Economic Advisers, it is transmitted to this, I think is a 23-member Commission, the National Commission on Productivity, consisting of administration people, public members, labor members and business members. And then this group takes that data and makes his own comments and recommendations as to how we can speed the closing of the gap between cost inflation and productivity increases. At the same time we know that Government affects those areas. He has set up a Regulations and Purchasing Review Board within the Federal Government, reviewing all actions to determine whether Federal purchasing and regulations drive up costs and prices, import policies, et cetera. Mr. CHAPPELL. I see that my time has expired.

Mr. Chairman, I wonder if I might ask for one answer in the record? The CHAIRMAN. Certainly.

Mr. CHAPPELL. It is my understanding that part of this whole picture, of course, is a balancing of the budget. And this means that we are not going to spend any more than we take in, and we reduce spending. How do you answer the apparent proof that the budget as prepared by the President now-and I am not talking about the unitary budget, I am talking about the purely administrative budget, the budget which includes all of the spending is in deficit by more than $11 billion?

Mr. WALKER. Economically

Mr. CHAPPELL. Dr. Walker, you answer that, please, when you look over your transcript, because our time has expired.

Now, we appreciate your testimony, Dr. Walker. And if you would like to add anything else we will hear it, or if you will write to us we will receive it and make it a part of the record.

Mr. WALKER. You say I can add something more at this time?
The CHAIRMAN. Our time has expired.

Mr. WALKER. I would like to answer Mr. Chappell's question. I can do it in 1 minute.

The CHAIRMAN. We do not have the time. We have just got to get through. And I believe you want the bills.

Mr. WALKER. Yes. I want a Defense Production Act and an emergency housing bill.

The CHAIRMAN. We will try to get them for you.

(The information requested by Mr. Chappell follows:)

The latest official estimates of Federal Government receipts and outlays were released by the Bureau of the Budget on May 19, 1970. In that document, receipts for the fiscal year 1971 were estimated at $204.3 billion, outlays at $205.6 billion, and the deficit at $1.3 billion. These figures were computed on the basis of the unified budget, which is the most comprehensive measure available of Federal budget results-this is "the budget which includes all of the spending."

It may be recalled that the unified budget was originally recommended by the (Kennedy) Commission on Budget Concepts to replace what had been a variety of different ways of looking at the budget. The unified budget includes the operations of the "Federal funds" (roughly comparable to the old Administrative budget) as well as the trust funds.

In the budget document for the fiscal year 1971, it was then estimated that the Federal funds would show an excess of expenditures over receipts of $7.3 billion in the fiscal year 1971. This was offset by an excess of revenues in the trust funds.

From the viewpoint of fiscal comprehensiveness as well as economic impact, all of the revenues received by the Federal Government-whether for administrative funds or trust funds should be included in the budget. For example, the gasoline tax revenues going into the Federal-aid highway trust fund are just as much Federal revenues as other forms of taxation such as liquor tax

revenues, which go into the general fund. Similarly, Federal-aid highway disbursements, made from the trust fund, are analogous in both fiscal and economic respects, to the Federal-aid airport disbursements, made from general funds.

Hence, we get the most accurate indication of the state of Federal finances by focusing on the unified budget, which contains all of these revenues and expenditures.

The CHAIRMAN. The witnesses who are here that have statements for the record, will you stand up.

Here is the way I have conducted hearings all over the Nation on different matters. And sometimes we get in a squeeze like this to where we cannot hear everybody. And when you put your statement in the record, don't think that is just put into a pigeonhole somewhere. It is not. It really receives more attention than most any other statement, because the staff is required to go over it and pick out the points that are important for the Members to consider. And then the Members look over it. It is sent to every Member of Congress, it is sent to all the executive branches of the Government, and it really has better coverage than most any other part of the testimony.

So any of you that now want to put your statements in the record after identifying yourself, may be permitted to do so, and we will see how many we have left. Do any of you want to do that, put your statement in the record now?

(No response.)

The CHAIRMAN. We have here a number of witnesses. Obviously we cannot hear all these witnesses. We have Mr. Lyle, president of the National Security Industrial Association; Mr. Stewart, president of Machinery & Allied Products Institute.

