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services and facilities and construction were for a while at a lower priority than procurement and inventory management and supply management. Now we have tried to have a more rounded approach, giving more emphasis to manpower and the other things that I just mentioned.

We knew they needed attention, but we felt that the others would produce more benefits from our audit attention at the time.

COORDINATION WITH AGENCY AUDITING OFFICERS Mr. ANDREWS. Is it not true that most Government agencies have their own internal auditing forces?

Mr. STAATS. That is true. Mr. ANDREWS. In the military, they have their inspectors general. Is there any conflict between your effort and the effort on the part of the intraservice auditing?

Mr. STAATS. I do not think there is any conflict, Mr. Chairman. We utilize audit reports made by agencies by internal audit. We are able to save time that way.

ACCURACY OF INTERNAL AUDITS

Mr. ANDREWS. Generally speaking how good are those internal audits?

Mr. Staats. In terms of accuracy, I could not really speak to that so much as I could in terms of their usefulness. We will not accept an internal audit as final. We do not think this would be the correct interpretation of our responsibility to Congress. We sometimes can use their material and go back of it and check it out and, if it looks as if it covers the area thoroughly and well, then we will do less work in that area. Mr. ANDREWS. You do not accept their findings at face value. Mr. Staats. No, sir. Mr. ANDREWS. In how many cases, percentagewise, do you find they are incorrect? I know some of the defense agencies take a great deal of pride in their internal audit setup. The Navy, for instance, has a system that was instituted under Mr. Franke several years ago. His auditing system was his pride and joy.

Mr. STAATS. I would like to give you a couple of examples relating to the Defense Department. I would like to preface it by making this statement :

We welcome strengthening of internal audit in these agencies. In fact, we are doing what we can to try to encourage them. We have been making reviews of the adequacy of these reports, highlighting these. We have been sending these reports to Congress. We will have 12 or 15 of these reports before we are through. We have just finished one on the Defense Department.

In these, we are trying to make suggestions for improvement in internal audit in terms of the organizational location in the agency, in terms of their statutory authority or the internal authority given to them by management. If we can strengthen internal audit, it means we will have less to do. This would bear, again, on the question of how large the GAO eventually should become as an agency.

In many cases, their interests are more, you might say, on the fiscal side, on the financial audit, whereas we are interested in knowing whether they are carrying out the law as intended by the Congress.

I mentioned in our testimony the 1962 legislation called the truth-innegotiations law. In brief, what this law said was that the contractor had to furnish the contracting officer of the Government with current, accurate, and complete information with respect to his costs, if he knew what those costs were, at the time the negotiation of the contract took place. We did a review of 242 contracts on this, beginning in 1964. In other words, 2 years after the law went into effect, we made a review as to how this was working out.

We developed information which indicated that the Defense Department really had not fully insisted upon this information, or at least they had not insisted on its documentation to the point that a Government auditor or anyone else coming in later could be sure that that information had been provided.

SAVINGS THROUGH GAO EFFORTS

Mr. ANDREWS. Have you recouped any moneys as a result of your efforts ?

Mr. STAATS. We have succeeded in getting a large number of changes made in the procedures by the Defense Department. Some of these are still being worked out as a result of the reports that we did and as a result of hearings which were held by the Joint Economic Committee and the House Armed Services Committee.

Mr. ANDREWS. What you are trying to do, in plain, simple language, is to make them do right.

Mr. Staats. To make them improve the administration of the law passed by the Congress.

In making this report to Congress, Congress is free to say we are wrong, but in this case they said we were right.

How much money is involved in this in terms of savings, it would be impossible to calculate. It could be a sizable amount of money.

DEBARMENT OF CONTRACTORS

Mr. ANDREWS. Do you have authority to put a contractor on a blacklist if you find, for example, that he is defrauding the Government?

Mr. STAATS. The agency has the authority, and in some cases-
Mr. ANDREWS. Do you make recommendations?

Mr. KELLER. In some cases we would develop the information. We had a case just within this last year where the Defense Department put a contractor on the blacklist, on a proscribed list. It is a list of contractors who have defaulted under contracts, or are otherwise in trouble. It is commonly referred to as a blacklist, but it is a list of contractors who are debarred from receiving Government contracts.

Mr. STAATS. Debarment is the word I was seeking.

Mr. ANDREWS. Everybody knows what a blacklist is. That is a good term. I have heard it used since I have been on the Defense Subcommittee, and that has been a long time.

OVERCHARGES MADE BY CONTRACTORS

Mr. KELLER. The thing I had in mind was not a default case. It was a case where a contractor was charging the Government many times over what he was charging his regular commercial customers. When this was brought out in information that was developed between the GAO and the House Armed Services Committee, the Defense Department placed the contractor on the debarred list. The contractor is not eligible to receive future contracts.

Mr. YATES. Why would the contractor do that? Mr. ANDREWS. Human nature, selfishness, sharp practice. Mr. YATES. I wonder what justification is given to the Government for charging so much more to the Government than to private customers. Mr. STAATS. I do not recall. Do you recall the justification given ? Mr. KELLER. In the particular case it seems that the contractor was charging whatever the traffic would bear. In many cases he was charging well in excess of the published catalog price. The Government buyer should have been more careful.

Mr. ANDREWS. Was he prosecuted ?
Mr. KELLER. It was referred to the Department of Justice.
Mr. YATES. How long ago?

Mr. KELLER. About 3 or 4 months. I am not currently up to date on it.

Mr. ANDREWS. Of course, it is not your fault if the Attorney General does not press for prosecution. Mr. KELLER. Actually, it was referred by Defense to Justice. (Off the record.) Mr. YATES. What about the contracting officer?

Mr. KELLER. I cannot condone the actions of the Government buyers either.

