If I may invite your attention to title 31, United States Code, section 74, which governs the certification of balances of public accounts by the General Accounting Office. Section 74 very clearly points out the suspension power when it says:

Nothing in this chapter shall prevent the General Accounting Office from suspending items in an account in order to obtain further evidence or explanations necessary to their settlement.

Mr. ROBACK. You recommended the disallowance?

Mr. KELLER. We recommended the disallowance of the costs, but as far as the accounts were concerned we merely made a suspension pending a redetermination.

Mr. CAMPBELL. Mr. Roback, I think it was a very effective way of doing it because, as you know, after our suspension, the agency went back in to see what there was to it; the result was that they cut down the contractor by half a million dollars, recovered a half million dollars.

Mr. NEWMAN. In the current overhead.

Mr. CAMPBELL. In the current overhead.

Mr. DAHLIN. In fact, they have disallowed it subject to final decision on the whole contract. Or at least the matter is still in dispute and subject to appeal; is that not the case?

Mr. FASICK. They have not acceded to the disallowance of $544,000. Mr. NEWMAN. Any contractor can always go to the Contract Board of Appeals.

Mr. DAHLIN. There has not yet been recorded the amounts due. And the Air Force responded that it was unwise to open up the entire overhead account because this would open up a lot of other itemswhich you did not review-which might be quite unfavorable to the Government.

Mr. NEWMAN. Well, we may open that up.

Mr. DAHLIN. You may open that. You have not reviewed it, in other words.

Mr. NEWMAN. We have got a perfect right until 3 years after completion to look at it. First, we want to see what action the Air Force is going to take. We still have the same type of expenditure in prior years, as well as the current overhead, which they are trying to settle

now.

Mr. DAHLIN. Does that mean that you would still take exception to the previous years? You say that you have suspended, but do not say exception.

Mr. KELLER. The fact is there are no suspensions in this case at present.

Mr. DAHLIN. Not now. You issued a letter of January 7, 1965, in response to the company's protest to the procedures being followed. You said that you would not make an exception or a suspension in this case because it was being handled through the disputes channel, is that correct-is that a summary of the position?

Mr. KELLER. That is correct.

Mr. DAHLIN. That is the position that is announced on page 19 of the Comptroller General's statement where you say "Under a cost reimbursement contract we have the authority to take exceptions in the accounts of the accountable officer when the payments are not

authorized by law or by terms of the contract or where there has been a breach of contract." Does that mean that you will limit these formal exception or suspension procedures in the future? Or what kind of a policy decision is this?

Mr. KELLER. I would explain it this way. We will not issue suspensions of an item pending a determination by the contracting agency as to what costs will be allowable. We will still make recommendations as to matters that we have examined for consideration by the contracting official. However, we will still take exceptions, even under a cost contract, to payments that are contrary to law, contrary to the terms of the contract, or even items of cost which are not allowable under the cost principles set forth in the procurement regulations.

Mr. DAHLIN. Well, is that a statement of the policy then?

Mr. KELLER. Yes, sir.

Mr. DAHLIN. That you are not going to take certain kinds of action where there is a cost determination problem; is that a summary of the position, or is it not?

Mr. KELLER. Yes, sir.

Mr. DAHLIN. Now, these three general categories that are indicated on page 19 of the statement: (1) Where payments are not authorized by law, or (2) by the terms of the contracts, or (3) where there has been a breach of contract. Who decides whether there has been a breach of contract on one of these defense contracts?

Mr. KELLER. We would have to make the decision on it.

Mr. DAHLIN. And even though the contract is still open and administrative determinations are to be made, you can decide in the midst of the contract whether there has been a breach of contract to date? Mr. KELLER. That is possible; yes, sir.

I think maybe a little background would help here. Title 41, section 321, United States Code, provides, in effect, that any decision of the head of an agency or his designated representative or board on a disputed question of fact arising under the contract will be final and conclusive unless the same is fraudulent or capricious or arbitrary or so grossly erroneous as to necessarily imply bad faith or is not supported by substantial evidence.

In addition, in title 41, section 322 provides that:

No Government contract shall contain a provision making final on a question of law the decision of any administrative official, representative, or board.

Now, if you have a breach of contract, you can sometimes get into a very close question as to whether you have a question of law or of fact. If one of law, and most are, the General Accounting Office would have authority to make a decision notwithstanding the position of the contracting agency. It would be subject to review of the courts, certainly.

Mr. DAHLIN. Yes, sir. Let us say you have a contract audit that you are making and you are issuing a report, let's say, today. Mr. KELLER. Yes, sir.

Mr. DAHLIN. And there is a finding of breach of contract in it. Are there any limits to the kinds of breach of contracts you are going to address yourself to?

Mr. KELLER. I would like to answer that for the record, if I may. I would like to think about that one a little bit, because we have all kinds of breaches in contracts and some of them are quite major, and there are various types which have a different legal answer to them. (The following answer was supplied for the record:)

Yes, there are certain limits. Exceptions for breach of contract by the contractor, rather than by the Government, which is the type of breach we are discussing here, necessarily would be limited to situations where the contractor's breach resulted in a monetary loss or additional costs to the Government.

Mr. ROBACK. Before we close, Mr. Chairman, we have a report here which Mr. Newman lent to us, and we will return it. He referred to a recommendation in the report to the effect that the Defense Department keep a central filing or register of contracts, and take account of contractor performance and integrity. The subject matter of this report had to do with the problem of the marginal, fly-by-night type of operator. I am not trying to interpret the recommendation, but to point out that this was pointed toward that kind of issue, which is not an issue in our discussion. We are not dealing here with fly-by-night operators.

