'feasibility' will be judged in terms of the capability of the standards to provide valid cost data, generally acceptable and fair to all parties, in an expeditious and economical manner. To be feasible the standards must be workable from the standpoint of both public and private interests. Therefore, the study will be directed to the feasibility of developing and applying uniform cost accounting standards as a means of enhancing the comparability, reliability and consistency of cost data used for negotiated procurement contract purposes while at the same time maintaining equity and adherence to sound accounting principles. It will also include consideration of those factors which bear upon the administrative costs to Government and industry of implementing uniform cost accounting standards. . . ." Active participation in the GAO study and subsequent review and analysis of the Report have convinced our industry experts that standards meeting these criteria cannot be developed and that feasibility, as defined by the Comptroller General, has not been established. As part of the GAO study, several examples or samples of proposed standards were presented to industry for review and comment. Because they represent the only tangible clue as to what the term "uniform cost accounting standards" might mean if the Comptroller General were authorized to promulgate them, these sample standards are of significance. In our comments to the GAO on the sample standards, we pointed out that they did not meet the criteria established by the Comptroller General. For that matter, the sample standards are not responsive to the criteria contained in the "Conclusions and Recommendations" of the GAO Report-namely that "cost accounting standards . . . should evolve from sound commerical costaccounting concepts and should not be incompatible with generally accepted accounting principles." Virtually without exception, the proposed sample standards would require the very kind of "consistent uniform cost-accounting practices for all contractors" which the Comptroller General describes as going "to such an extreme as to be unreasonable and unenforceable." In any event, the sample standards and industry's comments thereon do not appear in the Report. Summarizing our first point, then, we emphasize that neither the study nor the Report of the Comptroller General establishes any generally acceptable definition of uniform cost accounting standards or cost accounting standards; and the Comptroller General does not offer any cogent evidence that it is feasible to promulgate such standards. FAILURE TO JUSTIFY NEED I now turn to my second point-the Report and prior testimony on legislation calling for cost accounting standards fail to establish or justify the need for uniform standards. One of two prinicipal reasons advanced for the enactment of Sec. 2, Section 718, of Public Law 90-370 was the allegation that there were serious problems in defense procurement which would be solved by mandatory use of uniform cost accounting standards. However, the recent GAO Report does not present any credible evidence that there are any significant procurement problems which would be solved by cost accounting standards. Morover, no evidence has been presented which would contravert the General Accounting Office testimony during the hearings on S. 3097 in June, 1968, that “on occasion, we have problems because of the accounting system of a particular contractor, but I would say for the most part, in 99 percent of the cases, we are able from contractors' records to determine costs.' Nor is the case for standards made in Appendix II of the GAO Report, which describes cases as reported by Government auditors, which, unfortunately, were selected on the basis of, and I quote, "recollection of such audit reports having been issued." Accordingly, they are not representative of the results of many thousands of reviews of contractors' price proposals and audits of contractors' costs. Further, in evaluating the significance of these cases, consideration should be given to the following: (1) Many represent situations in which an auditor expressed his disagreement with a contractor. Past experience shows that the people to whom the auditor submits his reports frequently do not agree with the auditor's positions or recommendations. Some of our members believe they have recognized, among the cases cited, specific instances in which subsequent reviews of the pertinent facts have resulted in a rejection of the auditor's recommendations. Cases of this type are of questionable value in demonstrating a need for standards. (2) Some of the cases evolve from human error. Occasional mistakes are to be expected, and accounting standards would not prevent them. It is clear that we must continue to rely on established Government and industry audit and review systems to uncover and prevent such errors to the extent feasible. In his Report, the Comptroller General emphasizes the need for consistency in accounting. Consistency is a cardinal priniciple in accounting and is one of the primary factors reviewed and reported on by Government auditors and the independent auditors who certify contractors' financial statements. Because of this emphasis on consistency, we don't understand why some of the audit report problem cases were cited in Appendix III. These cases concern attempts by Government auditors to force changes in contractors' long-standing, consistently used, approved accounting policies and practices, where such changes were not required by a change in circumstances or conditions and were merely a reflection of the Government auditor's desires to have things done his way. Of course, it is generally recognized that alteration or deviation from established practices is required when significant changes in conditions dictate a change. This condition is clearly recognized in the professional accounting community, in the Comptroller General's guidance to Federal agencies; and it is expressed in the present Armed Services Procurement Regulation Cost Prinicples (15-203 (d)), as follows: ". . . . However, the method used by the contractor may require reexamination when "(i) any substantial difference occurs between the cost patterns of work under the contract and other work of the