Mr. Naumann, I am just calling out a few-we have got about 10 witnesses. And even if we get permission to sit this afternoon, which I am not sure that we will, we could not hear all of you fully at all. But those of you who would like to put your statements into the record after identifying yourself, you may do so now. Otherwise you will just have to take your chance when we can.

And so I assume that you want to take your chance when you can make a statement if you are allowed to do so. But I am telling you now we are going to start tomorrow morning on these three bills. Mr. LEHRER. Mr. Chairman, I would like to make a statement and echo what Congressman Mize and Congressman Blackburn said. At a time when our young are questioning our democratic procedures I think this committee would set a very unfortunate precedent in allowing the proponents of this legislation 2 full days to present their case and giving the opponents of permanent legislation only the opportunity to put their remarks in the record where they will be printed in 6-point type that almost defies reading. This is major legislation, Mr. Chairman.

The CHAIRMAN. No, your testimony would go in just like you said it, it would not be 6 point.

Mr. LEHRER. I respect fully submit that with legislation of such import as this is, this is not something that demands precipitous action. The CHAIRMAN. I thoroughly agree with you.

Mr. LEHRER. You do have pressure to extend the Defense Production Act. There is nothing that would prevent this committee from setting aside the controversy on UCAS and giving all witnesses a full and fair hearing.

The CHAIRMAN. Will you identify yourself, sir.

Mr. LEHRER. I am Mr. Lehrer, representing EIA. But I am sure I speak

The CHAIRMAN. I will call the first witness.

Mr. J. M. Lyle, come around, please.

Will you make your statement as brief as you can, and put your points across and put your statement in the record.

STATEMENT OF JOSEPH M. LYLE, PRESIDENT, NATIONAL SECURITY INDUSTRIAL ASSOCIATION; ACCOMPANIED BY CECIL L. COVINGTON, MANAGER FOR GOVERNMENT RELATIONS OF THE EQUIPMENT GROUP OF TEXAS INSTRUMENTS, INC., AND CHAIRMAN OF SPECIAL TASK GROUP ON COST ACCOUNTING OF THE PROCUREMENT ADVISORY COMMITTEE OF THE NATIONAL SECU

RITY INDUSTRIAL ASSOCIATION

Mr. LYLE. Mr. Chairman, may I take 6 or 7 minutes?
The CHAIRMAN. Yes, that will be all right.

Mr. LYLE. Thank you, sir.

I am Joseph M. Lyle, the president of the National Security Industrial Association.

I have with me as my colleague Mr. Cecil L. Covington, manager for government relations of the Equipment Group of Texas Instruments, Inc., and chairman of a special task group on cost accounting standards of our procurement committee. He is extremely well qualified to speak for the association on accounting matters related to procurement.

Mr. Chairman, I have a prepared statement. To save your time I propose to give the highlights orally, submitting the complete statement for the record.

We are opposed to the provisions of title I of H.R. 17880, because we believe the objectives being sought by this proposed legislation concerning cost accounting standards can be accomplished more effectively and more economically by existing Government procurement agencies under existing statutory authority. Consequently other new legislation is not necessary.

Mr. Chairman, I will just skip through this statement.

The CHAIRMAN. It will be made a part of the record and printed in its entirety.

Mr. LYLE. No real evidence has been presented that legislation of the type proposed would solve alleged problems. When considered in relation to the billions of dollars of defense procurement which has been carried out successfully, it is clear that the alleged cost accounting problems have been greatly exaggerated and distorted. I quote from testimony of officials of GAO during the hearings in 1968.

And Mr. Chairman, I will not go through the quotes, in order to save time, but the burden of them is that GAO auditors have not had any significant difficulty in determining what contractors' actual costs

were.

The CHAIRMAN. May I state that I am compelled to leave, and we will just have to stand in recess until we can call you back.

I assume that the staff knows how to reach these gentlemen. Check back with the committee at 2 o'clock. If we have permission to sit, we can hear you gentlemen, and will be glad to do it.

If we possibly can we are going to have a meeting immediately after the House adjourns for you gentlemen. We would be glad to do that.

Mr. LYLE. We will be back at 2, then.

The CHAIRMAN. You keep in touch with the staff. But we must recess at this time until we get satisfactory arrangements made. Thank you, sir.

We will stand in recess then, subject to the call of the Chair.

