points to the fact that snooping has occurred and does occur under the present interpretation of the General Accounting Office's authority. Have you further comment on this, Bill?

Mr. HEALEY. I would just like to say one additional thing on that, if I may, Mr. Roback. It seems to me that with reference to your comments about snooping, if we are dealing with a negotiated contract situation which by definition is competitive and I think truly competitive in the same sense as a formal advertised contract is then it seems to me, of necessity, an audit of the contractor's books and records will be snooping in the sense that the audit has no reasonable purpose with respect to the pricing of the contract. I think, as some of the Department of Defense witnesses have indicated, the Department of Defense or the military service go into such a contract with their eyes wide open. They know that there is a possibility that the contractor may make a large profit, but he also undergoes a very large risk in many of these situations. Both parties are determined to accept the risks incumbent upon establishing a firm fixed price. And my basic point, Mr. Roback, is that the firm fixed price in such a situation results from competition. And we can see no useful purpose to be served by a GAO audit of the books and records of the contractor in a situation such as this.

Mr. ROBACK. And you want that determination of competition to be in the procuring agency, not in the GAO, I take it.

Mr. HEALEY. That is right.

Mr. DERR. It seems to me it has to be there.

Mr. HEALEY. This basic point concerning negotiated pricing in which there is competition led to the comments which Mr. Derr mentioned earlier about the DOD refund policies, as I am sure this committee well knows.

Mr. HOLIFIELD. Thank you very much, gentlemen, for your appearance here this morning.

Mr. DERR. Thank you, sir.

(The complete statement of Mr. Derr follows:)

STATEMENT OF CHARLES I. DERR, SENIOR VICE PRESIDENT, MACHINERY & ALLIED PRODUCTS INSTITUTE

Mr. Chairman and members of the subcommittee, the Machinery & Allied Products Institute appreciates the opportunity of appearing and offering testimony in the course of the current subcommittee hearings on procedures and results of contract audit reports by the Comptroller General. With me is my associate, Mr. William J. Healey, Jr., staff counsel of the institute.

In order to suggest the viewpoint from which our testimony is offered it may be useful to indicate briefly the nature of the institute and the character of its member companies' Government business. The Machinery & Allied Products Institute is a national organization of capital goods and allied product manufacturers. The bulk of such companies' business is commercial in character with a minor percentage of their total production sold to the Government, although the products of certain of our member companies are indispensable to national defense. A considerable precentage of such Government business consists of standard commercial, or slightly modified standard commercial, products sold customarily under fixed-price contracts.

The members of the subcommittee are, of course, fully cognizant of certain difficulties resulting from the GAO's contract audit program, the intragovernmental stresses which that program has produced, and the unfortunate position in which Government contractors find themselves as a result. The institute has had brought to its attention by member companies in the course of regular contact with them a number of unfortunate side effects of the GAO audit program. This growing interest of institute member companies in the GAO contract audit

program caused us to devote a major share of attention to this subject at the recent institute seminar on Government contracts and institute spokesmen have recently discussed this subject at professional meetings conducted by the American Bar Association and the Federal Bar Association.

THE PURPOSE OF THESE HEARINGS

The statement by Chairman Holifield opening these hearings on May 10 clearly and cogently establishes the necessity for-and defines the boundaries of-this congressional inquiry. Wisely, we think, these hearings are not concerned with the whole range of statutory functions assigned to the Comptroller General but rather are to "be directed mainly to contract issues and problems."

It is especially fitting, in our judgment, that these matters should be reviewed by the Government Operations Committee to which the House of Representatives has confieded general authority for overseeing the activities of the executive branch, because the principal issue-upon which all others depend-is that of responsibility for management of Government procurement activities. The somewhat muted jurisdictional dispute evident from a close reading of statements filed in these hearings by Assistant Secretary of Defense Ignatius and Comptroller General Campbell seems to us clear evidence that this question deserves study by the Congress.

The chairman's opening statement poses two central questions of such importance that we are quoting them below as a preliminary to a statement of the institute's views:

1. "Is the GAO, as some Government and industry parties believe, enforcing its own standards of proceurement on Government and industry without authority of law or without the benefit of the initimate technical and business experience which resides in the parties to the procurement process?"

