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spiral, if you prefer), and bank loans for essentially non-productive uses, such as financing a pell-mell rush of corporate acquisitions, as well as other purposes which business should have been forced to the marketplace to finance.

This inflationary cycle advanced to a point which became self-reinforcing through inflationary psychology. This is the general belief of both businessmen and the consumer that if you intend to buy something-a car, a washing machine, a new factory or a new piece of equipment-buy it now, quickly—in a few months it will cost more; if you don't have the money, borrow it-even at high interest rates it will be cheaper than at next month's price.

At this point, the inflationary cure could be likened to a three legged stoolwhich cannot stand on even two legs, let alone one leg. The three legs are: Monetary policy, which is currently being employed as an anti-inflationary weapon-and possibly even over-employed;

Fiscal policy-which has had little except lip service.

Incomes policy-which has not even had lip service in Washington,

It is the last of these three, the Incomes Policy, which alone has the potential to break the inflation psychology without breaking the economy as a whole. The proposed freeze, though temporary, could thus provide the time for the two elements of anti-inflationary monetary and fiscal policies to take effect in an orderly economy.

This proposal will not increase the popularity of its proponents and much less that of those political leaders who must act to place such a measure in effect.

However, we are blessed with many public officials who are willing to stand up and "tell it like it is"-and act.

Hopefully, Congress will grant to the President the power necessary to impose the implement such a freeze and the purpose of this statement is to urge such action. If this is not accomplished, we believe that in 1970-and possibly beyond-both business and the individual will continue to suffer from combined inflation and recession.

STATEMENT OF THE AUTOMOBILE MANUFACTURERS ASSOCIATION, INC.

The subject Bill provides that the Comptroller General shall promulgate costaccounting standards designed to achieve uniformity and consistency in the cost-accounting practices followed by defense contractors and subcontractors under Federal contracts. The standards would be used by defense contractors and subcontractors in estimating, accumulating, and reporting costs in connection with the pricing, administration, and settlement of all negotiated prime conract and subcontract defense procurements with the United States Government.

Our position has been, and still is, that we cannot subscribe to the adoption of cost-accounting standards when such standards have not been developed, nor has any study been made to determine the cost of implementing such standards if developed. The imposition of a new set of Federal regulations' on the defense ndustry would result in increased cost to both Government and industry. While laims have been made for substantial savings to be realized from the promulgaion of cost-accounting standards, such claims have not been documented. It could well be that the cost of implementation would exceed any benefits to be realized. The McGuire Commission on Government Procurement Practices is naking a study in this area. It would seem appropriate that, before any law is nacted, this Commission review the desirability of issuing cost-accounting tandards and measure the benefits to be derived against the cost of mplementation.

If, nevertheless, it is the consensus of the Banking and Currency Committee hat a Bill to promulgate cost-accounting practices should be enacted, then onsideration should be given to including in the Bill the following provisions n the corresponding Bill reported by the Senate Banking and Currency Committee:

1 Defense contractors are now subject to the Armed Services Procurement Regulation. ederal Procurement Regulations, Regulations of the Services and other Government gencies, Renegotiation Act, Truth in Negotiations Act, Pre-award audits by the Defense ontract Audit Agency, Department of Defense Directives and Instructions, Executive rders, Post-award audits by the Defense Contract Audit Agency, and General Accounting ffice Audits.

1. Provide that no defense contractor or subcontractor shall be subject to the cost-accounting standards requirements of the Bill if the sales of such contractor or subcontractor under contracts negotiated in connection with national defense procurements, exluding sales of commercial products sold in substantial quantities to the general public, did not exceed $25 million during the most recently completed fiscal year of such contractor or subcontractor.

2. Exempt contracts and subcontracts where the price negotiated is based on (a) established catalog or market prices of commercial items sold in substantial quantities to the general public, or (b) prices set by law or regulation.

3. Provide that in promulgating standards, consideration will be given to the cost of implementation compared to the probable benefits.

4. Change the effective date for standards promulgated from 30 days after publication in the Federal Register to the start of the second fiscal quarter beginning after the expiration of not less than 30 days after publication in the Federal Register.

