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SUBCOMMITTEE FOR SPECIAL INVESTIGATIONS,
ARMED SERVICES COMMITTEE,
Thursday, August 27, 1957.

A. F. POWERS, Esq.,
Assistant General Counsel,

General Motors Building, Detroit, Mich. :

Re your letter August 21 and affidavit of H. W. Clapsaddle, subcommittee considered affidavit inadequate information required for understanding by subcommittee of record on that subcontract purchase. Also, subcommittee desires complete information from General Motors concerning accuracy of General Accounting Office report to subcommittee on August 21 record, pages 795 through 806. As to whether or not GM agrees that General Accounting report adequately and completely reflects state of books and accounts as represented, request have qualified witnesses of your company present on Thursday, August 29 at 10 o'clock forenoon in subcommittee room authorized to speak on aforesaid records and reports. Am telephoning you today. Urgent we receive your advice immediately because of prospective adjournment.

JOHN J. COURTNEY,

Special Counsel, Subcommittee for Special Investigations, Armed Services Committee.

DETROIT, MICH,

JOHN J. COURTNEY,

Special Counsel, House of Representatives Committee on Armed Services,
Subcommittee for Special Investigations, Old House Office Building,
Washington, D. C.:

Re your telegram, my letter of August 21 and affidavit of H. W. Clapsaddle, impossible to review data and have qualified witnesses available in Washington to testify Thursday. We are analyzing General Accounting Office report, transscript and available records to clarify the record on the subcontract which was the subject matter of the affidavit. With respect to General Accounting Office compilation in August 21 record, pages 795 through 806, Buick-Oldsmobile-Pontiac representative will be in Kansas City tomorrow to check compilation against books and accounts. Believe all data can be checked and report sent to you this week. A. F. POWER,

Assistant General Counsel, General Motors Corp.

DETROIT, MICH.

JOHN J. COURTNEY,

Special Counsel, House of Representatives Committee on Armed Services,
Subcommittee for Special Investigations, Old House Office Building,
Washington, D. C.:

Re your wire of August 27, 1957. Supplemental affidavit of H. W. Clapsaddle will be mailed Friday, August 30, 1957. With respect to your request for complete information concerning accuracy of General Accounting Office report to subcommittee on August 21, 1957, set forth on pages 795 through 806 of record, compilation of material cannot be completed until next week. In view of this your request for advice whether the report adequately and completely reflects the state of books and accounts as represented can only be answered broadly and generally by tomorrow, August 30. If the subcommittee desires detailed and accurate verification answer cannot be given until detailed audit is completed next week. This General Accounting Office compilation had not been checked against our records when we received your wire on August 27 although a copy was the August 21 transcript which we received August 22, 1957. Upon receipt of your wire 2 men were sent immediately to our Kansas City plant to commence the checking of this information and 4 men in Detroit were immediately assigned to reviewing such records as have been transferred from Kansas City to Detroit. Even if these men continue the verification of this information through the Labor Day weekend the task cannot be accomplished before Friday, September 6, 1957. Unless we hear from you to the contrary, I will assume that you are interested in detailed verification rather than the general answer which could be supplied to you August 30.

With respect to your request for witnesses to appear before your committee on August 29 to discuss the aforesaid records, may I advise that both Mr. Gordon

and Mr. Mark were and are away from Detroit on their vacations. Mr. Gordon was called back from his vacation to assemble data and information and to be present before your subcommittee on August 15 and 16. Immediately after August 16 he resumed his vacation. Mr. Mark delayed his vacation because of the August 16 hearing. He too left on his vacation immediately thereafter. Even if these men had been in Detroit on August 27 they would not have been qualified to speak on the aforesaid records until the verification of the GAO compilation which is presently underway had been completed.

A. F. POWER,

Assistant General Counsel, General Motors, Corp.

SUBCOMMITTEE FOR SPECIAL INVESTIGATIONS,
ARMED SERVICES COMMITTEE,
Friday, August 30, 1957.

Mr. A. F. PoWERS,

Assistant General Counsel,

General Motors Corp., Detroit, Mich.:

Re your telegram August 29. Subcommittee desires detailed verification General Accounting Office audit report in record August 21. Request that data be furnished in writing to me when completed. House adjourning today, subcommittee will convene especially to hear witnesses later and after staff evaluation of data you submit. From your wire assume data will be here about September 11.

