[From the Hartford Courant, Aug. 2, 1964]

NAVY DENIES IT, BUT GENERAL ACCOUNTING OFFICE CONTENDS PRATT & WHITNEY OWES $5 MILLION IN RENT

WASHINGTON-The General Accounting Office (GAO) said Tuesday that Pratt & Whitney Aircraft, a division of United Aircraft Corp., of East Hartford, owes the Federal Government $5 million in rent.

It was the GAO's contention that the rent was due as a result of Pratt & Whitney's uses of Government-owned facilities to produce piston engines from 1951 to 1959.

DENIAL ISSUED

Pratt & Whitney denied the accusation, as did the U.S. Navy. The GAO said the Navy should collect the rent.

During the 1951-59 period, the Navy charged no rent. But the Navy did require that Pratt & Whitney should take into account any benefits it derived from the rent-free facilities in the sale of commercial engines when it submitted the bill to the Federal Government for military engines.

Pratt & Whitney, the GAO said, did not make any allowances in the price it asked the Federal Government for military engines.

The GAO said that it brought the matter to the attention of the Navy, and that the Navy and Pratt & Whitney subsequently reached an agreement for 1960-62 under which the company paid the Navy $819,000 in rent.

On this basis, the GAO said, Pratt & Whitney owes the Navy $5 million for the 9-year period prior to 1960.

COSTS TRANSFERRED

But the Navy and Pratt & Whitney said that the aircraft company, in its accounting system, had charged to the production of commercial engines some of the costs of production of military engines.

They said that the Government, in purchasing the military engines, enjoyed a saving greater than the Navy would have received in rent.

This conclusion was not accepted, however, by the GAO.

WASHINGTON.-The General Accounting Office said Thursday the Air Force wasted $104,000 on a 1960 contract for air traffic control sets because it permitted indirect purchase of transmitters for use in the equipment.

In a report to Congress, Comptroller General Joseph Campbell said the Rome, N.Y., Air Materiel Area permitted the Hamilton Standard division of the United Aircraft Corp., Windsor Locks, Conn., to buy the transmitters from a Chicago firm when the Air Force could have purchased them from the same firm at less cost.

The Air Force, Campbell added, then could have supplied the transmitters to Hamilton Standard for inclusion in the traffic control sets.

Campbell said Hamilton Standard should refund the unnecessary cost. He added the Air Force has begun an investigation to determine the amount of any refund due.

A spokesman for Hamilton Standard said Thursday night that the company has not received an official report from the General Accounting Office and therefore could make no comment.

Mr. HOLIFIELD. Thank you, Mr. Horner.

Mr. Moorhead?

Mr. MOORHEAD. Thank you, Mr. Chairman.

Mr. Horner, I note at page 4 and again at page 16 of your testimony, that you talk of the lack of competence of the GAO people in the field of management decisions. Do you think this subcommittee should recommend to GAO that they employ persons who have a competence beyond that of the accounting field to review some of these contracts!

Mr. HORNER. The thoughts that were expressed during Mr. Harr's testimony were of great interest to me and I had not thought of it before. And I think it is probably desirable to have an independent management survey team. I would hope it would not be called GAO. Maybe it should come under the GAO, but it should not be called GAO. Because GAO to me is recognized by the thinking public as the watchdog to catch the crook. These management surveys, as brought out so ably by you gentlemen, too, are matters of opinion. As I said, you look back at something and you can see how to do it a little differently. But when the heat was on you at the time and you had to make a decision quickly, things might appear quite different.

So if this were called a Government management survey or management recommendation or something similar, and then you had real expert management consulting people in that group, I think it would be helpful.

Mr. MOORHEAD. Thank you.

Mr. HORNER. But it should be from a prospective standpoint. You should not go back and try to be punitive retrospectively.

Mr. HOLIFIELD. But the past is prolog to the future and you have to draw your analogies and your assumptions and your procedures by looking at what has happened.

Mr. HORNER. I agree with you completely, Mr. Holifield, but I do not think a Government agency should be punitive because of an honest business decision made 3 years before. You could say, here was a decision which was made with hindsight, we think it could have been better done this way and we would suggest that people look at it from this standpoint in future cases like this. That is just my feeling.

Mr. MOORHEAD. Thank you, Mr. Chairman.

Mr. HOLIFIELD. Mr. Horton?

Mr. HORTON. I have no questions.

Mr. HOLIFIELD. Mr. Callaway?