2. "Is there developing a basic clash of procurement philosophies between GAO and DOD?"

If our answers were limited to a single yea or nay, we would be inclined to respond affirmatively to both questions. However, such a response without more would not express completely our feelings with reference to the very complicated set of relationships within Government and between Government and industry which are here involved.

One further general observation seems indicated before proceeding to the body of our statement. In the course of the subcommittee's consideration of the effects of GAO audit reports on defense contracting, there is one overriding consideration that should be borne in mind. It is the purpose of defense procurement to buy on the most favorable terms, all factors considered, the materiel required for the defense of the United States. The attainment of this objective is the all-important goal. Too often, we think, this goal is obsured by the network of restraints, injunctions, prohibitions, etc.-legislative, judicial, and administrative-by which the process of Government procurement is hedged about. It is important therefore that the Government Operations Committee, in considering the GAO audit program, not lose sight of the fact that it is oneand only one-of a formidable array of controls over Government contractors. This arsenal includes, in addition to GAO audits, a substantial body of legislation, procurement regulations, audits by the contracting agencies, the resolution of contract disputes by administrative procedures and, finally, the process of renegotiation.

THE COMPTROLLER GENERAL FUNCTION

Lest certain of our comments be misunderstood, we want to emphasize at the outset our respect for the Comptroller General's Office and our complete support for the theory of governmental management which underlies its creation. This watchdog of Congress-and of the people-performs an invaluable service for which every citizen must be grateful. However, as the chairman has observed, "It does not hurt once in a while, however, to examine the operations of the General Accounting Office itself. . . ."

In addition to his investigative or audit function, the Comptroller General exercises an adjudicatory responsibility in passing on the propriety of Government contract arrangements. This latter function, incidentally, has served frequently to protect the interests of contractors as is recognized in a recent institute pamphlet "Comptroller General Decisions on Technical Data and Related Patent Problems."

In carrying out his statutory responsibility for independent audit of contract matters as to the general desirability of which there can be no question-the Comptroller General has identified a variety of undesirable contracting procedures. In thus rendering management assistance to Government procurement agencies he has made a substantial contribution to improvements in procurement policy and practice. However, in the methods by which he has carried out this audit responsibility the Comptroller General has approached, and quite possibly overstepped, that ill-defined line which separates the responsibility for procurement management from the audit responsibility of investigation, analysis, and reporting.

THE CONTRACTOR'S GRIEVANCES

It is not our purpose here to argue the case for procurement agencies-with whom, incidentally, we frequently disagree; they are, of course, far more competent than we to state their own positions. Rather, it is our purpose to tell this subcommittee of the quandary in which the contractor finds himself as a result of the GAO audit program.

After making due allowance for cases involving genuine abuse or misrepresentation on a contractor's part, we think that the contractor in too many cases has become a pawn in what seems to have become, as a practical matter, an intragovernmental power struggle between GAO and the contracting agencies. He is cast in the unhappy role of the innocent bystander who suffers most of the damage. To the normal risks of doing business and the unusual hazards of Government business is added the uncertainty of what a GAO audit may do to him at some remote date in the future. If one were to set down his principal complaints in a bill of particulars, they would read like this:

He may suffer by reason of a GAO conclusion that the procurement agency erred.

He may face a demand for a "voluntary refund" and the unhappy choice of admitting guilt by making the refund or endangering customer relations by refusing.

His contractual rights to have the allowability of costs under his contract determined by designated procurement agency personnel or to appeal disputes with the contracting officer to an administrative tribunal established for the purpose may be prejudiced by the premature release of a GAO audit. His most confidential cost and profit margin figures may be publicly released for his competitors to read.

The whole record of his performance as a Government contractor may be distorted by the public release of an adverse GAO report concerning a fraction of such business.

He may be confronted with demands to make available to GAO examination books, records, and physical properties having no relation to the contract under audit.

WHO'S IN CHARGE HERE?

We have no doubt that a central question in this inquiry is that of procurement management responsibility-in short, "Who's in charge here?" This famous vaudeville line is no joke when applied to the present situation, and particularly as the fallout from this undecided issue affects contractors.