Mr. NEWMAN. Well, we do.

Mr. ROBACK. I know, but we are not dealing here with fly-by-night operators in the subject matter under discussion.

Mr. HOLIFIELD. The subject matter is not fly-by-night operators, but reputable contractors.

Mr. ROBACK. They may be tough and nasty, but they are not fly-bynighters.

Mr. CAMPBELL. You are working on the assumption that they are reputable, competent, and honest.

Mr. ROBACK. The backbone of American industry.

Mr. HOLIFIELD. We are not referring, of course, to some of those contractors that may have-regardless of how reputable a concern may be, an official may do something wrong, and of course we are not trying to defend them in any case. What we are thinking about mainly is the improvement of the procedural methods in order to obtain across-theboard expedition and resolution of problem areas rather than having them hang on for such a long time that it becomes indeed a burden not only to the Government but a burden to the contractor himself.

Well, due to the interest of the members of the subcommittee, we did not get to some of the cases we wanted to talk about, so at a time which is convenient to you, General Campbell, we will have another session, and we apologize for running so long today. We ordinarly stop at 12 or 12:30, but we wanted to get certain facts on the record today. So we will adjourn subject to arrangement for another session. The meeting is adjourned.

(Whereupon, at 1 p.m., the hearing in the above-entitled matter was adjourned, subject to call of the Chair.)

COMPTROLLER GENERAL REPORTS TO CONGRESS ON

AUDITS OF DEFENSE CONTRACTS

TUESDAY, MAY 18, 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, Frank J. Horton, and Howard H. Callaway.

Also present: Herbert Roback, staff administrator; Douglas Dahlin, attorney; Paul Ridgely and Robert J. McElroy, investigators.

Mr. HOLIFIELD. The Committee on Government Operations is given the duty by rule XI, paragraph 8(c) (1) of the House of Representatives, of receiving and examining reports of the Comptroller General of the United States and of submiting such recommendations to the House as it deems necessary or desirable in connection with the subject matter of such reports.

We will proceed today with our hearings on Comptroller General reports to Congress on audits of defense contracts. Today's witness is the Honorable John W. Douglas, Assistant Attorney General, Civil Division, Department of Justice. We expect to hear about the procedures for handling cases and reports which the General Accounting Office and/or the agencies have referred to the Justice Department, and about other legal questions that have been raised by these reports. The Deputy Director of the Bureau of the Budget, Mr. Elmer Staats, also was to have appeared here today, but had a conflicting schedule and we will try to hear from him at the end of the Comptroller General's testimony later on in the hearings, possibly tomorrow, but that has not been pinned down as yet.

Mr. Douglas, do you have a prepared statement this morning? Mr. DOUGLAS. Yes, I do, Mr. Chairman.

Mr. HOLIFIELD. Will you please come forward and bring any of your associates that you wish to the table and proceed.

48-132-65- -7

87

STATEMENT OF JOHN W. DOUGLAS, ASSISTANT ATTORNEY

GENERAL, CIVIL DIVISION, DEPARTMENT OF JUSTICE

Mr. DOUGLAS. Mr. Chairman, with your permission, I would like to read my prepared statement.

I am John W. Douglas, Assistant Attorney General for the Civil Division, Department of Justice. I am appearing in response to the request contained in your letter to the Attorney General dated April 27, 1965.

In your letter you state that the committee desires information concerning the handling of General Accounting Office reports relating to defense contracts, and which are referred to the Department of Justice by the General Acounting Office or the contracting agency. In particular, it appears that the committee desires information on the following matters:

1. The review process within the Department of Justice.

2. The nature of the clearance or settlement undertaken by the Department of Justice.

3. The difference between the authority of the Comptroller General and that of the Department of Justice to settle claims.

4. Whether Public Law 67-653 should be construed to require the submission of cost or pricing data or both at the option of the contracting agency.

5. The elements which establish a violation of the "cost or pricing” requirements of Public Law 87-653.

6. The numbers and kinds of cases reviewed by the Department. of Justice upon the basis of referrals arising out of GAO reports of audit of defense contracts.

If it is agreeable with the committee I will restate and respond to these questions in the same order.

1 and 2. The question relating to the processes for the review of GAO reports within the Department of Justice is so closely connected to the second question which concerns the nature of the clearance or settlement undertaken by the Department of Justice that both matters will be considered together. If the GAO report reveals conduct which may constitute a violation of the criminal statutes, it is reviewed by both the Criminal and Civil Divisions of the Department of Justice. We in the Civil Division coordinate our investigation with that of the Criminal Division. However, we normally withhold final action or decision on a civil suit pending the disposition of the matter in the Criminal Division. This procedure is followed in order to avoid prejudicing any possible prosecution. If there is nothing in the GAO report which requires consideration of criminal prosecution, the Civil Division proceeds to complete its review as soon as it can obtain such additional information and documentation as may be required.

These reports are thoroughly canvassed in the Civil Division. No suit will be filed, assuming as much as $50,000 is involved (which is usually true of GAO reports relating to defense contracts), unless a detailed memorandum has been prepared for my review and approval. Assuming the GAO report states facts which, if substantiated, will make out a prima facie case, the Civil Division proceeds to obtain supporting and supplemental information and documentation from the Defense agency, the General Accounting Office, or both. In some