(Whereupon, at 12:15 p.m. the committee adjourned, to reconvene subject to the call of the Chair.)

AFTERNOON SESSION

The CHAIRMAN. The committee will please come to order.
All right, Mr. Lyle, you may proceed.

STATEMENT OF JOSEPH M. LYLE; ACCOMPANIED BY CECIL L. COVINGTON-Resumed

Mr. LYLE. Mr. Chairman, you will remember my colleague, Mr. Covington, from Texas Instruments, Inc.

I will resume, sir, two-thirds down on page 2 of my statement. In spite of what a few individuals have said, cost accounting standards already exist. The standards portion of section XV of ASPR (paragraphs 201, 202 and 203) has been effectively applied to all defense contracts, as the Comptroller General recognizes in his report. These sections contain general cost principles and criteria for determining the proper classification of costs.

Defense Contract Audit Agency and GAO auditors have enforced compliance with these standards not only through audits and adjustments of cost incurred on cost reimbursement, incentive and redeterminable type contracts, but also effectively on all types of contracts through reviews of costs of proposals and in making surveys of prospective contractors' accounting systems prior to contract award. Effective July 1, 1970 the use of section XV, both the standards portion and the provisions covering the allowability of costs, has been made mandatory by Defense Procurement circular No. 79 in the pricing of all contracts and adjustments negotiated on the basis of costs. This action clearly eliminates the necessity for legislation on this subject. Any improvements in these existing standards can be accomplished most efficiently and economically by the agencies responsible for procurement, operating within the framework of recognized accounting principles and sound business practices.

The GAO report to Congress on the feasibility of uniform cost accounting standards explicitly states that detailed standards cannot be developed which could be applied to all contractors and subcontractors in all cases. It also states that "*** to require consistent uniform cost accounting practices for all contractors, whatever the circumstances involved in contract performance, goes to such an extreme as to be unreasonable and unenforceable."

In virtually none of the cases cited in the GAO report would cost accounting standards have prevented the problems set forth. Standards will not prevent departure from accounting policy, differences of opinion between auditors and contractors, misinterpretation of regulations or various methods of classifying costs.

The GAO report does not effectively distinguish between the necessity, as opposed to the feasibility, of new standards. Unless and until it can be demonstrated that such new standards are a necessity, we see no reason for the Congress to launch a program which will require every contractor, large and small, to make costly changes in his established accounting policies changes which will increase his costs and his paper work, but will not contribute to any net improvement in the efficient and economical production of military products.

The imposition of detailed cost accounting standards which the GAO report appears to advocate would entail a great amount of work at very large cost. Such costs would, of necessity, be passed on to the Government in higher prices for the products it buys. After an 18 month study, the GAO in its report could not support any estimate of substantial dollar savings to the Government and was careful to avoid any discussion of the cost to implement standards.

The bill requires that contractors and subcontractors disclose in writing to the Government their cost accounting practices. Most major defense contractors not only have disclosed their accounting practices to the Government but have had them accepted. Defense contract auditors are resident in all major defense contractors' plants. They are furnished copies of contractors' standard accounting policies and procedures, audit manuals and charts of accounts and are fully cognizant of, and maintain constant surveillance over, defense contractors' cost accounting policies and practices. Historically, industry has discussed major changes in accounting with the Government's contracting and auditing personnel and has supplied them with full details and disclosures.

any

In view of this existing high degree of disclosure, our member companies feel that this provision is unnecessary. In event, legislation is not required to accomplish disclosure. The GAO report stressed the need for consistency between the way a contractor prepared his pricing proposal and the way he records his costs and files his claims for payment. We believe most contractors already follow such a policy as far as possible, subject to improvements in operating practices and changes in corporate organization and business that are appropriate over extended periods of contract performance.

Prior to any final action by the Congress in this area we would recommend that the responsibility for looking into cost accounting standards be referred to the Commission on Government Procurement. Certainly there is a close interaction between procurement policy and cost accounting and it might save a false start, considerable expense and great confusion to give the Commission an opportunity to act without preempting this area by this proposed legislation.

As we have stated, we do not believe legislation is necessary. If, however, legislation is to be enacted nevertheless, we feel that title Í of H.R. 17880 has some basic faults which should be corrected: