12 don't recommend it to everyone. Nevertheless, a systematic approach to financial disclosure, governmental accounting and public reporting will offer many public benefits and I hope that the accounting profession, municipal finance officers, and the academic community can work together both to point the way to solutions for the significant problems which now exist, and to encourage the adoption of an appropriate institutional framework for the ongoing resolution of both today's and tomorrow's challenges. Senator METCALF. On Thursday, we will hear from Elmer Staats, who is our accountant, who is Comptroller General of the United States. He is the one who tells us when we do things wrong. And he is the Chairman also of the Cost Accounting Standards Board. He will tell us about that. And we will also hear from Adm. H. G. Rickover, who has been a pioneer in getting uniform cost accounting standards in defense contracts. We will meet in this room at 10 o'clock. I may be a little late because I have to open up a hearing in the Energy Committee at 9:30. If my substitute doesn't arrive on time, I won't arrive here on time. Just as soon after 10 o'clock as possible, I will be here. Thank you, Mr. Auerbach. The committee will be in recess. [Whereupon, at 1:35 p.m., Tuesday, May 24, 1977, the subcommittee was recessed, to reconvene at 10 a.m., Thursday, May 26, 1977.] The subcommittee met at 10:07 a.m., pursuant to recess, in room 6202, Dirksen Senate Office Building, Hon. Lee Metcalf (chairman of the subcommittee) presiding. Present: Senators Metcalf and Percy. Also present: E. Winslow Turner, chief counsel; Vie Reinemer, staff director: John B. Chesson, counsel; Gerald Sturges, professional staff member: Jeanne A. McNaughton, chief clerk; Anne Boni, lage islative assistan: and Christopher S. Tavlor, research assistant. Senator METAL. The subcommittee will be in order. This is a continuation of the hearings on wounting and auditing practices and prores. Today, for the frs witness this morning, we are privileged to have our own congresual vochtant, the Comptroer Gmail, who testifying the nerung in his other capacity na coziruan ka n Accounting Standarts Boari As usual wear swaed and botomi to have you befon w G Staats, and you s pret dhead with your emai TESTIMONY OF MINER 3 STAATS CHATRYŁK SVET KOMUNTIBO STANDARDE BI KANTLEETY STELMAZ Y Mr. State Tanya Tuch K. Cal to be here. me you might have questions about procedures of auditing Federal programs. He is responsible for the work GAO does in this area. I do have a statement, Mr. Chairman, which I would like to read. first to give you a little bit of background on where we are in the development of cost accounting standards. We have promulgated 14 cost accounting standards, two interpretations of standards, and implementing regulations. All of these promulgations are required to be included in major negotiated defense contracts. That statute, as you know, applied only to negotiated defense contracts. In addition, we have developed a cost accounting conceptual framework. The essence of that framework was published in March 1973. in our statement of operating policies, procedures, and objectives. The framework has recently been updated and expanded and a restatement has just been published. We believe that establishing concepts for cost accounting, as early in our history as 1973, was very important to our success.. The framework establishes as one of our principal purposes the setting of standards to measure the cost of supplies and services acquired by the Government in a way that is fair to both buyer and seller. Beyond providing for a reasonable profit, the Government wants to pay the cost of the resources used to fulfill a Government contract-no more and no less. Therefore, our principal guideline for measuring and allocating cost is to match costs with resources used. The details of our objectives, policies, and concepts are outlined in the published restatement which has just recently come out, and I would like very much to have that document a part of the hearing record. Our major promulgations are listed in appendix A to this statement. We expect 13 additional subjects, now in various stages of research and development, to culminate in cost accounting standards or regulations; these are briefly described in appendix B. At this point, it may be useful to summarize the process by which we identify subjects for research leading to potential new standards. We began operations in 1971 with the benefit of major research work recently completed as part of GAO's feasibility study which supported the desirability of a Cost Accounting Standards Board. That re search included impressive work by groups outside GAO. We used the feasibility study report as one of the major guides in selecting the first subjects for standards; in effect, we started working on the major problems which had already been pinpointed. Our staff provides us with time-phased technical work plans, including proposals for additional topics. We periodically review these work plans. We also keep informed about the entire process of staff research and the development of potential standards. We have from time to time sought and obtained advice about the importance of various subjects. We have asked Government agencies. contractors, industry associations, academicians, professional account ing associations, and others for their suggestions for research topics. We have especially asked for instances where contracting parties found problems or difficulties. Decisions on whether and when to research a subject are based jectives of Public Law 31-379, which established our Board; (2) the importance of contract cost accounting problems in the area; and (3) the subject's relationship to other work of the Board. The Board also has designed a cost accounting practices disclosure statement which must be submitted by companies who receive negotiated defense contracts and subcontracts exceeding $10 million in 1 year. Contractors are required to follow their stated practices in pricing contract proposals and in accumulating and reporting contract performance cost data. As of December 31, 1976, we have received copies of 1,447 disclosure statements from 203 companies. Information from these statements is fed into a computer which can provide aggregate data on any question or combination of questions covered by the disclosure statement. This data bank helps us in our research. Much of this information is published in aggregate form in our progress report to the Congress and is available to the public. The task of issuing sound, fair cost accounting standards is exceedingly complex. To help us achieve our objectives, we continually seek the cooperation of all those who have an interest in our work. We have established active, open consultations with representatives of all groups, including Government agencies, professional and industry associations, the academic community, and representatives of individual companies. There are now more than 1,300 organizations and individuals from all of these groups to whom our proposals are regularly mailed during our research. These organizations and individuals have provided constructive comments. We have had very, very fine cooperation. Recognizing that training on Board regulations and newly issued standards would serve both industry and government, we are participating in established training programs of the Government and of professional accounting and legal associations. In addition, Board members and staff speak to interested groups and participate in panels, conferences, and the like, sponsored by accounting or legal professional associations or by industry associations. These occasions have afforded us opportunities to inform interested parties about the Board and to answer questions and discuss concerns about the Board's standards and regulations. In conjunction with the Department of Defense, we have undertaken special efforts to explain our standards and regulations to European contractors involved in negotiated defense contracts and subcontracts. We have also cooperated with Federal agencies in developing regulations to implement Board promulgations. We sponsored establishment of an Interagency Advisory Committee, to which procurement and finance representatives of DOD, ERDA, NASA, GSA, HEW, and DOT are appointed. This committee meets from time to time to discuss problems of common interest concerning the Board's regulations and cost accounting standards and to discuss ways that all executive branch agencies can act uniformly on such matters. The Administrator of the Office of Federal Procurement Policy, Office of Management and Budget, is chairman of this committee. We receive annual reports from Federal agencies who use our stand |