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issued to officials of the defense agencies transmitting our findings and recommendations.

At the request of congressional committees, a number of representatives of this Division have testified at congressional hearings, made comments on proposed legislation, and furnished information on various matters.

Mr. CASEY. I would like you to justify these increases, please.
Mr. NEWMAN. Page 45 shows the figures, Mr. Chairman.
Mr. Casey. Insert that page at this point.
(The page follows:)

NATURE OF THE WORK

The activities and programs of this Division are directed toward providing assistance to the Congress and improving management and operating controls and financial administration of the Department of Defense and the military departments so as to promote greater efficiency and economy in their complex operations. We are intensifying our reviews of agency accounting systems and our efforts to assist the agencies in expediting the development and establishment of such systems to the degree necessary to obtain the approval of the Comptroller General. Our primary audit effotrs are directed toward those programs having major financial significance. These include such areas as procurement, supply management, utilization of manpower, support services, facilities and construction and research and development activities of the military establishment. We are continuing our reviews of contract administration and contractor operations.

Our audit work includes reviews and evaluations of functions and organizations, audits of civilian pay and the centralized audit of military accounts. Our planned programs are subject to adjustment, continuously, due to such factors as available manpower, travel funds, congressional assistance requirements, and other special assignments which develop from time to time.

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Mr. NEWMAN. Of the $270,800, that increase is for in-grade step increases, new hires, and regular promotions.

We need these new people coming aboard, Mr. Chairman. We have reorganized our staff into seven functional areas. In the mangement control, we are trying to take care of the added load and are working closely with the Department of Defense on the new prime program; planning, budgeting, programing, and accounting in the Department of Defense.

Mr. Staats. This is essentially working with Defense on improvement of their accounting systems and getting them to a point where We can approve it.

The only part of the Defense Department where we have approved the accounting system to date is the Corps of Engineers. The accounting system for the Defense Department, except for the Corps of Engineers, never has been approved by our office.

Part of the increase Mr. Newman refers to is to work with them in trying to get their accounting system to a point where we can approve it.

Mr. CASEY. Are you making any headway?

Mr. Staats. Yes, we think we are making good progress. It is the first time we have ever seen any light at the end of the tunnel. Mr. Casey. When did you start this reorganization?

Mr. NEWMAN. July 1, 1966, Mr. Chairman. We are not yet a year old.

The areas we are trying to build up with additional talent are the research and development, facilities and construction, and support services.

We already have two management engineers who are coming with us. One will be in a research and development group and the other with our management control group. We have six other prospects.

These people are from private enterprise or the Department of Defense.

Mr. Staats. We were asked a question as to the areas we feel are important for us to audit. We have done little in defense communications, for example.

The Defense Department is spending very substantial sums of money in this area. The last figure I saw was some $3 billion a year for communications.

We have done very little in the area of the expenditures the Defense Department is making for communication services.

Part of what we seek in this reorganization is to organize our own staff into units in which they can specialize in defense programs. We get greater specialization of the staff by assigning them into the seven major functional groupings.

Mr. Casey. You have better control within your own departments. Mr. STAATS. That is right.

Mr. NEWMAN. For the record there is a good writeup from pages 51 through 54. It gives some detail on what we plan to do in the new areas.

Mr. Casey. We shall insert those pages in the record at this point. (The pages follow :)

PLANS AND PERFORMANCE GOALS FOR 1967 AND 1968 Our audit efforts during fiscal years 1967 and 1968 will be directed to examination of the manner in which the Department of Defense and the three military departments discharge their financial responsibilities. However, the plans and performance goals discussed below are subject to change in the event there are significant increases in the Department of Defense budget because of the Viet Nam conflict.

We plan to continue our shift in emphasis from the reriew of individual actirities and operations to broader reviews of selected areas of operations. This will probably mean fewer reports to the Congress ; particularly those relating to sup ply management activities and contractor operations. However, we will continue to review individual contracts, contractor operations, specific supply management operations, and other individual selected activities, as in the past, but at a some what reduced level. Our reporting on many of these reviews will be at the secre tarial or lower level in the departments. Our more significant findings, however, will be included in reports to the Congress.