Mr. CALLAWAY. No questions, Mr. Chairman.
Mr. HOLIFIELD. Mr. Latta?

Mr. LATTA. I was a little curious. Mr. Horner, on page 1 of your statement, you mention that in the past 2 years, GAO has had about three to eight auditors in residence at your place. How many company auditors have you had in that time?

Mr. PRESTON. Our internal audit staff is approximately 8 to 10 people.

Mr. HORNER. This is our inside audit staff.

Mr. LATTA. How many independent auditors?

Mr. PRESTON. At varying times in the course of a year's audit, they may use six or eight people.

Mr. LATTA. You do not consider three to eight GAO auditors too many, do you?

Mr. HORNER. Yes, sir: I do.

Mr. LATTA. Considering the amount of business you do with the Federal Government?

Mr. PRESTON. I might add that we have some 25 military service auditors in residence in just 1 division. There are others in residence in other divisions.

Mr. LATTA. I have reference to GAO auditors, three to eight. I think on page 2, you had reference to $11,500,000 as being one-tenth of 1 percent of the business you are doing with the Federal Government. That is a lot of business.

Mr. HORNER. During this period, which is 1951 to 1963.

Mr. LATTA. That is still a lot of business.

Mr. HORNER. Yes, sir.

Mr. LATTA. That is all, Mr. Chairman.

Mr. MOORHEAD. Mr. Chairman, there is one thing. The statement I have gives the period 1961 to 1963. Should that be corrected?

Mr. HORNER. No, sir; this is the period we picked for the number of GAO auditors at our plant. But the contracts that are under review are 1951 to 1963. [To Mr. Beach] Am I not right?

Mr. BEACH. That is a typographical on page 2, sir.

Mr. MOORHEAD. On page 2.

Mr. BEACH. That is supposed to be 1951, I believe.

Mr. HOLIFIELD. You have corrected that for the record.

Now, Mr. Horner, your statement as prepared and the added cases that you have cited will be printed in their entirety in the record. Mr. HORNER. Thank you, very much, sir.

Mr. ROBACK. Just one question, Mr. Horner. Can you tell us how the GAO auditors operate when they come into the plant? What do you provide for them, what kind of requests do they make? How do you deal with them, in other words, just for the information of the committee?

Mr. PRESTON. We provide a room for them to work in, telephone facilities. We have had some disagreement in the past about the approach to be taken where they require information on records. The GAO would like to have complete freedom to talk to all of our employees, with no restrictions. We, on the other hand, feel that we should make sure that the information that is given to them is the correct information, have insisted that they channel their requests through perhaps three to five people, who will then, if they have a question, get the answer for them and if it is necessary for them to talk to a particular department head, we will make those arrangements. Mr. ROBACK. Do you rest this on a legal interpretation that they have access to records and not to people?

Mr. PRESTON. I do not know whether we rest it on a legal principle at all, so much as the fact that this seems to be a logical way to do it. Mr. ROBACK. You insist that they talk with designated management officials, is that right?

Mr. PRESTON. That when they require information, they contact these designated officials, who will then get the information for them. Mr. ROBACK. You do not want them to interview people who might talk to them about things, give them leads for new investigations. That is part of it, I imagine?

Mr. PRESTON. It may be part of it, but I think more importantly than that, if they go around and ask questions of, say, the bookkeepers who actually keep the books, these people in most cases may not be competent to answer the question asked.

Mr. ROBACK. Do you designate a liaison-type officer to deal with them on request?

Mr. PRESTON. That is correct.

Mr. ROBACK. Are these requests submitted in advance? When they come in, do they know what they want to see or do they make blanket requests?

Mr. PRESTON. Well, their requests continue all the time that they are making the audit. I think it would depend somewhat on just what it was they are auditing. Sometimes they come in and they know in advance that they want information on certain parts that we sold, a certain contract, and they would ask for information.

Mr. ROBACK. Do they ask you to produce any and all papers relating thereto? Do you have that kind of a request, like a subpena? Mr. PRESTON. I am not familiar with any such request as that. Mr. ROBACK. Do they find references in some documents that they examine to others and then make a request for those?

Mr. PRESTON. Yes; I am sure they do.

Mr. HOLIFIELD. Mr. Horner, I am interested in one of these cases and I am going to take the time to ask you about it. That is the one on the Hamilton Standard purchase of radio transmitters. It is very short there and I just noticed that a refund of $104,000 was suggested on that. I also noticed that the contract was awarded to Hamilton Standard as the low bidder in a formal advertised competition. You go ahead and explain that the radio transmitters in question were to be furnished by the Air Force as Government-furnished equipment for incorporation by Hamilton Standard in mobile air traffic control sets, but the earlier contract awarded by the Government to another contractor for the Government-furnished equipment transmitters had to be terminated for default because of the contractor's failure to deliver. Accordingly, Hamilton Standard was asked to submit a bid for radio transmitters after the unavailability of suitable replacements from Government sources had been determined.

Then there is a discussion about direct and indirect and I would like to hear you explain what direct procurement is and what indirect procurement is.

Then further on, after giving your own justification for proceeding as you did, you say:

The GAO report shows that a minimal profit (5 percent) was obtained by Hamilton Standard, for which is assumed full responsibility for timely deliveries, scheduling, and any future performance deficiencies. These points were set forth in Hamilton Standard's letter of June 16, 1964.

The GAO's own report shows absolutely no fraud, overreaching, concealment of facts or other moral or legal factors entitling the Government to any refund. It appears to be a typical case of the GAO attempting to substitute its judgment for that of the Government procurement officials responsible for meeting a current operating need.

Now, in the first place, it seems that was an advertised competitive bid, apparently. The GAO report shows that a profit of only 5 percent was made and there was no fraud or anything like that, concealment of fact. And yet the Government asks for a refund. I assume this is another one of those voluntary refunds. Is it? Mr. BEACH. Yes; it was.

Mr. HOLIFIELD. I have pretty well stated the case as it is, and it is stated in more detail here, but tell me what the difference is between direct procurement and indirect?

Mr. BEACH. We are using those expressions, sir, in the sense of who the Government buys, the transmitters in this case, from. Direct pro

curement would be if they bought the transmitters from the company who manufactured them. Indirect procurement means that they buy them through the prime contractor, Hamilton, who then in turn bought them from the manufacturer of the transmitter.

Mr. HOLIFIELD. The difference between Government-furnished equipment and outside procurement?

Mr. BEACH. That is right; yes, sir.

Mr. HOLIFIELD. Since there are no further questions, we will excuse you gentlemen. Thank you for your statement.

Mr. HORNER. Thank you, gentlemen.

Mr. HOLIFIELD. Our next witness is Mr. Daniel J. Haughton, president of Lockheed Aircraft Corp.

STATEMENT OF DANIEL J. HAUGHTON, PRESIDENT, LOCKHEED AIRCRAFT CORP.; ACCOMPANIED BY JOHN E. CAVANAGH, COUNSEL, LOCKHEED MISSILES & SPACE CO.

Mr. HOLIFIELD. It is a short statement, so you go right ahead.

Mr. CALLAWAY. I wonder if I might be granted the special privilege of welcoming my close friend, Dan Haughton. He is a former Georgian. He was head of Georgia Lockheed, the largest single employer in Georgia. He was a great Georgian in every way and we hated to lose him to California, when he became president of Lockheed and it is a pleasure to have him here today.

Mr. HOLIFIELD. I am certainly glad to have that comment and we are glad to have you in California, in the parent company, I might say. Mr. HORTON. We wish you would come to New York.

Mr. HOLIFIELD. Any comment from your, Mr. Latta?
Mr. LATTA. I would be glad to have them in Ohio.

Mr. HOLIFIELD. Mr. Moorhead?

Mr. MOORHEAD. Pennsylvania's door is open.

Mr. HOLIFIELD. You may proceed. You find yourself welcomed with open arms.

Mr. HAUGHTON. It is more than I deserve.

I want to thank you, Mr. Holifield, and the other members of your committee for the opportunity to appear before you to discuss the relationships between the General Accounting Office and our industry. I have with me John E. Cavanagh, counsel for the Lockheed Missiles & Space Co.

Mr. Harr has already summarized for you some of the philosophy and basic problems involved, and I wish to support the things he has told you and the feelings he has expressed.

There certainly is no question that the General Accounting Office has an essential job to perform. It is our hope that these hearings will lead to a better definition and understanding of the proper role of the General Accounting Office and its effects upon industry's responsibilities and prerogatives in designing, producing, testing, and managing defense and space systems.

I am personally very much interested in this subject. I have read all of the GAO reports affecting our corporation in recent years and have signed many of the replies.

One division of our corporation has received major attention from the GAO in the past few years. This is the Lockheed Missiles & Space