Mr. STAATS. Yes.

The CHAIRMAN. But if necessary we will have them printed, if and when the request is demanded.

We now have Mr. Lincoln, Director of OEP, and we shall be very glad to hear from you, Mr. Lincoln; and Mr. Staats if you will remain so we can ask all of you gentlemen questions after you have finished.

STATEMENT OF HON. GEORGE A. LINCOLN, DIRECTOR, OFFICE OF EMERGENCY PREPAREDNESS; ACCOMPANIED BY CHARLES H. KENDALL, GENERAL COUNSEL; WILLIAM LAWRENCE AND ALBERT SANDERSON, MATERIALS POLICY DIVISION, OEP

Mr. LINCOLN. Mr. Chairman, gentlemen of the committee. I do appreciate this opportunity to appear before you. My primary purpose is to urge the prompt enactment of legislation to extend the Defense Production Act of 1950 in view of the expiration of the last extension at the end of this month. This act is a long tried and well proven instrument essential to our ongoing preparedness and the national security operations.

I realize the committee has before it H.R. 17880. I did transmit to the Congress, on April 9, 1970, the administration's draft legislation for extension of the act which includes two other amendments not being considered under H.R. 17880.

The first of these is a provision permitting members of the National Defense Executive Reserve to be paid subsistence per diem at the current rate for Government officials (currently not more than $25 per day) rather than at the rate of $15 set in the act in 1950.

As you know, prices have gone up since. This is an updating

matter.

The second changes the method of financing programs under sections 302 and 303 of title III. These are programs for the expansion of industrial capacity where necessary to the national defense. For 20 years they have been financed by a borrowing authority, now virtually exhausted. The administration proposal would require that new programs be financed by appropriated funds, and would phase out the borrowing authority in an orderly way. The most recent expansion financed under title III was the 1967 Duval Corp. contract for the production of copper in Arizona, which has practically exhausted the available funds.

Clearly the provisions of the Defense Production Act will continue to be needed for a number of years to come; hence, the administration proposes a 4-year rather than a 2-year extension.

As members of this committee know, the Defense Production Act provides a group of authorizations which are essential to the support of current military programs, and to other preparedness activities, as well as to insuring that the burdens of defense programs are spread equitably among basic materials producers. For, while industry is required to give priority to defense orders, the system also provides for set-asides of materials and thereby avoids the danger of unfairly monopolizing facilities to the exclusion of normal civilian business. During this fiscal year, the priorities and allocations authority in title I has had significant use. The Business and Defense Services Administration has processed 1,722 special assistance cases, a number about 50 percent greater than in the previous fiscal year.

The Business and Defense Services Administration has been providing set-asides for certain forms of four materials-steel, aluminum. copper, and nickel. The authority was essential in coping with the effects of the shortage of nickel resulting from the strikes of Canadian plants during the late summer and fall of last year.

Less well known, but very important, are the industry committer: created under title VII of the act to assist Government in the exercise of its economic power. The military, for example, has some committees of weapons manufacturers able to advise on the efficient production methods that can mean a better product at less cost. The world-wide importance of oil as a fuel underlies the Foreign Petroleum Supply Committee, which can be activated to meet emergencies of supply and distribution. And I will say this capability is continually very important

to us.

Such committees are effectively ruled out by the antitrust laws in the absence of authority such as is provided by section 708 of the act, where the creation and appropriate use of them is carefully spelled out.

With respect to the provisions of H.R. 17880 calling for uniform standards of accounting in connection with defense contracts, I endorse the views expressed by the Director of the Bureau of the Budget in his letter to the committee dated May 21, 1970.

Mr. MIZE. Would the gentleman yield at this point. May I ask that this letter be inserted in the record at this point.

The CHAIRMAN. Yes, that is what I was going to suggest. We have a copy of the letter of May 21, 1970, and it will be inserted without objection at this point in the record.

(The letter referred to follows:)

EXECUTIVE OFFICE OF THE PRESIDENT,

Hon. WRIGHT PATMAN,

BUREAU OF THE BUDGET, Washington, D.C. May 21, 1970.

Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: On April 6, 1970, H.R. 16752 was referred to your Committee. The purpose of the bill is to extend for two years the allocation authority contained in the Defense Production Act of 1950, and to establish uniform cost accounting standards for use in Defense contracts. This letter comments on the provisions of the bill and expresses the Administrations viewpoint on how uniform cost accounting may best be achieved.