In our broader reviews, our emphasis will be on contract administration and agency management of its programs. We will be concerned with such areas as contract pricing practices, management of major weapons systems, the effectiveness of the management of military supplies by the Department of Defense, and the evaluation of selected accounting and reporting systems. Where appropriate, particularly with respect to supply management, our reviews will include activities of the Far East and Europe as well as the United States.

We will continue to emphasize financial management in our work, including cooperation with the Department of Defense in bringing accounting systems to the level appropriate for submission to this Office for approval. In our review of manpower practices, we will consider the training and utilization of civilian and military personnel. In addition, we will give attention to the use of contractor versus civil service personnel for selected military operations. In our facilities and construction reviews, we plan to look into policies and procedures relating to military housing. We will look into various aspects of the research and develop ment activities of the Defense establishment, and we plan to give attention to services such as communications and transportation.

In conjunction with our work, it is our intention to make follow-up reviews where prior reviews disclosed significant opportunities for improved management or need for corrective action, particularly where congressional interest is known to exist.

Our plans for reviews by major functional area are briefly summarized below for fiscal years 1967 and 1968:

MANAGEMENT CONTROL SYSTEMS

Our intensification of efforts relating to improvements in financial management within the Department of Defense will continue in accordance with plans formulated in fiscal year 1966 for increased emphasis on this aspect of our work. We are reviewing the planning, programming, and budgeting system of the Department of Defense, including evaluation of Army, Navy, and Air Force tests underway of revised accounting systems to implement requirements of the Secretary of Defense. In addition to determining whether the objectives of the Secretary of Defense are being accomplished, we will cooperate with agency officials in assuring that the procedures developed conform with principles and standards prescribed by the Comptroller General

The development and review of accounting systems of the Departments of Defense, Army, Navy, and Air Force will continue to receive increased emphasis. For example, we expect the Department of Defense to submit for our review and approval, its (1) Procurement Accounting System and (2) Construction Accounting System. Prior to submission of the systems, we plan to cooperate with the Department in bringing the systems to acceptable levels of compliance with principles and standards prescribed by the Comptroller General. In addition, we plan to examine into systems in effect in the military departments at selected inventory control and cost accounting activities. Also, we will continue our inquiry into the adequacy of internal audit coverage of military audit activities.

PROCUREMENT

During fiscal years 1967 and 1968, we plan to continue our review of selected contracts and subcontracts to evaluate the pricing of contracts, including complicance with regulations implementing P.L. 87-653 and the reasonableness of prices negotiated in relation to information available at time of negotiation and award. We are also surveying certain aspects of the F-111 aircraft program at the request of a congressional subcommittee. We plan to continue to examine into lease versus purchase of facilities and equipment by contractors, the justification for negotiating with sole-source suppliers, and the administration of cost reimbursement contracts. We also plan to look into the contracting for ship repairs and for the repair and replacement of equipment.

In our procurement review, we plan to give increased emphasis to contract administration, contractor performance, and the effectiveness of internal audits. During these two years, we expect to inquire into (1) the policies, procedures and controls that have been established for paying for engineering improvements suggested by contractors producing material for the Government, (2) the determinations to manufacture items rather than contract for their production, and (3) the economies of “total package” type of procurement where the competition at the outset includes not only the development phase, but also production units and most of the logistics support.

SUPPLY MANAGEMENT We will continue our examination of the administration by the inventory managers at inventory control points in the areas of requirements, storage, transportation, and maintenance of supplies in selected commodity groups.

In our evaluations, we expect to place increased emphasis on the disposal and redistribution of materiel. We will also continue to give attention to the

Department of Defense programs and procedures for eliminating inactive items from its supply system. Much of our efforts in the supply management area will be on broad reviews where we examine into specific aspects of supply manage ment of the three military departments and the Defense Supply Agency simultaneously. We will also continue to give attention to the combat readiness of weapons and equipment of the three military departments including missiles, helicopters and other aircraft, combat or noncombat vehicles, and electronic equipment. Our consideration of readiness will be closely coordinated with examinations we plan to make into the maintenance management of equipment, including such aspects as repair, overhaul, servicing, inspection, testing, and modification.

MANPOWER We plan to continue, at a somewhat increased level, our reviews of Department of Defense military and civilian manpower practices. We will look into the acquisition, assignment and utilization of civilian and military personnel. We will continue our audit of civilian and military pay and allowances and the evaluation of related systems. In addition, our Manpower staff will be responsible for the audit of other types of transactions in disbursing accounts to the extent necessary to meet our statutory responsibility for the audit and settlement of accounts.