Congress has every right to expect not only a vigorous administration of Government procurement but an equally vigorous post-audit of that function's performance. Both functions are essential, but in the nature of things they are antipathetic and perfect harmony between them can never be achieved.

Ideally, it is the function of a procuring agency to establish and execute procurement policy; it is the function of audit to examine and report on the results, including an identification of shortcomings with appropriate suggestions for improvement. Audit, in short, is an aid to management but not a part of it-and certainly not a substitute for it. Yet we are now approaching-and may already have reached-in the field of government procurement a situation in which Government contractors can no longer be assured of what Assistant Secretary Ignatius has properly termed the "integrity of contract." Instead, the contractor must be prepared to deal with the varied faces and moods of Government as reflected by the contracting agency, the General Accounting Office, and in some cases the Department of Justice. He has every right to ask "Who's in charge here?" We hope this hearing may serve to answer that question.

DOD-GAO disagreement.-Not only does industry feel that the General Accounting Office has begun determinedly to impinge upon the management re

sponsibility of Government procurement agencies but it appears from testimony already presented that at least one of those agencies, the Department of Defense, feels the same way.

The testimony of Assistant Secretary Ignatius identifies three "areas of disagreement between GAO and DOD." First, there is disagreement as to the management wisdom, and in some cases the legal propriety, of requesting a voluntary refund from a Defense contractor whenever prices are found by the General Accounting Office to include "unnecessary," "excessive," or "unwarranted" costs. Second, the General Accounting Office's repeated criticism of DOD's selection of contract types would appear to reflect a basic difference in approach to Defense contracting. Third, the GAO has urged upon the Department of Defense a general policy of furnishing to prime contractors as Government-furnished equipment major subsystems and components except where the prime contractor makes a major contribution in the production of the item or in providing technical assistance to the subcontractor. All these are crucial areas of management decision and in each the GAO has shown no reluctance in recommending upon the basis of its selective spot checks that its judgments be substituted for those of the responsible procurement agency.

GAO "advice" on cost allowability.-To be sure, the General Accounting Office has denied this allegation, an example of such a denial appearing as appendix V to GAO Report B-146760, January 5, 1965. In that case, counsel for the subject company alleged in its response to the preliminary GAO report that "the draft report violates the exclusive and mandatory procedures required by the contracts for determinations of allowability or reasonableness of costs." In its rejoinder the GAO adverted to its earlier recommendation that the contracting officer "reconsider, in final settlement, the propriety of reimbursement to [the contractor] of payments made to [the subcontractor] in light of the information contained in this report." In commenting on counsel's assertion, the General Accounting Office declared "This, in our opinion, does not constitute a directive to violate the contract procedures respecting determinations of cost allowability."

Subsequently, the GAO withdrew its earlier statement indicating that it was prepared to withhold credit "in the disbursing officers' accounts reimbursed to [the contractor]," but nevertheless reasserted its authority for the exercise of such authority. On the question of management prerogative the GAO concluded that "In making our contract audit reports of this type, we do not consider that we are substituting our judgment for that of the officials designated in the contracts; rather, as auditors, we are recommending but not directing that certain factors be considered in arriving at final determinations under the contracts." At a later point the General Accounting Office response declares, “*** we again emphasize that our report does not divest the parties of their contract rights. We recognize that our reports may influence administrative decisions. This is necessary and proper. Our function is to report and to recommend corrective action. Whether the administrative office implements the recommendation is within its prerogative ***” Despite its protests we believe that the GAOperhaps as a result of misdirected zeal-is attempting to not merely influence, but to shape procurement policy.

We have no doubt that the DOD shares this opinion. If not already available to the committee it will want to examine, we believe, exchanges of correspondence between the Department of Defense and the Comptroller General bearing on this very question. We suggest that specific attention be given to Deputy Secretary of Defense Vance's letter to Senator McGovern, dated June 22, 1964, the exchange between Assistant Secretary of Defense Morris (June 17, 1964) and the Comptroller General (May 14, 1964) regarding the interpretation of Public Law 87-653, and the protracted correspondence between the Defense Department and the Comptroller General relating to the latter's recommendations in the Bainbridge case. This has already been discussed with the subcommittee by Assistant Secretary Ignatius.