Section 1 of the bill would extend the currently effective provisions of the Defense Production Act (Titles I, III, and VII) for two years, until June 30, 1972. On April 9, 1970, the Office of Emergency Preparedness transmitted to the Congress a draft bill, "To amend and extend the Defense Production Act of 1950 as amended." The draft bill provided for a four-year extension of the Act, and proposed a number of amendments to Titles III and VII not covered by the provisions of H.R. 16752. The Bureau of the Budget advised OEP that the enactment of the draft bill would be consistent with the Administration's objectives.

Accordingly, we strongly urge the enactment of the OEP draft bill in lieu of section 1 of H.R. 16752.

Section 2 of H.R. 16752 would define the term "defense contractor" as used in the Act. Section 3 would eliminate the present $100,000 ceiling on the annual expenditures of the Joint Committee on Defense Production of the Congress. Section 4 of the bill would establish uniform cost accounting standards for use in Defense contracts. We believe the feasibility of such standards for use in Goernment contracts has been well established. The General Accounting Office study of this matter amply demonstrated that such standards could yield substantial potential benefits. Others have testified before the Senate to the same effect. The Administration supports the contention that cost accounting standards for use under Government contracts are feasible.

We object, however, to section 4 as it now stands. The bill would give responsibility to the Comptroller General for developing cost accounting standards, and for issuing rules and regulations for their application to Defense contracts. We believe that these responsibilities should properly be placed in the executive branch of Government. The Comptroller General agrees with this location.

In his testimony before the Senate, Mr. Staats questioned whether the General Accounting Office should become deeply involved in the administration of Government contracts. He suggested that an independent board appointed by the President might well have greater prestige and attract more capable members than a board in his own office. He said that the responsibility for administration of contracts, including promulgating, interpreting, and administering cost accounting standards seems basically an executive branch function. Mr. Staats concluded that there did not appear to be any reason to divorce the promulgation of cost accounting standards from the executive branch.

The American Institute of Certified Public Accountants has taken a similar position on this legislation. Their representative testified before the Senate in favor of establishing an independent board within the executive branch. He said that a cost accounting board patterned after the many other independent executive branch agencies would be more in tune with the system of checks and balances inherent in most of our Government operations.

The Secretary of Commerce commented on this matter in a recent letter to the Director of the Bureau of the Budget. Referring to the Senate version of this bill, Secretary Stans indicated that we cannot solve executive branch problems by transferring executive functions to a legislative agency. He said that to do so would remove the prerogatives of the executive branch in administering the affairs of the nation. He recommended strongly that the responsibilities spelled out in the Senate bill be retained in the executive branch. He added that the proper function of the General Accounting Office should be that of exercising its oversight responsibility to insure that the requirements of the law are properly carried out.

We agree with the positions taken by the Comptroller General, the AICPA, and the Secretary of Commerce. We urge that responsibility for the development of cost accounting standards be placed in the executive branch. In addition to the strong arguments presented for this arrangement by the Comptroller General, the AICPA, and the Secretary, we would like to add the following comments for your consideration.

An independent board in the executive branch, empowered to issue cost accounting standards and rules and regulations for their applicatiion to Government contracts, would be preferable from an organizational viewpoint to a similar board established as a part of the General Accounting Office.

Ultimately cost accounting standards for Government contracts, regardless of their origin, will have to be applied at a working level to individual Government contracts. This application will inevitably lead to questions and disagreements requiring clarification and interpretation of the cost accounting standards. This clarification and interpretation will have to come from the authors of the cost accounting standards. Formidable communications and coordination problems could develop if these authors are in one branch of Government and the contract administrators in another. Although these problems would not be eliminated by placing responsibility for cost accounting standards in an independent board in the executive branch, they would at least be minimized.

Responsibility for resolving certain minor issues could be delegated by an independent board to other agencies in the executive branch, without raising constitutional questions regarding the separation of powers between the executive and legislative branches. Communication could be less formal, thus speeding up the operation and lessening the potential for red tape. Coordination of agency positions to assure a single executive branch posture on a given issue would be unnecessary.

Under this arrangement the General Accounting Office would retain its traditional oversight responsibility to insure the Congress that the requirements of the law were being properly carried out. This responsibility would not be compromised by active participation in the administrative process, as it might be if the cost accounting standards board were established in the General Accounting Office.

Independence has long been one of the outstanding attributes of the General Accounting Office. Under H.R. 16752, the General Accounting Office would be required to audit its own actions. It would be extremely difficult for the General Accounting Office to render indepedent judgment of cost accounting standards

and implementing rules and regulations promulgated by the Comptroller General, or a board under his direction. Constructive and independent criticism from the General Accounting Office has been, over the years, an important factor in the improvement of management in Government. We would hate to see this source of independent criticism lost in the important matter of costs of defense contracts. The Administration stands ready to provide further information on the specific provisions of H.R. 16752, or on any other aspect of cost accounting standards that the Committee wishes to discuss.