Mr. ANDREWS. I read from time to time where certain contractors buy material from one Government agency and turn around and sell it to another Government agency at an exorbitant price.

Mr. KELLER. Unfortunately, cases like that do happen from time to time, in the disposal of surplus. Communication does not always work, and you find one Government agency in the market for material which has been declared surplus and sold by another agency.

Mr. ANDREWS. Again, that is largely left up to the contracting officer?

Mr. KELLER. Yes. We do have in the Government a screening process for the disposal of surplus property which is supposed to catch this type of thing—where one agency has an excess which another agency needs.

Mr. ANDREWS. We have had that for years.
Mr. KELLER. It does not always work, but usually it does.

Mr. YATES. How many times have you found cases of overcharges to the Government like the one you mentioned a few moments ago, where he was charging the Government many times more than he was charging his customers?

Mr. KELLER. Not too many. The fact that we have not found them does not mean it is not going on to some degree. I think you will find

this occurs in the small dollar procurements where the pricing is not carefully checked by the procuring agency.

Mr. YATES. It would have to be that kind of item, would it not? You could not get it in the case of a tank or airplane, could you?

Mr. KELLER. I agree. In the larger procurements, moneywise, many steps are taken to make sure the price is reasonable.

Mr. STAATS. Congressman Yates, this does bring out an example of the kind of thing which we are concerned with. In other words, What is the procedure of the Defense Department to reasonably assure they are not being overcharged in this area? We are interested in their system for these small procurements. What kind of people do they have on the job? How well trained are they? Who reviews the judgment made by the person who makes the initial order?

These kinds of things we think we can get a better payoff on than if we try to chase down a whole series of small procurements.

DISMISSAL OR PROSECUTION OF CONTRACT OFFICERS Mr. ANDREWS. Has your office been responsible for the dismissal and/or prosecution of any contracting officer of the Government in the last 12 months ?

Mr. STAATS. Not that I am aware of.

EFFECT OF WAR AND DRAFT ON RECRUITMENT OF STUDENTS Mr. ANDREWS. I notice you say that your experience over the past 10 years has been that you were able to recruit annually, approximately 350 students of prime quality.

What effect will the war and the draft have on that policy?

Mr. Staats. It will hurt us. There are two things that are hurting us at the moment, Mr. Chairman. One is the bidding up of the salaries by public accounting organizations and private industry. The other is, of course, the draft. We are losing a great many of our own people to military service, and also we are losing people that we otherwise would be able to recruit. We are being damaged both ways.

PERIODIC STEP INCREASE AND EXTRA DAY'S PAY COST Mr. ANDREWS. Mr. Staats, I notice one item of increase you identified as periodic step increases plus an extra day's pay in 1969, for an additional cost of $876,000.

I take it that this is an item that appears in one degree or another in every annual budget request; is that correct?

Mr. STAATS. I am afraid it is, Mr. Chairman. I might say here, when I was in the Budget Bureau, I used to insist that this should not happen in an organization, and the staff of the Budget Bureau finally persuaded me that I was wrong; that this had to be in the budget, and that this was a real cost.

I come to the GAO and find Mr. Simmons and Mr. Cornett, my budget people, also are able to document this.

I think your statement is correct that this is a real cost, and one we have to pay for.

Mr. ANDREWS. It is a fairly sizable amount. What about savings programs-education, housing and community development, commerce and transportation, space research and development, and natural resources in recent years have required the allocation of more staff resources to our work in these areas. We expect to program approximately 900 man-years during fiscal year 1969 for management reriews in the civil departments and agencies.

92-655-6842

Reviews of the activities of the economic opportunity programs have had a particularly heavy impact on our staff needs for the 6month period ending June 30, 1968, and will continue into fiscal year 1969, as result of the direction to us for an in-depth investigation of these programs in title II of the Economic Opportunity Amendments of 1967, approved December 23, 1967. The law requires us to report on the results of our review by December 1, 1968. This assignment has required acceleration and expansion of our work relating to the OEO programs. To meet the congressional objectives, about 200 of our staff have been scheduled to participate in this review on an accelerated basis. This represented a redirection of effort of nearly 125 staff members who had been previously assigned to other important and highpriority work.

Our plans provide for reviewing the efficiency and effectiveness of all of the major programs financed by the OEO. In addition to the work performed by our staff, we have obtained assistance from consultants to provide advice on standards for evaluating the effectiveness of the various programs and on other matters related to program evaluation. This effort has required an additional $575,000 in 1968 funds for contract services and increased travel which was not reflected in our budget estimate.

Additional details concerning our plans in the civil agencies are contained in pages 29 through 43 of our budget justifications.

3. International activities. Our international effort will require approximately 225 man-years for assignments in about 40 foreign countries. In 1969 we will continue our examinations of the foreign assistance programs, and of other Federal Government activities outside the continental United States. Further attention will be given to possibilities for improvement in the U.S. balance-of-payments situation, and to reviews of U.S. contributions to international organizations.

In response to congressional requests and interests, we have had to expand our audit coverage of foreign economic and military assistance programs, as well as other Federal Government financial programs. Some of our important current reviews involve:

Countrywide U.S. assistance; that is, assistance to other countries.

Balance-of-payments effect of offshore procurements.
U.S. construction activities in Vietnam and Thailand.
U.S. participation in international organizations.
Foreign military sales program.

Management of the commercial import program for Vietnam. 4. Audit of transportation payments. The continued increase in Government transportation payments, principally freight payments in support of military activity, places a heavy burden on our transportation audit capability. During fiscal year 1967 we audited 24 percent more in freight payments than in fiscal year 1966. In the first half of this year we experienced an increase of about $130 million in freight

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