contractor; or "(ii) any significant change occurs in the nature of the business, the extent of subcontracting, fixed asset improvement programs, the inventories, the volume of sales and production, manufacturing processes, the contractor's products, or other relevant circumstances." This provision demonstrates that the Government has recognized over many years that variations in practices are sometimes dictated by changing circumstances or conditions. In attempting to justify the need to legislate cost accounting standards, the Comptroller General has, in our opinion, improperly minimized the impact of generally accepted accounting policies and practices in determining costs of individual contracts. Some of the existing policies and practices can be described as being directed toward the reporting of financial results. However, the fact cannot be denied that adequate cost accounting, including the proper application of generally accepted accounting principles, is essential in determining financial results. On occasion, it has been alleged that existing cost principles permit inequitable overloading of costs against Government contracts. Frankly, this is absolutely not so. The existing principles require fair allocations of costs. Existing audit and price analysis systems provide further assurance that costs are eqitably assigned. And, most important. the very intense competitive environment surrounding the awarding and performance of all defense contracts and subcontracts guarantees that contractors. if they are to be successful in obtaining Government contracts, will not overload costs against those contracts. A development of significance bearing on this subject is the recent change in the ASPR to extend the mandatory applicability of the Section XV Cost Principles to all negotiated fixed price contracts in addition to cost type contracts heretofore covered. LACK OF EVIDENCE OF POTENTIAL BENEFITS My third point is that there has not yet been offered any cogent evidence that the promulgation of cost accounting standards would accomplish anything beneficial. The enactment of Section 718 of Public Law 90-370, which directed the feasibility study, appears to have been based, at least in part, upon testimony to the effect that uniform cost accounting standards would produce savings in defense procurement costs-as much as billions per year. It is significant that, rather than forecasting savings, the Report discusses probable additional costs stemming from changes that would be required by the establishment and implementation of cost accounting standards. Because the nature and extent of such changes are uncertain, it is not possible to estimate with any degree of reasonable accuracy the cost increase that would result from their promulgation; but some increased cost is certain. However, it should be noted that the version of S. 3302 reported by the Senate Committee on Banking and Currency recognizes the likelihood of increases in costs arising from compliance with promulgated standards. That bill provides for increases in contract prices occasioned by compliance with duly promulgated cost accounting standards. The GAO Report promises neither savings nor other specific benefits. It merely lists certain procurement functions and processes that standards could—not will, or would-improve. We believe that legislated cost accounting standards cannot improve procurement functions and processes, but would, instead, have serious adverse effects on these functions and processes, including the possibility of reducing competition for Government contracts and subcontracts. Because the aerospace industry sincerely believes that proposed new Section 718 in Title 1 of H.R. 17880 will not contribute to greater efficiency or economy in the awarding and performing of Government contracts, we urge that no legislation directing promulgation of cost accounting standards be enacted. SUMMARY In summary, Mr. Chairman, we submit that: (1) The term "cost accounting standards" does not have a sufficiently clear meaning to make its use in legislation appropriate. (2) There has been no demonstration that it is feasible to promulgate cost accounting standards, that standards are necessary, or that they would be beneficial. (3) There is no evidence that there are any significant problems which would be solved by such standards. (4) Whereas there is no evidence that standards will produce any savings in defense procurement it is clear that they will increase costs. The CHAIRMAN. The next witness is Mr. Charles W. Stewart, president of the Machinery and Allied Products Institute. We are delighted to have you, Mr. Stewart. You may proceed in your own way, sir, to present your testimony to us. And we will place in the record your testimony, and you may comment upon it or handle it in any way you desire. Please proceed, sir. STATEMENT OF CHARLES W. STEWART, PRESIDENT, MACHINERY AND ALLIED PRODUCTS INSTITUTE Mr. STEWART. Respectfully, Mr. Chairman, ask that the attachments to our statement also be included in the record. The CHAIRMAN. Without objection it is so ordered. Mr. STEWART. I speak today in behalf of Machinery and Allied Products Institute, the national organization of capital goods and allied equipment manufacturers whose members are commercially oriented as distinguished from being primarily defense-oriented. However, many of our companies do have some percentage of Government business. And a limited number have substantial Government business. I will make some comments about the defense industry in general, however, as observations rather than by way of representation. I would like to make a few general points first and then call your attention to certain portions of our statement, so that they will be underlined, even though I shall not take your time to read them. First of all, with due respect I would like to suggest that from the beginning of the consideration of this subject all the way back to the proposal of the feasibility study and the period of congressional action and administrative implementation, there is some evidence of a lack of a full record being made. I would suggest even stronger that perhaps there has been an absence of some elements of due process in terms of bringing all of the information from the interested