Sincerely,

ROBERT P. MAYO, Director.

Mr. LINCOLN. H.R. 17880 also provides the President with authority to issue orders to stabilize prices, rents, wages and salaries, and I want to clarify my responsibility in that matter.

My office is charged with planning for the drastic economic controls needed in a wartime crisis, particularly a nuclear attack on the United States. We do not have responsibility for determining policies to counter inflation in situations such as the present. The President did state, as everyone knows, day before yesterday, that he would not use wage and price control and did state the actions that he is taking and those which should be taken in furtherance of countering inflation at the present time. I understand that the Secretary of the Treasury will testify before this committee next week on this matter in detail, and he is the expert on the details.

I do close this statement by emphasizing again the need for extending the Defense Production Act without interruption in order to provide continuity in authority for our on-going security and preparedness operations.

I have with me, Charles Kendall, my general counsel-who incidentally, was counsel of the National Security Resources Board when that agency submitted the Defense Production Act for consideration in 1950-and William Lawrence and Albert Sanderson of OEP's Materials Policy Division to assist me, if needed, in answering any questions that this committee may desire to ask.

The CHAIRMAN. We understand your situation. At a certain time you will have to attend a meeting which we are acquainted with. It is important that you be there.

I would like to ask you this question now. Since the Defense Production Act was enacted into law, for its extension the administration usually asked for 4 years and the Congress would give two, and that makes us consider the extension of the act every 2 years. Don't you think we should consider making it permanent?

I know you recommended 4 years.

Mr. LINCOLN. We recommended 4 years hoping that this would be viewed favorably. Certainly it would be a more efficient way to work if we made it permanent and thereby eliminated the mandatory need for the administrative effort, and the hearings that have been occuring, I believe, every 2 years. Now, we have asked for 4 years. If we made it permanent it would be much better.

The CHAIRMAN. A few days ago I introduced a resolution if we were to get into trouble we could get it extended for a definite length of time, 30, 60, or 90 days, but that is not satisfactory, I wouldn't think. It gives continuity but at the same time it leaves an uncertainty there for a definite period of time.

Mr. LINCOLN. That is correct. I understand that in practically every case in the past, coming up to an extension, where it has been

concerned, we have been right up against the deadline and even over the deadline. It has been necessary for the Congress to take special action, and that is really not the best way to run a government.

The CHAIRMAN. And we will ask that consideration be given to extending it permanently.

We have Mr. Anthony next. Mr. Anthony we are glad to have you and you may proceed in your own way.

STATEMENT OF PROF. ROBERT N. ANTHONY, ROSS GRAHAM WALKER, PROFESSOR OF MANAGEMENT CONTROL, HARVARD BUSINESS SCHOOL

Mr. ANTHONY. Thank you, Mr. Chairman and members of the committee.

I appreciate your invitation to appear before the committee to discuss the question of cost accounting standards. As a professor, as an author of textbooks, as a chairman or member of cost concepts committees of the National Association of Accountants, the American Institute of Certified Public Accountants and the American Accounting Association, as a consultant to industrial firms, and as Assistant Secretary of Defense, Comptroller, I have been involved with this subject for some 30 years. I endorse wholeheartedly the proposed amendment to the Defense Production Act that would authorize the Comptroller General to promulgate cost accounting standards.

In correspondence and testimony, some persons appear to argue that cost standards are unnecessary. Such an argument makes no sense at all. There must be some way of arriving at a meeting of the minds between the Government and a contractor as to which of the hundreds of possible cost accounting practices are to be employed in measuring the costs incurred on a particular contract. Section XV of the Armed Services Procurement Regulations does this today.

The central question is not: Should there be cost standards at all? Rather the question is: Should some new mechanism be set up, outside the Defense Department, to develop better standards than now exist? In my opinion, the answer to this question is an unequivocal "yes." The standards in section XV of ASPR are inadequate. The report of the Comptroller General on this subject contains ample evidence of these inadequacies.

As a further illustration, I should like to describe briefly some findings from a study of the cost accounting systems of 12 large defense contractors that I read recently. No two of these 12 contractors used the same method of allocating overhead costs to contracts. For example, five of them allocated material overhead costs as a separate overhead component; the other seven merged these costs with other costs. Two companies used only three overhead pools; another used 10 separate pools. Even for general and administrative costs, where one would expect similar treatment, six different bases of allocation were used by the 12 companies: direct labor dollars, direct labor hours, cost of sales, total cost input, number of employees, and payroll dollars.

ASPR permits this diversity, and it results in wide differences in the reported costs of a contract. In these 12 companies, for example, indirect costs ranged from a low of 23 percent to a high of 50.4 percent

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