policy of the Congress

that:

The auditing for the Government, conducted by the Comptroller General of the United States as an agent of the Congress, be directed at determining the extent to which accounting and related reporting fulfill the purposes specified, financial transactions have been consummated in accordance with laws, regulations, or other legal requirements, and adequate internal financial control over operations is exercised, and afford an effective basis for the settlement of accounts of accountable officers.

The "purposes specified" refer to the policy of the Congress, also stated in the act in section 111(a), that:

The accounting of the Government provide full disclosure of the results of financial operations, adequate financial information needed in the management of operations and the formulation and execution of the budget, and effective control over income, expenditures, funds, property, and other assets.

A third statute, amending the Federal Property and Administrative Services Act of 1949 and the Armed Services Procurement Act of 1947 (65 Stat. 700), provides as follows:

All contracts negotiated without advertising pursuant to authority contained in this act shall include a clause to the effect that the Comptroller General of the United States or any of his duly authorized representatives shall until the expiration of three years after final payment have access to and the right to examine any directly pertinent books, documents, papers, and records of the contractor or any of his subcontractors engaged in the performance of and involving transactions related to such contracts or subcontracts.

Pursuant to this authority, the primary purpose of audits by the General Accounting Office is to make for the Congress independent examinations into the manner in which Government agencies discharge their financial responsibilities. Financial responsibilities of Government agencies include the administration of funds and the utilization of property and personnel only for authorized programs, activities, or purposes and the conduct of programs or activities in an effective, efficient, and economical manner. There are many considerations which are taken into account in the selection of a contractor's activities for review. Congressional requests or expressions and inquiries of congressional interest are given top priority. Such interest may cover a particular program from which a contractor or a representative number of contractors participating in that program are selected for review. Other selections are made on the basis of the importance of programs or activities judged by such measures as size of expenditures, investment in assets, and newness or uniqueness of the program. Still other selections are made at random, considering such things as the volume and type of contracts held by the contractor, our experience with departments' activities administering the contracts, and knowledge gained from prior audits as to the effectiveness of the contractor's system of management control. The objectives of our contract audits primarily are to develop information which will indicate the effectiveness of the contracting agency and the contractor in fulfilling their respective management and financial responsibilities for timely and economically supplying a given product or service. Negotiated contracts generally are characterized by a lack of price competition at the time of negotiation. Therefore, many of our reviews are directed to an evaluation of the price negotiation.

In planning and conducting our audits, we place primary emphasis on agency, contractor, or subcontractor operations and activities in which opportunities for improvement appear to exist. This policy gives recognition to the need to examine into areas of known or anticipated interest and at the same time provides for the most effective use of available audit manpower. Application of this policy results in placing particular emphasis on known or suspected weaknesses, such as ineffectiveness, inefficiency, waste and extravagance, improper expenditures, failure to comply with laws or congressional intent, or other problem areas. With this kind of emphasis, we are in a position to provide the Congress, the agency concerned, and others where appropriate with a report on weaknesses found, our evaluation of their causes, and suggested remedies.

Because of limited manpower, we do not purport to cover all aspects of the administration of a particular contract and therefore do not submit reports to the Congress on reviews in which we have found no weaknesses. Occasionally we will report only to the agency on problems in which we feel the Congress would not have particular interest. Audits of negotiated contracts may involve a review of the contractor's cost representations and pricing proposals, a comparison of the contractor's cost estimates with his previous cost experience, a comparison of his cost estimates with costs actually incurred in the performance of the contract, and an audit of costs incurred in those cases in which reimbursement or the prices paid by the Government are based on or are affected by actual costs. They may also include a

review of the contractor's negotiation and administration of subcontracts. These audits are correlated with reviews of the actions of the administrative agency in negotiating and administering the contracts. The underlying causes of weak or extravagant procurements practices are sought and recommendations are made for improving contracting practices and administration. Recommendations are also made for correcting past actions to the extent found appropriate.

It is our policy to hold exit conferences with the contractor and subcontractor at the close of our audits to afford them an opportunity to express agreement or disagreement with the facts developed during the course of our review. If there is disagreement as to facts, additional work is done to clarify any area of question in this regard. We are not in a position at this time to provide final positions of our office or opinions as to what these facts represent in the way of critical or noncritical findings or our conclusions as to corrective action needed, if any. Subsequently we do give them, the contractor, an opportunity to comment on our findings and recommendations by submitting to them copies of the proposed draft reports. Any comments thus received are fully considered and the report is revised, where appropriate, to accommodate their comments. Points upon which there remain a disagreement with the findings and conclusions of our office are fully disclosed in our final report to the Congress. This is accomplished by setting forth the significant positions of the agency, the contractor, or the subcontractor, and our reasons for disagreeing with their positions. As a general policy, the comments received from the agency or contractor are incorporated as appendixes in the reports.

All audit reports to the Congress are reviewed by the Office of the General Counsel. The Office of the General Counsel has specific responsibility for examining all legal questions affecting the report. This includes consideration of the legal points covered in the report, as well as the legal aspects which may not be specifically covered.

It includes responsibility for consistency between, or reconciliation of, legal positions taken in the report and pertinent decisions of the Comptroller General, the Attorney General and the courts.

The accounting and auditing divisions also consult with the Office of the General Council on legal questions arising during the audit and during the drafting of the reports.

In addition, the Office of the General Council offers comments and suggestions on other than legal matters which it is believed will result in improvement of the reports. Responsibility for acceptance or rejection of suggestions on other than legal matters rests with the accounting and auditing division concerned.

Audit reports are reviewed within our auditing divisions and by the accounting and auditing policy staff prior to their release. In these processes the factual information in the reports is verified against the supporting workpapers. The reasonableness and validity of the conclusions reached are carefully considered to be sure that they are justified by the information developed and that careful consideration has been given to the comments obtained from the agencies and contractors affected by our findings. The report is also checked for compliance with established policies and required procedures. These processes are all designed to insure that our reports are of high quality and that our findings are sound.