We are currently considering the use of contractor personnel by the Department of Defense instead of civil service personnel for certain research work. We plan to continue emphasis on evaluation of contractor personnel versus in-house personnel for selected activities, particularly with respect to cost and policy considerations of the departments in determining the type of personnel to be used. In the near future, we expect to examine into the technical training of enlisted personnel and of civilian personnel as a part of our evaluation of the management and utilization of personnel of the Defense establishment

RESEARCH AND DEVELOPMENT

We plan to examine into several areas relating to the research and development activities of the Defense establishment. These include (1) unnecessary duplication of effort or lack of effective coordination in research and develop ment activities, (2) disposition of rights to inventions arising from work financed under Government research and development contracts, (3) planning and selection of organizations to manage and perform research and development programs and projects, (4) operation of nonprofit organizations, (5) expenditure of Government funds for contractor-sponsored research and development over and above that required in the performance of specific contracts. We are currently making surveys of management controls for administering selected research and development contracts. Our evaluation of management controls will include consideration, for selected activities, of those designed to prevent unnecessary duplication and promote effective coordination.

FACILITIES AND CONSTRUCTION We plan to review and evaluate the policies and procedures used in determining requirements for family housing and bachelor officer and enlisted quarters. We also intend to review, for the compliance with space and cost limitations in posed by the Congress, the more commonly constructed facilities at military bases, such as barracks, messhalls, and warehouses. We also plan to examine into the leasing of real property of the Department of Defense to determine the adequacy of the leasing arrangements and whether retention of the real property by the Department is justified.

SUPPORT SERVICES We are currently reviewing the utilization of aircraft assigned to Army sup port organizations. We are also looking into the management of material han dling equipment and other selected types of equipment to determine if manage ment controls over the use of the equipment are adequate. In the near future we plan to examine into the management of the Defense Communications System. and the Dependents' Medical Care Program. During fiscal years 1967 and 1968 we also plan to give attention to the management by Department of Defense activities of (1) transportation services, (2) industrial facilities and machine

tool reserves, (3) need and use of electronic data processing complexes, (4) fuel distribution systems, (5) printing services, (6) intelligence and security services, and (7) civil defense.

Mr. REIFEL. I have no questions.

DEFENSE DEPARTMENT ACCOUNTING SYSTEM

Mr. ANDREWS. You said that the Engineers was the only branch of the Defense Department which had an accounting system which you approved?

Mr. Staats. That is right.

Mr. Newman. That is being revised now, putting military and civilian together.......

Mr. ANDREWS. Have you recommended to the other services an accounting system they should adopt?

Mr. STAATS. The effort in the Defense Department has been to try to bring their accounting system into a form which could meet our approval. This started about a year and a half ago under the direction of Assistant Secretary Anthony. He is shooting, as an executive, to get a system which will get our approval by July 1, 1968. DA popoljongti

DEFENSE DEPARTMENT AUDIT SYSTEMS

Mr. ANDREWS. How do you find the auditing systems of the services?

Mr. STAATS. We have a report in process at the moment to the Congress dealing with our appraisal of the adequacy of their audit system internally. Mr. ANDREWS. You think their audit systems are good or bad ?

Mr. STAATS. It is hard to characterize it that way. We feel the Defense Contract Audit Agency generally has developed quite well. We think they need to do more postaudit work.

One of the recommendations we will make is that they should have responsibility for postaudit as well as preaudit on defense contracts.

Mr. ANDREWS. When your men go into a Government agency, if that agency has an auditing section what credence do you give to their audits ?

Mr. STAATS. If we find that they are already in process of making an audit on a matter in which we are interested we would in some instances wait to see what they come up with.

Those reports usually are available to us. If we are not satisfied we then go ahead and make our own.

We do not feel it is in the interest of the Government to duplicate work that an internal audit agency is doing just because we are interested. We reserve the right to go ahead and make our own review.

Mr. ANDREWS You don't accept it at face value, then?
Mr. STAATS. That is right.

Mr. WEITZEL. We try to evaluate the internal audits. We have a good idea in most cases of how much reliance we can put on them.

We have to do this in order to determine how far additionally we have to go. They know this.

Mr. REIFEL. I have no questions.

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