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.

MSPB

There has been considerable discussion in the last few years as to the right of the General Accounting Office to access to contractors' records and as to just how far that right goes.

The General Accounting Office access-to-records clause first came into being in Public Law 921, approved January 12, 1951.

Public Law 921 was an amendment and extension of the first War Powers Act, 1941. Section 1 of that act, as reported by the committees, granted authority to enter into contracts and into amendments or modification of contracts without regard to provisions of law whenever it was determined that such action would facilitate the national defense.

Congressman Hardy offered an amendment to the bill on the floor of the House. This amendment provided that all contracts entered into, amended, or modified pursuant to section 1, shall include a clause to the effect that the Comptroller General or any of his duly authorized representatives shall have access to and the right to examine any pertinent books, documents, papers, and records of the contractor or any of his subcontractors engaged in the performance of and involving transactions relating to such contracts and subcontracts.

The Hardy amendment was adopted by the House, and the legislation with the Hardy amendment, was approved by the Congress and became Public Law 921.

A short time later Senate bill 921 was introduced to amend the Federal Property and Administrative Services Act and the Armed Services Procurement Act to provide that all contracts negotiated without advertising under those acts shall include a clause to the effect that the Comptroller General shall have access to and the right to examine 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. An identical bill, House bill 2574, was introduced. Hearings were held on the bills by the Committees on Government Operations (then the Committees on Expenditures in Executive Departments) of the House and the Senate. However, the hearings were not printed.

The bill passed the Senate without debate.

In the House there was considerable debate on the legislation; and, with the exception of the committee reports, we are aware of no other source but the Congressional Records of October 15 and 17, 1951, where legislative intent can be found. There was opposition to the bill and amendments were offered. However, the bill passed by the House was not substantially changed from the bill introduced. The legislation was subsequently enacted as Public Law 245, approved October 31, 1951.

In our opinion, the language of the act and the legislative history clearly establish that the basic purpose of the statutory provision was to make possible the close supervision and control over negotiated procurements, which the Congress regarded as necessary in the interest of the Government. This purpose requires that the act be interpreted to permit detailed examination of a contractor's records to insure the necessary degree of supervision and control. In other words, the clear intent of the statute is to provide for the examination by the General Accounting Office of such records of a contractor, to such an extent as will permit a meaningful examination of the reasonableness of the prices charged to the Government.

It is our position that, under the statute and the contract clause, all books, documents, papers, and other records relating to the pricing and cost of performance of negotiated contracts are directly pertinent to the contracts and that such books, documents, records, et cetera, are not limited to the formal cost-accounting records and their supporting data, but include all underlying data concerning contract activities and operations which afford the basis for contract pricing and the incurrence of costs by the contractor.

The question of the rights of the General Accounting Office, under the statute and the examination-of-records clause, is now being litigated in the Federal court in San Francisco in the case of United States against Hewlett-Packard Co.

Briefly, this case involves four contracts which were negotiated with Hewlett-Packard by the Department of the Air Force for certain electronic test and measuring equipment. The prices negotiated for the contracts were catalog prices established by the contractor less discounts ranging from 9 to 32 percent. In connection with our work, our auditors, conducting an examination at the HewlettPackard Co., requested cost records on the four contracts. This request was denied by Hewlett-Packard. After extensive correspondence with Hewlett-Packard and a hearing by the House Committee on Armed Services, we requested the Department of Justice to bring an action against Hewlett-Packard to require that the cost records be made available.

The basis for Hewlett-Packard's refusal is that production costs are not considered directly pertinent because costs were not a factor in the negotiation of the contracts involved. The firm contends that the use of the words "directly pertinent" in the contract clause and the underlying statute limit the application of the access-to-records clause to contracts where costs were a factor in the negotiation, where effective competition was not present, where standard catalog prices were not used as a basis for pricing, or where substantial quantities of the products involved were not sold to the general public. In brief, it is the position of Hewlett-Packard that the clause applies only to the type of records and information upon which price negotiations were conducted.

It is our position that the contract clause and the statute on which the clause is based gives us the right to examine the cost records of the contractor and other pertinent data that relate to the items included in the contract, in sufficient completeness and detail to permit us to examine into the reasonableness of the negotiated prices. We believe our position is supported by the statutory language and the contract provision and, to an even greater extent, by the legislative history of the statute.

There has been one hearing by the court on this case, but no decision has been rendered. The case has been in abeyance pending a stipulation of facts between the Government and the contractor. We hope that the stipulation can be worked out in the near future so that the court can render its decision.

However, we do not believe that the decision in the Hewlett-Packard case will answer all the questions of interpretation of the contract clause. For example, broad ruling by the court that the General Accounting Office has right to examine Hewlett-Packard's cost records

would not decide which records of the company are "directly pertinent."

Sometimes we are faced with an access-to-records problem in the form of cumbersome and time-consuming procedures just short of refusal to make records available.

Contractors have attempted to monitor our reviews of records and documents by assigning one or a limited number of individuals through whom all requests for records and documents must be channeled and by substituting their judgment for ours as to what is pertinent to our review. Other attempts have been made to select the files and records needed for our audit, which, if they had been condoned, would have been tantamount to an audit by the contractor instead of the General Accounting Office. It is essential that we have free access to original source records in the environment in which they were compiled. If these access-to-records problems persist, it may be necessary for us to ask the assistance of the Congress in enacting more effective laws for enforcing our right to inspect books and records of contractors.

Our findings with respect to review of Government activities conducted under contracts cover a variety of subjects, such as (1) excessive prices in relation to available pricing information, (2) acceptance and payment by the Government for defective equipment, (3) charges to the Government for costs applicable to contractors' commercial work, (4) contractors' use of Government-owned facilities for commercial work for extended periods without payment of rent to the Government, (5) duplicate billings to the Government, (6) unreasonable or excessive costs, and (7) excessive progress payments held by contractors without payment of interest thereon. The majority of our contract audit reports deal with excessive prices resulting from the failure of the agencies to request, or the contractors to furnish, current, accurate, and complete pricing data or from failure to adequately evaluate such data when negotiating prices.

Mr. Chairman, because of the varied types of contracts involved in our audit reports and the many different conditions under which we have found prices and cost allowances to be excessive or unreasonable, it is not possible to enumerate the various remedies available to the Government without becoming involved in a detailed discussion on the merits of each case. I will, however, endeavor to briefly describe to you our general methods of effecting recovery. But before discussing this subject, I wish to emphasize that, while we strongly urge recovery action in appropriate cases, the primary purpose of our audit is to identify the causes of any weaknesses we have found and to suggest ways and means of preventing recurrences. It should also be noted that collections or recoveries are made by the agencies involved or by the Department of Justice and-except where we exercise the power of disallowance-indicate the concurrence or acquiescence of these agencies or the Department of Justice with our findings.

Pursuant to the Budget and Accounting Act, 1921, as amended, we are authorized to take exception in the accounts of the accountable officer when the payments are not authorized by law or by the terms of the contracts or when additional information is needed to document the transaction. These exceptions become disallowances in final settlement of the accountable officer's accounts unless they are answered satisfactorily prior to that action.