The contractors' dilemma.-The question of "Who's in charge here?" assumes particular importance when the General Accounting Office decides to intervene openly in the normal procurement process. Perhaps the most flagrant, and to our minds most unjustified, such intervention occurred in connection with audit report No. B-146717 issued on May 25, 1964. In that report, the Comptroller General commented as follows with respect to proposed ASPR implementation of the "adequate price competition" and "commercial items" exceptions to the general cost data and certification requirements of Public Law 87-653:

"However, our view of changes proposed to ASPR, information contained in Air Force procurement circulars, and certain documents recently issued by the Department of Defense regarding (1) limitations as to when pricing certifications are required and their effect on cost projections and proposed prices for future work, (2) limitations on when requests for cost breakdowns or projections from contractors are required, and (3) the definitions of 'adequate price competition' and 'established catalog or market prices of commercial items sold in substantial quantities to the general public' which we believe are inadequate and will perpetuate sole-source and noncompetitive procurement without the benefit of cost analysis, raises serious questions as to whether they are in accord with the intent of Public Law 87-653. Unless such guidance to procurement personnel is clarified and corrected, it could result in actions that would be contrary to the spirit and intent of that law and possibly violations of it."

It is interesting to note that the Comptroller General saw fit to include such a characterization of DOD policy on implementation of the price statute when at the same time he declined to release to the public his letter B-39995 of May 14, 1964, to the Secretary of Defense, formally offering his criticism of the proposed ASPR implementation of the statute. We had hoped that the basis for withholding the letter-which we understand to be contrary to the Comptroller General's normal practice-was that this was an intragovernmental matter involving a recommendation from the General Accounting Office to the Defense Department which it might be undesirable to bring to the public attention prior to its final resolution by DOD. Obviously, when the audit report was released 11 days later, we knew that we were mistaken in any belief that the Comptroller General might desire to try to settle policy disputes with the Defense Department in private. In our opinion, the quoted excerpt from audit report B-146717 is the type of gratuitous comment, unfortunately typical of many recent audit reports, which is not a necessary part of the findings and recommendations with respect to a particular Defense contract audit. To some extent, these comments seem to represent a querulous insistence by the Comptroller General that if DOD does not accept its recommendation, that recommendation must be "pressed" further by bringing it to the attention of the Congress, the public, and the press, with an intimation that the Defense Department is guilty of "wrongdoing" in not accepting the recommendation. This conduct on the part of the Comptroller General is, in our view, completely unjustified, and we think it indicates a fundamental misconception of his proper responsibilities with respect to audits of Defense contracts.

For the purpose of illustrating the contractor's dilemma which has resulted from GAO's publicized position on Public Law 87-653, assume that in a negotiated price situation the contractor is told by the contracting officer that under ASPR 3-807.1 there is "adequate price competition" and for that reason it is unnecessary to furnish cost data to be taken into consideration with such pricing. A fixed price is then agreed upon and the contractor thinks no more about the situation until he becomes aware that perhaps he cannot rely upon the contracting officer's instructions and the relevant ASPR provisions as representing the authoritative Government position with respect to his contractual obligation. This is because he finds out about the Comptroller General's innuendos in the audit report cited above concerning the "legality" of DOD's concept of what constitutes "price competition" under the statue. At that point, what is the contractor to do? He knows now that there is always the possibility that GAO will eventually audit this contract-this may be a probability if he is involved in a prime contract or subcontract relating to a major weapon system—and that GAO may criticize him for not furnishing cost data to the contracting officer, in spite of the fact that he was told by the contracting officer, the Government official having responsibility in the matter, that it was not necessary to submit cost data. And, if the Comptroller General decides that cost data should have been submitted, the contractor can be fairly sure that the Comptroller General will insist to the Defense Department, the Department of Justice, and any other official forum which might be available, that the contractor make "voluntary" refunds of any amounts by which the Comptroller General assumes that the contract price was increased because of what he alleges to have been the "improper" failure to submit cost data. Nor is this a hypothetical possibility. Contractors have confronted this dilemma in the past and will continue to face it until some clearer limits on GAO audit authority are defined. This can only be done by Congress.