Now, to me there is a real gross inequity when we sit here for one full hearing and allow Mr. John Kenneth Galbraith whose economic theories have been repudiated by Democrats and Republicans alike for 25 years, and yet we have to sit here and listen to his economic nonsense, whereas these gentlemen represent millions of jobs, millions in industries, and in fact the defense of this country could depend on the job that the defense industry does. And we are giving them 10 minutes apiece to talk about a subject that is as involved as accounting which I studied in law school, and I know it is a very complicated subject matter.

Mr. LEHRER. As a matter of fact, Mr. Blackburn, it was not easy for us to find out when the committee was holding the hearing.

The CHAIRMAN. The gentleman is not entirely on solid ground in what he said, that this gentleman did not know that the cost accounting issue was coming up. It was in our bill 3 years ago.

Mr. BLACKBURN. Am I to understand that when anything which has been professed in the last 200 years of this country is ready to come up we should know about it?

The CHAIRMAN. It has been debated 2 years ago, and has been debated in the Senate.

Mr. BLACKBURN. The fact that something was proposed 2 years or 10 years ago does not mean that it is likely to come up in the morning. The CHAIRMAN. If I represented industry like he does I would be on my toes.

Mr. LEHRER. Mr. Chairman, unfortunately the industry that will suffer most if this bill is railroaded through is small business, which has not had an opportunity to be heard.

The CHAIRMAN. You say that some small businesses want to be heard that have not been heard. Name me one.

Mr. LEHRER. I did not say they have asked to be heard, I said they are the ones that will be most affected. On the 5th of June we requested this committee to appear only because we knew something had to be done. And finally on the 15th of June your committee

The CHAIRMAN. I will admit that we have something to do, and we want to be fair with you. But you have something to do. The challenge is on you.

Mr. LEHRER. I agree, Mr. Chairman, I would merely reiterate my plea, Mr. Chairman, I would like you to give us an opportunity to consider this fairly and on the merits. I submit that that has not been done.

The CHAIRMAN. Well, 2 years ago you knew that it was coming up again this year, it would be up again. You expected it, didn't you? Mr. LEHRER. Eighteen months ago you asked the Comptroller General to make a study. For 15 months of that 18 months we were engaged with the Comptroller General's staff. And the draft report that came out was one of the most monstrous and I use the word advisely-pieces of literature ever perpetrated.

The Comptroller General personally got in the act and I pay tribute to the General—he did make some very significant changes. However, we were in a tremendous quandary, and still are.

Just what do we mean by cost accounting standards, to what degree will these become a straitjacket of practices? The Comptroller General speaks in reasonable terms. The senior staff members of GAO do

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not. And the Comptroller himself has pleaded that he not be saddled with the responsibility which the committee bill would propose to do. The CHAIRMAN. You have a challenge yourself, and if I were youI know you will get busy, because I am sure

Mr. LEHRER. If the committee is going to mark up in the next day or two it is hard to see how the challenge can be met.

The CHAIRMAN. But you have known about it for 2 years.

Mr. BLACKBURN. Can we get the Comptroller General to testify, Mr. Chairman, as to whether or not he wants to administer this bill? The CHAIRMAN. If the Congressman stayed around all the time he would know that the Comptroller General did testify.

Mr. MOORE. And it is noteworthy, Mr. Chairman, that the Comptroller General said he would like not to have to administer this. The CHAIRMAN. That is what the committee would like to decide. Anything else from the members of the committee?

Mr. MIZE. I would just like to point out that you do have a few friends in court, and we are going to work like the dickens for you. Mr. LEHRER. I thank you and the American people thank you. The CHAIRMAN. If you want to get together and vote for future time we would be glad to hear you on that.

Mr. LEHRER. Is it my understanding that the entire statement will be printed in large type?

The CHAIRMAN. Yes, sir. And if you want to add to it, add to it. (Whereupon, at 4:10 p.m. the committee recessed to reconvene at 10 a.m., Tuesday, July 7, 1970.)

TO EXTEND THE DEFENSE PRODUCTION ACT OF 1950,

AS AMENDED

TUESDAY, JULY 7, 1970

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.

The committee met, pursuant to recess, at 10:25 a.m., in room 2128, Rayburn House Office Building, Hon. Wright Patman (chairman of the committee) presiding.

Present: Representatives Patman, Reuss, Moorhead, Stephens, St Germain, Minish, Hanna, Gettys, Rees, Galifianakis, Bevill, Chappell, Widnall, Johnson, Mize, Blackburn, Brown, Heckler, and Crane. The CHAIRMAN. The committee will please come to order.

The committee has received a number of letters and statements for insertion in the record, and I ask unanimous consent for them to be printed in the record at the appropriate point. Without objection, it is so ordered.

Now, then, this morning, six witnesses who appeared before the committee on June 22 to testify on H.R. 17880 principally concerning the provisions authorizing the establishment of uniform cost accounting standards by the General Accounting Office, are here to answer members' questions today. You gentlemen may take your places at the witness table, if you please.

As you know, the Defense Production Act was to expire on June 30, 1970. We have secured a 1-month extension until the end of July. Because of the pressures of other lesiglation and the desire to expedite legislation generally in the House, it is my view that we should mark this bill up promptly. However, I did want to give these gentlemen an opportunity to answer any questions that might be on the members' minds before final action on this bill. Therefore, we are holding this session this morning. The six gentlemen who have agreed to questioning are-now, you gentlemen identify yourselves for the record, please.

(493)

STATEMENTS OF KARL G. HARR, JR., PRESIDENT, AEROSPACE INDUSTRIES ASSOCIATION OF AMERICA, INC.; CHARLES W. STEWART, PRESIDENT, MACHINERY & ALLIED PRODUCTS INSTITUTE; MAX LEHRER, VICE PRESIDENT, DEFENSE FINANCE, RCA CORP., ON BEHALF OF THE ELECTRONIC INDUSTRIES ASSOCIATION; J. M. LYLE, PRESIDENT, NATIONAL SECURITY INDUSTRIAL ASSOCIATION, ACCOMPANIED BY CECIL L. COVINGTON, MANAGER FOR GOVERNMENT RELATIONS, EQUIPMENT GROUP, TEXAS INSTRUMENTS CORP., AND CHAIRMAN OF THE TASK FORCE ON COST ACCOUNTING STANDARDS OF THE NATIONAL SECURITY INDUSTRIAL ASSOCIATION; W. STEWART HOTCHKISS, CHAIRMAN, GOVERNMENT PROCUREMENT POLICIES COMMITTEE, FINANCIAL EXECUTIVES INSTITUTE; AND WILLIAM QUINLAN, GENERAL COUNSEL, ASSOCIATED RETAIL BAKERS OF AMERICA-Resumed

Mr. HARR. Karl G. Harr, G. Harr, president, Aerospace Industries Association.

The CHAIRMAN. The next one, please.

Mr. STEWART. My name is Charles W. Stewart, president, Machinery & Allied Products Industry; my associate, Charles Derr is senior vice president of MAPI.

Mr. LEHRER. I am Max Lehrer, representing EIA, and at my left is William Moore, staff vice president of EIA.

The CHAIRMAN. And the next one, please.

Mr. LYLE. Joseph M. Lyle, president of the National Security Industrial Association, accompanied by Mr. Cecil L. Covington, of Texas Instruments, the chairman of our task force on cost accounting standards.

(The following supplemental statement was submitted for the record by Mr. Lyle:)

SUPPLEMENTARY STATEMENT OF J. M. LYLE, PRESIDENT, NATIONAL SECURITY INDUSTRIAL ASSOCIATION

For those members of the Banking and Currency Committee who could not be present during my testimony on the afternoon of June 22, I would like to summarize in two short paragraphs what was said at that time.

The National Security Industrial Association (NSIA) is a nonprofit association of approximately 375 industrial and research companies of various types and sizes representing all segments of defense industry in every part of the United States. It is the consenus of the views of the member companies of NSIA that Title I of HR 17880 should not be enacted. The member companies believe that existing executive agency machinery is adequate, without any new legislation, to refine existing cost accounting standards to the extent necessary. Such standards should be guiding principles rather than detailed rules. Otherwise they cannot fit all of the various types of businesses engaged in defense work, will be costly to implement, and these costs will be reflected in higher overhead costs for defense products.

If the committee goes ahead with legislation, in spite of the opposition we and others have expressed, our members believe the following should be corrected in the proposed bill:

(i) Cost accounting standards should be defined to mean broad guiding principles (ii) the Advisory Board should be an independent board, appointed by the President, to conform to our American concept of separation of powers (iii) xemptions should be provided for contracts or subcontracts where the price ated is h "adequate price competition, or established catalog or mar

ket prices of commercial items sold in substantial quantities to the general public and contractors, subcontractors, or plants operating primarily under those types of contracts should be exempt (iv) an appeal procedure should be provided for contractors where non-compliance with standards is alleged (v) a provision should be included for a determination of economic feasibility before implementation of new standards (vi) the right of the government to examine records should be limited to those related to compliance with the standards and the right to make copies of contractors records should be deleted (vii) prior to promulgation of new standards all affected parties should be given sufficient time to comment and new standards should not be made effective in the middle of normal accounting periods or during performance of an existing contract.

We would also like to take this opportunity to convey to you the comments of some of our member companies on certain of the statements contained in Comptroller General Staats' testimony before your committee on June 19, 1970. Those comments are as follows:

1. The several references in the first four pages of testimony to the percentage of defense procurements entered into on a negotiated basis are misleading, since a large part of those procurements were entered into a result of competition. For example, where the Comptroller General states that negotiated procurement constituted 88.6% and 89.0% of the Defense Department's total dollar value of procurements for 1968 and 1969 fiscal years, respectively, only 57.9% to 60.3% of the dollar volume in those years were non-competitive negotiated procurements, as reported in the published statistics of the Department of Defense. It is apparent, therefore, that cost accounting standards would be applicable to a much lower percentage of goverment procurement than the Comptroller General would lead you to believe.

2. The enumeration of the potential benefits from the establishment of cost accounting standards as set out on pages 5 and 6 of the testimony suggests that there are widespread abuses, misunderstandings, and inadequacies in these areas at the present time. Our member companies say this does not present the true picture. Practically everyone of the "benefits" enumerated is being realized under present regulations and audit surveillance of defense contractors.

3. Our members do not agree with the Comptroller General's arguments that audits and investigations of contractor's costs by Government agencies do not provide ample disclosure of contractors' cost accounting practices and their consistent use. While audits of individual contracts are on a selective basis. audits of contractors' overhead rates require access to and understanding of all significant accounting records. During such audits simple opportunity is afforded the government auditors to observe the consistency with which a contractor complies with his own company accounting rules and principles as well as with Section XV of ASPR and generally accepted accounting principles and practices. Moreover, under present ASPR regulations audit reviews are required to be made by defense contract auditors of all proposals in excess of $100,000 where the price will be based on cost data. This affords practically continuous review of the accounting practices of all sizable defense contractor since proposals of this nature are made every month.

4. Our members do not agree with the Comptroller General and Mr. I. Wayne Keller, Chairman, Committee on Accounting Practices, National Association of Accountants that “after the initial change the cost of continuing cost accounting under the standards as promulgated would be little or no different from the costs that those companies are expending now in recording costs under their present systems. There would be some minor cost of adapting to the new standards."

We refer you to the testimony of Mr. John W. Gilpin presented to this committee on June 22 for specific examples of both initial costs and recurring costs for a medium-sized company. He estimated one-time costs of $170,000 and annual costs thereafter of $250.000 for only three standards. Recurring costs will be substantial for those companies not engaged exclusively in defense work since it is unlikely that the new cost accounting standards will be the same as the companies' existing standards. Thus, dual records, internal operating procedures, and electronic data processing programs will be required. Recurring costs will also vary in proportion to the extent that the new standards depart from tax laws and regulations and regulations of the Securities and Exchange Commission and the Renegotiation Board.