Request you confirm exact date by letter. No witnesses needed until after that date.

JOHN J. COURTNEY,

Special Counsel, Subcommittee for Special Investigations,
Armed Services Committee.

Mr. JOHN J. COURTNEY,

GENERAL MOTORS CORP., Detroit 2, Mich., September 10, 1957.

Special Counsel, House of Representatives Committee on Armed Services, Subcommittee for Special Investigations, Old House Office Building, Washington, D. C.

DEAR MR. COURTNEY: In accordance with your telegram of August 27, 1957, there is submitted herewith the affidavit of Mr. H. W. Clapsaddle setting forth the results of the review by Buick-Oldsmobile-Pontiac assembly division of the General Accounting Office compilation submitted to your subcommittee and included in the stenographic transcript of the hearings of August 21.

There is one other matter which appeared in the transcript of August 21, 1957, which we believe requires clarification. On pages 773 through 776 of the transcript, the letter of August 2, 1957, from Mr. Dudley C. Sharp, Assistant Secretary of the Air Force, addressed to the Comptroller General of the United States, is set forth. Reference is made therein to the request by the Air Force for advice from General Motors concerning the dates when changes to purchase orders involved in the $1,700,000 questioned by the Comptroller General were approved by the Air Force or were furnished to Air Force personnel.

For the purpose of the record, this request was set forth in the letter of July 26, 1957, from George W. Thompson, lieutenant colonel, United States Air Force, Chief, Pricing Staff Division, Deputy Director for Procurement, addressed to John F. Gordon, vice president, General Motors Corp. On Monday, August 12, the letter of reply dated August 10 from Mr. Gordon was delivered personally to Lt. Col. George W. Thompson.

In the August 10 reply the procedure followed with reference to purchase orders and purchase order revisions was detailed. A copy of this letter is attached for the records of your subcommittee.

We are providing this information in view of the possible misinterpretation which might be given to the following statement in Assistant Secretary Sharp's letter:

"In accordance with a quite common practice, the purchase orders, which would indicate any revision of prices, after approval by the Air Force were returned to the contractor and copies were not retained."

Regardless of what may have been the practice of other contractors and the fact that the contract did not require that a copy be delivered to the Air Force, except to the extent that records are subject to inspection by the Air Force at all reasonable times, the fact is that Buick-Oldsmobile-Pontiac assembly division made it a practice in accordance with a written procedure to deliver the second, third, and fourth copies of all purchase orders over $25,000 to the Air Force.

Yours very truly,

A. F. POWER, Assistant General Counsel.

GENERAL MOTORS CORP., Detroit, Mich., August 10, 1957.

Subject: Contract No. AF 33 (038)-18503, General Motors Corp. (Buick-Oldsmobile-Pontiac assembly divisioon).

Lt. Col. GEORGE W. THOMPSON,

Chief, Pricing Staff Division, Deputy Director/Procurement, Headquarters,
Air Materiel Command, Wright-Patterson Air Force Base, Ohio.

(Attention MCPPB.)

DEAR SIR: This is in reply to your letter of July 26, 1957, requesting information as to whether, prior to final agreement on pricing of the second segment of airplanes on September 11, 1954, the Air Force was in possession of data of any kind indicating that General Motors had commitments from suppliers for parts to be used for planes in the second segment at prices lower than those listed as estimated material cost in its proposal. We gave this information in our letter of October 25, 1956, to General Thurman, stating that copies of all purchase orders amounting to $25,000 or more were given to the Air Force representatives. Early in the F-84F program we provided that purchase order sets for the subject contract should be printed with copies No. 2, 3, and 4 allotted for the resident Air Force Audit Section. Our standard purchasing procedure at Kansas City (sec. III, p. 6, May 2, 1952) describing the preparation of purchase orders reads in part "The following copies are prepared:

"Copy No. 1 Original-Vendor.

"Copy No. 2 Audit Copy (for Resident Air Force Audit Section).
"Copy No. 3 Audit Copy (for Resident Air Force Audit Section).
"Copy No. 4 Audit Copy (for Resident Air Force Audit Section)."

