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 the terms of the contract or where there has been a breach of contract. Under these circumstances, we will issue formal notices of exception against the accountable officer's accounts. As stated in our reply to your request of January 7, 1965, during the period July 1, 1958, through December 31, 1964, we issued 216 reports covering contract matters. In only a very few of these cases did we issue a notice of exception.

In addition, other notices of exception are issued during our audit and settlement of accountable officers' accounts. These exceptions cover incorrect or improper payments for such items as duplicate payments, time discounts lost or trade discounts not taken, items billed at other than contract prices, excess freight charges, errors in computation, liquidated damages, and unreimbursable overhead charges.

It is well established that the allowability of costs for reimbursement under Government cost-plus-a-fixed-fee contracts, as determined by the designated official agreed upon therein, is final and conclusive on the Government, as well as the contractor, absent fraud or a showing that the determination is arbitrary or capricious, or is so grossly erroneous as to imply bad faith, or is contrary to law. A finding by our office that an item of cost duly approved under the contract is unreasonable affords no legal ground for denying reimbursement to the contractor or for denying credit to the accounts of the disbursing officer.

While we may have no legal basis to take exception to particular items of cost where the question of reasonableness is involved, we believe that we have the duty to so advise the Congress and the administrative agency when in our opinion such costs are unreasonable. We believe that this type of reporting is desirable in that it enables the agency to reconsider its position and to take appropriate administrative action to effect recovery in the event it agrees with our conclusion. It also provides the agency with an opportunity to take such corrective action as may be necessary to overcome the problem area. Recoveries resulting from actions taken under our contract audit reports frequently are in the nature of voluntary refunds to the administrative agencies. Frequently these refunds have been accepted in a reduced amount to give credit for the income taxes already paid on the amount being refunded. The Department of Defense treats voluntary refunds as a form of renegotiation subject to section 1481 of the Internal Revenue Code of 1954 which requires that there shall be credited against the amount of excessive profits eliminated the amount for which the tax for the prior taxable year is decreased by reason of such elimination. Insofar as voluntary refunds as distinguished from legal indebtedness is concerned, we have regarded the net refund as a full recovery of the amount in question.

The position has been taken by at least one defense contractor that the issuance of a report by the Comptroller General, recommending that the contracting agency reconsider in final settlement of a costplus-a-fee contract the propriety of reimbursement of certain costs in light of the information disclosed in our report, violates the mandatory procedures of the contract for determination of allowability or reasonableness of costs. Normally, under the provisions of the contract, such determinations are made by the official designated in the contract,

subject to appeal by the contractor to a board of contract appeals. The contractor has taken the position that no report should be issued until such time as the contract procedures governing cost determinations have been exhausted.

As mentioned earlier, under section 312 of the Budget and Accounting Act of 1921 (31 U.S.C. 53), the Comptroller General is authorized and directed to investigate, at the seat of government or elsewhere, all matters relating to the receipt, disbursement, and application of public funds and is authorized and directed to make reports to the Congress on matters relating thereto as he may think advisable. In addition, he is required to make recommendations looking to greater economy or efficiency in public expenditures.

We cannot agree that we are precluded from exercising these statutory responsibilities in an individual case until such time as the contract procedures governing cost determinations have been exhausted. The audit responsibilities of our office extend not only to determinations of legal sufficiency but also to management efficiencies and controls over expenditures by the Government. The fact that, in final analysis, we may not be able to question the legality of particular contract transactions does not preclude our reporting to the Congress and to the responsible administrative agencies that such transactions are wasteful or extravagant or that a particular contract transaction illustrates the need for an improvement in existing procurement or management procedures. We are of the opinion that we would not be carrying out our statutory responsibilities if we failed to inform cognizant officials of the Government of our audit findings and recommendations at a point in time when appropriate consideration could be given to the findings and recommendations to assist them in arriving at proper decisions, even though our recommendations may be advisory in nature. Also, we are of the opinion that the Congress should be informed of our recommendations through the means of a report. In making our contract audit reports of this type, we do not consider that we are substituting our judgment for that of the officials designated in the contracts; rather, as auditors, we are recommending but not directing that certain factors be considered in arriving at final determinations under the contracts.