5. Provide that the Government's audit rights extend only to those documents, papers, or records of contractors and subcontractors expressly relating to compliance with cost-accounting standards.

The first provision would avoid subjecting the small defense contractors, who do not have sophisticated accounting systems and use of computers, to the possibility of having to revise their accounting systems to meet the new requirements. The second provision would exempt those products which are sold off-the-shelf and which represent the normal commercial products of the contractor or subcontractor. In many instances, these could be the contractors' only sales to the Government. The other changes to conform to the Senate Bill are to provide a more equitable and practical law.

We also request the establishment of an independent Cost Accounting Board whose members would be appointed by the President. The responsibility for the development and interpretation of any cost accounting standards should not be assigned to the Comptroller General, as proposed in HR-17880, because he is the individual responsible for reviewing contracts predicated upon those same standards. The enforcement of standards through audit by the Comptroller General would mean that he is responsible for legislative, executive and judicial | functions.

STATEMENT OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS ON COST ACCOUNTING STANDARDS

The American Institute of Certified Public Accountants is the national professional association of certified public accountants. It is composed of more than 70,000 members, residing in every state of the Union.

The American Institute fills a distinct and important role in our economic system by setting auditing standards which must be adhered to by Institute members in their independent examinations of financial statements. The Institute also sets accounting principles which are followed in the financial statements reported on by members.

Like other earnest tax paying citizens, we are devoted to the idea that the Department of Defense and all other agencies of government, both Federal and local, obtain maximum value for their expenditures. We firmly believe every reasonable effort should be made to avoid excessive costs on procurement contracts. Also, we recognize the need for business organizations to earn a fair profit in order to sustain themselves as viable productive entities.

It is in the light of these objectives that we greatly appreciate and welcome this opportunity to comment on proposed legislation on cost accounting standards. We see the concept of cost accounting standards not as a radical new idea, but as a continuation of one segment of a body of accounting practice that has been developing for a long time. It would be self-deluding to start from a premise that generally accepted cost accounting principles, consistently applied, were nonexistent among Government contractors prior to this time. In fact, there now exists a substantial body of literature on cost accounting. Also, we recognize that there never will be, nor should there be, a finished product of permanent and inflexible standards, no matter how they are developed and implemented: standards will need continual refinement in the light of experience and changing

conditions. At all times, there will be a need for judgment in their application and in identifying circumstances in which various standards apply.

Before commenting specifically on the proposed legislation, we would like to review briefly the development of accounting principles in this country by way of setting this statement in perspective.

For the protection of the investing public, Congress passed the Securities Act of 1933 (which set requirements for the offering of new stock and bond issues) and the Securities Exchange Act of 1934 (which created the Securities and Exchange Commission as an independent agency of Government).

The Securities Act empowered the SEC to prescribe accounting rules, but the Commission made it known that it expected the accounting profession to assume the major part of this task. And the profession has been diligent in meeting this responsibility.

A committee on accounting procedure formed by the AICPA to "narrow areas of difference and inconsistency in accounting practice," issued 51 Accounting Research Bulletins indicating preferred treatments of various items and transactions.

The Accounting Principles Board, the successor body to the committee on accounting procedure, which was formed by AICPA to carry on the work in a broader and more intensive way, has issued fifteen Opinions and three Statements, and has a full agenda of active projects. Two proposed Opinions have been circulated to businessmen, academic authorities, Government officials and others, for comment.

When the Accounting Principles Board has a topic under consideration, it consults with representatives of the groups most directly concerned. The draft of a proposed Opinion is distributed widely-more than 50,000 copies in the case of the business combinations Opinion-and comment is invited. In short, the process is a deliverative one, in the tradition of democratic procedure. In a recent statement before the Senate Subcommittee on Antitrust and Monopoly, Chairman Hamer Budge of the Securities and Exchange Commission, noted that "The Board's procedures for drafting, exposing and adopting opinions are similar to those for rulemaking required of government agencies under the Administrative Procedures Act."