In addition, this procedure contains the following instructions (sec. III, p. 10,
May 2, 1952):

SPECIAL REQUIREMENTS ON PUCHASE ORDERS

(a) On orders over $25,000 Request for Approval of Expenditure Form KAP-526 is prepared in triplicate. These copies and a complete comparative cost breakdown of all bidders is made up and three audit copies of the purchase order are attached. All of these are then taken by the buyer to the Air Force office where signatures of the Air Force cost analyst and the Air Force contracting officer are obtained, approving the transaction. The administrative contracting officer acknowledged receipt of this procedure on January 2, 1953.

We know that the instructions were carried out throughout the contract performance. Prompt delivery of all purchase orders and revisions automatically supplied the Air Force representatives with the information on the second segment material commitments before the September 1954 pricing session.

However, even before our delivery of the copies Nos. 2, 3, and 4, any of these orders aggregating more than $25,000 (and most of them fell in this category) were submitted for approval and were approved by the local Air Force representatives at Kansas City as will be shown by the data requested in question (2) of your letter. The approvals indicate that these matters were known to Air Force representatives at dates ranging from August 8, 1951, to as late as August 1954.

We have reviewed all available purchase orders covering procurement from our vendors of second segment quantities of parts listed in the attachment to your letter. The enclosed schedule sets forth the results. Purchase order revisions were quite numerous, but in each case we have selected the revision which was in effect at the time of redetermining the second segment prices.

Your letter requested that our reply include the same information with respect to the particular purchase orders mentioned in the GAO report as having been

redetermined prior to negotiation of the 228 airplane segment, and making up the total alleged price difference of $1,700,000. Only one purchase order was identified in the GAO report submitted to us. This was an order to Vendo, Inc., priced by us at $1,507, which is included in the attached schedule. The specific purchase orders used by the GAO in compiling the total alleged price difference of $1,700,000 have not been made known to us.

With respect to the information on the schedule, we have, except as noted therein, located in our files and currently examined all of the purchase orders, revisions, and signed forms designated as "Request for Approval of Expenditure (Purchase Orders, Subcontracts)." In other instances parts listed by the GAO were ordered in quantities under $25,000, in which cases purchase orders were not required by the Air Force and approvals were not obtained. At one time we were delivering to the local Air Force representatives copies of all purchase orders regardless of amount; but were asked by the Air Force to discontinue submitting those below $25,000. This was done without correspondence and we are unable at this time to reestablish the dates involved.

Air Force representatives who approved all but one of the purchase orders and purchase order revisions on the attached schedule were present at the redetermination meeting of the second segment on September 8, 9, 10, and 11, 1954, and the third segment redetermination meeting on March 23, 24, and 25, 1955.

If we can furnish any further information of assistance to you please call upon us.

Yours very truly,

JOHN F. GORDON,
Vice President, General Motors Corp.

AFFIDAVIT

STATE OF MICHIGAN,

County of Wayne, ss:

H. W. Clapsaddle, being first duly sworn, deposes and says that he is and, throughout the periods during which the matters hereinafter occurred, was the Divisional Comptroller of Buick-Oldsmobile-Pontiac Assembly Division of General Motors Corporation and an Assistant Comptroller of General Motors Corporation, with powers and duties of the Comptroller limited to the activities of the aforementioned Division.

That he has caused to be reviewed and has reviewed the General Accounting Office Compilation incorporated in the stenographic transcript of the Hearings before the Subcommittee for Special Investigations, House of Representatives Committee on Armed Services on August 21st and included on pages 795 through 806 of the stenographic transcript; that he understands that the General Accounting Office Compilation was submitted to substantiate its claim of overpricing in the "Estimated Material Costs" delivered by Buick-Oldsmobile-Pontiac Assembly Division to the Air Materiel Command on August 26, 1954, in support of its "Proposal for Redetermination of Prices of F84F Aircraft Produced on Contract No. AF 33 (038)-18503" dated July 15, 1954; that he understands that this Compilation, entitled "Comparison of Projected Outside Material Costs With Prices Known at the Time Proposal Submitted Second Segment of 228 Planes" was based upon a review of Purchase Orders and Purchase Order Revisions in effect in September 1954, when contract prices were redetermined.