The procedures under the contracts require that determinations of allowability or reasonableness of costs be made by the official designated in the contracts and that any dispute with respect thereto is for settlement under the disputes provisions, and our reports do not preclude the application of these contract procedures.

The procedural rights of contractors to have costs determined as provided for in the contracts are not affected, nor are the rights to proceed under the disputes procedure affected should such a course. of action become necessary. We regard our reports in this area, in addition to fulfilling our reporting responsibilities to the Congress, as rendering advisory audit assistance to management officials for their use in making determinations of cost allowability under the contracts. We do not agree that reports issued prior to the administrative procedures being exhausted are contrary to the legal principles governing cost determinations. Rather, we recognize the limitations placed upon us by those principles in making our report recommendations.

The contention has been made by some contractors that the General Accounting Office is precluded by 18 U.S.C. 1905 from disclosing in its audit reports information relating to costs and profits under Government contracts. Section 1905 makes it unlawful to disclose certain information of this type "to any extent not authorized by law." As previously indicated, the Comptroller General has a statutory duty, under 31 U.S.C. 53, to investigate all matters relating to the receipt, disbursement, and application of public funds and to report to the President and to the Congress on such work and concerning such other matters relating to the disbursement and application of public funds as he may think advisable. He is also directed to make recommendations in such reports looking to greater economy or efficiency in public expenditures.

In certain reports it is necessary to disclose sources of income, cost and profit figures, and other information of a similar nature in order to support the findings, conclusions, and recommendations in our reports. We regard such disclosures in a report to the Congress as within the meaning of the words "authorized by law" as used in 18 U.S.C. 1905, since such reports are made pursuant to our statutory responsibility and duty of reporting to the Congress matters relating to the receipt, disbursement, and application of public funds. Consequently, we cannot agree that the disclosure of information of the type set forth in 18 U.S.C. 1905, in a report to the Congress in furtherance of our statutory responsibilities, is in contravention of the statute.

Further, we seriously question whether 18 U.S.C. 1905 should be construed to prohibit the disclosure of anything other than "trade secrets." There is persuasive evidence in the legislative history of the section that the prohibition against disclosure of the "amount or source of any income, profits, losses, or expenditures" should be interpreted to apply only when such information is obtained from income tax returns. We have filed with your subcommittee a legal memorandum in support of this conclusion. The statute is, of course, a penal statute, and we cannot say with finality what the courts might hold as to its applicability to disclosures of this type of information in reports of the General Accounting Office.

However, regardless of the statute, we recognize the desirability of avoiding, to the extent possible, the disclosure of matters of business privacy in our reports. We have recently issued internal instructions designed to minimize the disclosure of the details of contractors' cost and profit figures and other information of a similar nature. All reports are reviewed by the Office of the General Counsel with 18 U.S.C. 1905 in mind.

There is another point which we would like to mention and that is the matter of the referral of reports to the Department of Justice and the request to the contracting agencies not to effect any recovery from the contractors or to make contract amendments without coordination with the Department of Justice.

A few years ago the former Attorney General became concerned that the Department of Justice was not having an opportunity to consider our contract audit reports that possibly involved statutes under the Department's jurisdiction, prior to the contracting agency's

1 The memorandum referred to appears in appendix 1C, p. 692.

accepting a refund from the contractor or making a contract amendment. After several meetings between officials of the General Accounting Office and the Department of Justice, we revised our procedures. When we believe that the action required as a result of our review is or may be within the jurisdiction of the Department of Justice in addition to the administrative agency, the final report is referred to the Department of Justice for its consideration at the time it is sent to the administrative agency and to the Congress. We suggest to the administrative agency that no steps be taken to amend the contract or otherwise effect recovery from the contractor without prior consultation with the Department of Justice.

In our reviews of contract pricing, we do not make final determinations as to whether the fraud statutes, or other statutes within the jurisdiction of the Department of Justice, have been violated in particular contract transactions. However, where our contract reviews disclose that overpricing may have resulted from overreaching conduct, questionable cost or pricing information, or the withholding of information pertinent to pricing, we refer the report to the Department of Justice for its consideration.