parties before a forum where the full complexities of this subject could be adequately discussed. I say that with due respect, and I suggest that it be considered. Whether you are given 10 minutes, 3 hours or 3 days at this hearing, no one could possibly achieve any understanding of what is meant by uniform cost accounting standards based on what the Government has submitted to date. The Comptroller General, I submit, does not know. His report does not demonstrate it. And proponents of the legislation do not know, we submit. I am certain that those of us in the private sector who have misgivings about UCAS share this lack of certainty as to what are uniform cost accounting standards. Reference was made earlier this morning to the feature story in the morning papers concerning one of our major railroads. I remind the committee that this is a regulated industry. Indeed in many ways, directly and indirectly the defense industry is at least as regulated as the railroad industry, and perhaps because of the manner and the process, more unfairly so. And it is my impression, although I cannot certify to it, that the railroad industry through its regulatory body has been blessed with some sort of a uniform accounting system. I do not believe that testifies very well to the desirability of spreading uniform cost accounting into another area. I would suggest that Congressman Mize's comments during the morning are very apropos. What is the urgency about congressional action on uniform cost accounting standards or I should say, "cost accounting standards" because, said the Comptroller General, the word "uniform" is redundant. Actually the omission of the word "uniform" is an indication again that this is the kind of a messy and complex subject about which we need to do a great deal more thinking before we legislate on it. Mr. Mize's suggestion was that we engage in a little surgery, disengage the two sections of the bill which do not apply to a simple extension of the Defense Production Act, take action on extension only, and put the other two items aside for more careful study. I have indicated that we speak primarily from the commercial point of view, but that I would make certain comments in terms of what I consider to be serious concerns about the so-called defense industry. We need to put these proposed cost accounting standards and their advocacy in proper perspective. I would suggest first that they have been caught up in the swirl of the unpopularity of the Vietnam war, which has colored certain attitudes in the Congress. They have also been affected to some extent by certain other developments within the defense industry. You need to bear in mind that there have been very substantial defense cutbacks in terms of contracts for fiscal reasons to which Under Secretary Walker referred, and that there are major parts of the defense industry in the United States which are now in a recession or in a depression, depending on the company or the product to which you address yourself. And this does not only affect industry in a narrow sense. It means jobs, thousands of jobs, blue collar jobs, white collar jobs, even officers of some companies. This is hardly a sign of an industry characterized by unconscionable profits and tricky accounting devices. There are many facts which are in dispute in connection with defense industry. What are defense profits; what are their dimensions? You the Congress feel so strongly that you do not have the facts that you have directed the Comptroller General to engage in a study to determine the level, quality, and other characteristics of defense profits. Accounting procedures themselves are a mysterious territory, and hence the ambiguity of the definition of accounting standards. The subject of research and development has been under fire. And so it goes. Karl Harr referred to the new Commission on Government Procurement which you, the Congress, have set up. It is charged with a very large mandate. Why not give it this subject to consider among others. The defense profit study is already underway at the General Accounting Office. I am impressed by one other thing which seems to be almost paradoxical. Those people who advocate so strongly that we need uniform cost accounting standards because they profess to know so much about what is going on in industry in accounting practices and procedures, are themselves incapable of making or refuse to submit to the Congress a cost-benefit study which justifies the promulgation of uniform cost accounting standards at this time. Indeed, the Comptroller General almost cavalierly has said, you cannot do that cost study in advance, you will have to pick it up as you go along. This is hardly good government or good administration. The reference during the early part of the consideration of this proposal to inapplicability of ASPR cost principles to fixed-price contracts is already superseded by an event that has taken place that Admiral Lyle referred to, namely, the demise of the genuine fixedprice contract. We now have mandatory application of the Armed Services Procurement Regulations' cost principles to fixed-price contracts. When you put fixed-price contracts in that vise you can forget fixedprice characteristics. And the very thing that is implied as a complaint about fixed-price contracts is now moot. Admiral Rickover testified at length, I must confess, sir, in a little more comfortable timeframe than industry has been placed in. And he has made some accusations-both general, and one in particular, without naming a company. I have had some experience with companies over the years who are Navy nuclear contractors. This is hearsay, but it bears some investigation. I would venture to say that if the General Accounting Office were to audit the contracts which have been executed under the administration of this extraordinary and able man-and he is even abler than he admits with reference to controlling costs-you would find that the contractors involved get only a minimum profit, and sometimes no profit. Now, that is a suggestion for investigation. It is only an impression on my part. But I urge that it bears investigation. Our statement covers a number of background issues. We object for reasons that others have cited to delegating responsibility for |