The reliance on a professional group to meet the responsibility of developing accounting standards is an excellent example of the value placed in American society on voluntary, self-regulatory effort by private citizens.

As background for the Board's deliberations, the AICPA sponsors research studies by its Accounting Research Division and others. Among research projects currently under way are studies on basic cost concepts, inventory pricing, depreciation methods, and research and development expenditures, all of which have an important bearing on cost accounting.

The study on basic cost concepts and implementation criteria, being conducted by a team of Stanford University professors, deals with concepts used in cost determinations for several purposes. The study reflects our belief that further research is needed to refine the inter-relationship between cost accounting principles used for measuring and predicting costs and generally accepted accounting principles used for financial reporting purposes.

The public accounting profession is heavily involved in providing client assistance in establishing cost accounting systems to facilitate managerial controis and to identify product costs. Much of the authoritative literature on cost accounting concepts and applications has been written by CPAs who have extensive experience in developing sound cost accounting practices and in establishing data handling systems to implement them.

This practical experience, together with the Institute's experience in setting standards and conducting accounting research, puts the accounting profession in a position to make a significant contribution to the objectives of this legislation. We earnestly hope that this capability will be used and specifically provided for in the final bill.

In this way, the objectivity of the CPA, concerned with both the purposes of government and the problems of industry, can be helpful in developing fair and useful standards.

The AICPA has taken an active interest in the cost accounting standards project since its inception.

In a letter to the General Accounting Office last August, we reviewed the applicability of Section XV of the Armed Services Procurement Regulations for use in the feasibility study. On October 31, we commented in detail on the draft report circulated by the General Accounting Office. While not objecting to the

major conclusion of the draft report that uniform cost accounting standards are feasible, we did point out the continuing uncertainty as to the meaning and impact of these proposed standards.

New requirements of disclosure may have been over-emphasized in the Comptroller General's report. Many contractors already disclose to the Government their cost accounting principles and the basis upon which they project costs. Also, the report appears to have concentrated too heavily on the problem of overhead allocation, without giving balanced attention to labor, material, and capital costs.

Several members of the Institute who reviewed the Comptroller General's report observed that the case examples presented were not a representative sample, and that the bad effects illustrated in these cases were caused not by the absence of standards, but by the contractors' failure to adhere to cost accounting standards already prescribed by Section XV of the Armed Services Procurement Regulations. As the report itself acknowledges "cost accounting standards could not, by themselves, ensure that contracts will be effectively negotiated, administered, and settled or, for that matter, that costs will be determined in accordance with those standards."

As indicated above, the impact of legislation on cost accounting could have far-reaching effect. While the report of the Comptroller General on this subject recognizes that "it is not feasible to establish and apply standards in such detail as may be necessary to ensure uniform application of precisely described methods," the practical problems of delineating between those standards which have general application, and those techniques or concepts appropriately applicable to a given situation are likely to be especially difficult.

By way of illustration, we note that the Comptroller General's report expresses the view that "the essential function of cost accounting is to allocate direct and overhead costs to individual orders." This assertion, in our view, is an unfortunate oversimplification and inadequate statement of the true objectives of cost accounting. While identification of costs applicable to particular product or product lines is one of the usual functions of cost accounting, it is, by no means, the only one. In fact, product cost determination for many commercial products often utilizes approximations, based upon certain conventions of planned or normal costs, as distinguished from incurred or "actual" costs. The emphasis, in these situations is given to measurement of functional coststhe costs incurred by a department or other organizational unit as compared with budgeted costs. In addition to the basic process of matching costs and revenues, this is the prime means of exercising control over costs and serves as an effective way to monitor operations and to direct managerical attention to problem areas.

The documentation on cost accounting standards to date does not give consideration to one of the most important aspects of cost assignment, or cost allocation, which is the inter-relationship of total costs between products and activities. This applies to a mixture of commercial products, a mixture of governmental products, or a mixture of both. The fundamental problem is proper and equitable allocation of costs according to their real causes and benefiting sources regardless of the cost type or origin.

Many of the major problems stated in the Comptroller General's report are not necessarily founded in the method or concepts of cost accounting. Often, disputes over cost determination are but a symptom, whereas the real problem is insufficiently defined contracting procedures.

Two of the major problems, (1) presenting costs in the same format as original contract estimates, and (2) changing cost assignments after a contract is in process, can be corrected without cost accounting standards, but with appropriate cost accounting specifications expressed in the contract terms.

In defining standards, it may be appropriate for the framers to consider what should be covered in contract negotiations as well as how to account for the contract. Also, for practical reasons, it may be prudent to concentrate initially on a specific industry or a limited number of industries because the standards may vary for different industries. For example, Defense Department contract problems may be quite different from medicare contract problems. After the concepts of cost accounting standards are proven in a given application, they can be expanded to a wider spectrum of government procurement activities. Overall, however, our general impression is that the Comptroller General's report of January 19, 1970, sets forth a reasonable conceptual basis on which cost accounting standards may be developed. Unquestionably the time and effort spent by the General Accounting Office staff and consultants have con

tributed greatly to the understanding of the problems involved in setting cost standards.

The emphasis should not be on uniformity, since this often leads to misapplication and attempts to apply similar procedures to unlike circumstances. We caution, therefore, against emphasis on uniformity and encourage emphasis on codification of broad standards, recognizing the myriad circumstances in which they will be applied. The experience of agencies that set rigid uniform charts of accounts has demonstrated that needs change, but reporting requirements persist long after they are obsolete.

The matter of prime concern now should be to ensure that the standards to be set are rational and sound, workable without imposing undue burden on those charged with putting them into practice, not disruptive of accounting in other areas, and fair to all in their results.

We concur in the statement in the Comptroller General's report of January 19 that cost accounting standards for contract costing purposes should evolve from sound commercial cost accounting concepts and should not be incompatible with generally accepted accounting principles. Cost accounting standards will inevitably have impact far beyond government procurement; therefore, they should have broad applicability and usefulness for commercial as well as government business.

Stated another way, our concern is that development of cost accounting standards in an environment apart from generally accepted accounting principles could lead to a lack of conceptual harmony between the whole and one if its parts. Therefore, we recommend that pronouncements of the Accounting Principles Board be the starting point for development of cost accounting standards in all areas in which the Board has spoken.

To ensure that there is no conflict between cost accounting standards and the larger body of generally accepted accounting principles which includes principles of cost compilations, it will be highly desirable to draw on the services of practicing public accountants who are well-informed as to cost accounting principles used in industry. It will also be desirable to involve the cooperation and partici pation of industry representatives.

We understand that both of the proposed bills before your committee, H.R. 17880 and H.R. 16752, provide for cost accounting standards to be set by the Comptroller General. Thus, either of these bills would vest total authority in a single person-he, who at a given period of time, occupies the post of Comptroller General of the United States.

The occupant of the post of Comptroller General at a particular time might exercise his authority under the contemplated legislation not only well, but with conspicuous excellence. But we think you may agree that any legislation that may be adopted in this field should be regarded in terms of the principle involved rather than of persons.

The bills provide for the establishment of an advisory board composed of members from both inside and outside the Federal Government. The members would be chosen by the Comptroller General. Their number is described as "no more than five", and this could be any number from two to five. The ratio of Federal members to non-Federal members in a five-man board could be one-tofour, four-to-one, or anything in between.

We believe that the Congress should be concerned not alone with the source of members of the board but, even more, with their competence. The likelihood of attaining that competence would be greatly enhanced by a provision that the members be selected from among professional accountants inside the Federal Government and outside the Federal Government, with competence in the field of cost accounting.

The bills imply that members of the cost accounting standards advisory board would be serving only part time in this capacity, and the bills do not specify a term of board service. Whether the functions of such a board would require full time service can be determined as experience is gained. But we can be certain its functions will require continuing attention. Therefore, members should serve for a specific term with only one term expiring in each year, thus providing continuity of service.

Under the two bills, paragraph (d) of Section 718 would give government representatives the right to examine and make copies of contractors' documents, papers, and records. The government's purposes would be served and contractors' privacy would be respected if this right were limited to pertinent or relevant documents, papers and records.

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