As mentioned earlier, we may find it necessary to ask the Congress for legislation to provide more effective means of enforcement of our right of access to records. Also, we have under consideration other areas in which we feel improvements in contract administration may be needed. Since we are still working in these areas, we are not prepared to make legislative recommendations at this time. Briefly, we are concerned with the possible need for first charging interest on overpayments on contracts, second, more effective warranty clauses and administration thereof, third, more precise rules for documenting lump-sum negotiations to show basic considerations used in arriving at a price, fourth, providing right of appeal by the Government from injudicious decisions of Government contracting officers, and fifth, providing greater and more uniform audit authority for agency auditors. Some of these problem areas may be remedied through amendment of agency procurement regulations. In other areas it may be desirable to recommend legislative action.

Mr. Chairman, we think it appropriate to emphasize that, for the most part, the cases and problems we are talking about today involve contracts that were negotiated, rather than those awarded on sealed bids after formal advertising. When a contract is awarded after formal advertising, the Government has no authority to audit the contractor's books and records, except where a change order is issued which is in excess of $100,000. Therefore, our audit reports have covered negotiated contracts almost exclusively. Where contracts are negotiated there is lacking the full and free competition that you have in advertised procurements, with the result that additional safeguards must be followed in order that the Government's interest is protected. We have urged over the years that advertised procurement be used to the fullest extent possible, and the military departments are using advertised procurement to a greater extent each year. We believe that this type of procurement is in the best interest of the Government and the contractor.

Mr. Chairman, with that addition which I have just read, my statement is complete.

And I have with me today those men who have given many years of their careers in the Government to this problem.

First, I have Mr. Robert Keller, our General Counsel, who will be very glad to assist me and assist you on legal matters.

Mr. William Newman, a very experienced Director of our Defense Accounting and Auditing Division; his right-hand bower, Mr. Charles Bailey, who is Deputy Director of the Defense Accounting and Auditing Division.

And with us to assist also so that you will have every possible help in this very important matter are the associate directors of the Defense Accounting and Auditing Division, whose names are as follows: Mr. James H. Hammond for the Air Force activities in our office, Richard W. Gutman, who has surveillance of Army activities in our office, Mr. J. K. Fasick for the Navy activities, and Mr. Harold H. Rubin, Associate Director of that Division, who has to do with overall defense activities, Mr. Edward J. Mahoney, who is on our policy staff, is our best man in the field of ADP equipment and has been giving a great deal of time with that, and I believe he is here today.

In regard to the AEC and General Services and NASA contracts, we have present Mr. Arthur Schoenhaut, who is Deputy Director of the Division having surveillance of our interests in those activities, Mr. L. K. Gearhardt, Associate Director of that Division, and Mr. John E. Milgate, Assistant Director of that Division.

I should mention that Mr. Keller has with him Mr. Stephen Haycock who, as you know, from years ago, has had long experience in our office and is one of our very able lawyers. He is one of our

Assistant General Counsels.

Thank you, Mr. Chairman.

Mr. HOLIFIELD. Thank you, General Campbell, for your statement and for the introduction of your associates.

Your statement is very comprehensive and gives us a clear insight to the philosophy under which your agency operates.

Mr. Horton.

COMMENTS ON DEFENSE TESTIMONY

Mr. HORTON. Well, I, too, want to commend the Comptroller General on the very comprehensive and clear statement.

Yesterday we had testimony from the Assistant Secretary of Defense for Installations and Logistics, Hon. Paul Ignatius, and in his report he indicated the three areas of disagreement between the GAO and the DOD, and selected as these areas: integrity of contracts, pricing policy, Government involvement in contractor operations. Mr. Comptroller General, would you comment on that testimony and that selection of those areas, indicating whether or not there is disagreement and, if so, what the disagreement is.

Mr. CAMPBELL. Well, I have not seen his testimony, so I really could not comment on it.

Mr. HORTON. Has anybody from your staff had an opportunity to look at it?

Mr. HOLIFIELD. Mr. Bailey, were you here?

Mr. BAILEY. Yes, I was here yesterday, Mr. Horton. And there are some differences or areas of disagreement. I think they are to be expected. As Mr. Ignatius pointed out in his statement, there