That he further understands that in its Compilation, the General Accounting Office proceeded on the assumption that certain parts would have been used in the second segment of 228 airplanes; that based on this assumption, the General Accounting Office computed average prices for the parts listed; that using these average prices, the General Accounting Office concluded that there was an excess of $1,718,045.97 in the "Estimated Material Costs" submitted by Buick-Oldsmobile-Pontiac Assembly Division over the prices for the listed parts, determined as aforesaid by the General Accounting Office, from Purchase Order records.

That in attempting to determine the accuracy of this Compilation, BuickOldsmobile-Pontiac Assembly Division endeavored to follow this same method of computation; that there were certain areas in which there was a difference between the unit prices and quantities selected by the General Accounting

Office and Buick-Oldsmobile-Pontiac Assembly Division; that this is due in part to a lack of knowledge by Buick-Oldsmobile-Pontiac Assembly Division of the complete data used by the General Accounting Office in the preparation of its Compilation.

That in reviewing the purchase orders applicable to the second segment of 228 airplanes, Buick-Oldsmobile-Pontiac Assembly Division applied the same method assumed to have been applied by the General Accounting Office and its review based on these purchase orders resulted in an excess of $1,627,901.98 as compared to the excess of $1,718,045.97 stated in the General Accounting Office Compilation; that Schedule 1 attached hereto and made a part hereof sets forth this comparison and the areas of difference between unit prices and quantities selected by the General Accounting Office and Buick-Oldsmobile-Pontiac Assembly Division referred to above.

That, generally, subcontractor prices for parts were negotiated and established so that certain preproduction and startup costs were reflected in the prices for parts to be used for the first segment of 71 airplanes; that with respect to certain parts to be supplied by two or more sources, the aggregate number of parts which reflected these preproduction and startup costs of these sources exceeded the number required for the first segment of 71 airplanes; that in accounting for the cost of such of these parts as were furnished by one of these suppliers and used for the second segment of airplanes, it was deemed desirable for accounting and pricing consistency to include the preproduction and startup costs in the first segment-the same segment which included BuickOldsmobile-Pontiac Assembly Division's preproduction and startup costs; that accordingly Buick-Oldsmobile-Pontiac Assembly Division adjusted the prices on the excess quantity of such parts acquired from that supplier for the second segment of 228 airplanes by transferring the estimated preproduction and startup costs to the first segment of the prime contract.

That the foregoing applied to four of the part listed in the General Accounting Office compilation, described as follows:

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That as a result of the foregoing accounting adjustment the costs of units of the first segment increased and the costs of units of the second segment decreased; that in addition costs, determined on the basis of accounting records, vary as between the first and second segments based upon allocation of parts usage as between the first and second segments but this variance is of relatively minor importance and amounts to less than $1,000.00.

That attached hereto and made a part hereof is Schedule 2 which compares the prices of the parts listed above as reflected by purchase orders and prices of such parts giving effect to cost adjustments referred to above as reflected by accounting entries on the books of Buick-Oldsmobile-Pontiac Assembly Division; that this comparison reflects an increase in the variance determined by the books of account of $375,351.47 over the variance calculated on the basis of purchase orders as shown in Schedule 1.

That the foregoing was reflected by accounting entries made in the books and records of Buick-Oldsmobile-Pontiac Assembly Division in October 1954; that prior thereto, and during the course of the audit of the retroactive segment, this proposed method of costing was disclosed by Buick-Oldsmobile-Pontiac Assembly Division to the representatives of the Auditor General of the Air Force, and that in the discussions with these representatives of the Auditor General of the "Estimate To Complete" which related to the retroactive segment, Buick-Oldsmobile-Pontiac Assembly Division submitted a Schedule entitled "Proposed Retroactive Prices," which reflected these accounting adjustments.

That subsequently and as a result of the completion of price redeterminations with certain subcontractors, a revised "Estimate to Complete" was discussed with the Auditor General's representatives; that this revised estimate included this method of costing for these four parts; that this method of costing was reflected in Schedule No. 2 of the audit report entitled "Statement of Outside Material Costs with Comparison to Contractor's Estimate." That in the consideration of the foregoing, Buick-Oldsmobile-Pontiac Assembly Division desires to restate its position that this was not a cost reim

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