Up to now, Federal agencies have not permitted reimbursement of a com pany's cost for financing facilities for performance of Government contracts. This encourages defense contractors to continue using old and outmoded plant and equipment, since the Government does reimburse them for their entire labor costs. This adds to defense costs.

The new standard changes facilities investment expenses from an open-ended profit factor to a documentable cost factor. It will permit procurement agencies to discriminate more effectively between contracts in which a contractor has made a significant investment of his own funds and contracts where this is not true.

Six: The staff study also cites as disturbing the Cost Accounting Standards Board's recent proposal to increase exemptions from cost accounting standards. The study states that adoption of the proposal would impair the application of cost accounting standards to major contractors the reason for which the Congress created the Cost Accounting Standards Board.

Section 719 (h) (2) of the Defense Production Acts of 1950, as amended, authorizes the Cost Accounting Board.

to prescribe rules and regulations exempting from the requirements of this section such classes or categories of defense contractors or subcontractors under contracts negotiated in connection with defense procurements as it determines, on the basis of size of the contracts involved or otherwise are appropriate and consistent with the purpose sought to be achieved by this section.

Since its creation, the Board has viewed its exemption authority as a responsibility which must be exercised with great care to insure that the purpose of the law is not frustrated. With this in mind, the Board has made a series of studies of numerous classes and categories of defense contractors and subcontractors, to determine which could properly be exempted. No class or category has been exempted by the Board unless the information available clearly established that the exemption was appropriate and consistent with the act's purpose.

The purpose of the act is clearly stated in its requirement that the Board promulgate standards designed to increase uniformity and consistency. However, the act states that the Board shall take into account the probable costs of implementing a standard with the probable benefits. This requirement was amplified in an amendment to the act in 1975 which specifically included in the probable benefits improvements in pricing, administering, and settling contracts.

Consequently, if the Board finds categories of contractors-small business, for example-where such improvements would be consistently small in relation to the probable costs of implementation, it considers that exempting such a class of contractors would be appropriate and consistent with the purposes of the act.

The Board has been studying for some time the subject of exemptions for small business concerns and predominantly commercial companies. We have gathered substantial data as who would and who would not be exempt under the proposed modifications to the Board's regulations, and we have received numerous comments in response to our proposal.

It is difficult to achieve the proper balance between exempting concerns whose alleged problems in implementing standards out weigh the benefits and assuring that those companies whose cumulative activities affect defense procurement are covered. This matter is still under consideration. We are grateful for the views of your staff on this

*We have, I might add here, received about 130 comments from rious respondents. The Board in no sense has made up its mind in is matter. We are still seeking proper balance in the benefit versus

st.

Seven. As a final point, the staff study questions CASB's need for resenting public service awards to organizations such as AICPA, hich it so honored in 1976. The award was made in recognition of e assistance received from the CASB Committee of AICPA in proding the Board and its staff with information and advice during e many phases of the Board's research into potential cost accountig standards.

The AICPA Committee has participated extensively in the Board's esearch and has met frequently with its staff to discuss proposals nder consideration. The Board has seen no indication that committee embers have attempted to influence the Board to serve the interests f the accounting firms represented on the committee or of clients of hose accounting firms. In fact, the contrary has been true on some ccasions.

For example, in commenting on standard Number 409-"Depreiation of Tangible Capital Assets"-the AICPA Committee agreed n general with the accounting principles provided in that standard. Since the fundamental requirements of that standard were generally opposed by most of industry, one can conclude that the AICPA's views represented the objective and technical judgment of professional

accountants.

The Board believes that the comments it receives on its proposals from all professional accounting associations are essential inputs to its research. Those inputs generally deal with the cost accounting concepts involved and are not viewed as an attempt to subjectively or improperly influence standards set by CASB.

In conclusion, I welcome these hearings, which have brought to public attention issues which need to be aired. While I disagree with some of the criticisms and recommendations made in the staff study, that is in no sense to detract from the value which I think these hearings have had. And we would be delighted to work with you and your staff in the future on any further suggestions for more prudent operation of our Board which you may have. [Material submitted for the record follows:]

During the April 19, 1977, hearings of the Subcommittee on Reports, Accounting and Management of the Committee on Governmental Affairs, you expressed some concern as to the adequacy of governmental accounting. In view of your interest, I thought I might provide you with some current observations on this subject.

A great deal of attention has been focused in the last year or so on statements made by representatives of Arthur Andersen & Co. which implied that the Government did not employ the accrual basis of accounting in its financial statements. The statement was widely misunderstood. It is true that the statements prepared by the Treasury on a consolidated basis for all Government Agencies are on the cash, not the accrual, basis of accounting. However, the accounting systems used by individual agencies to show their own financial condition are mostly on the accrual 'basis.

Following the Arthur Andersen study, the Treasury Department started a program to develop financial statements for the Federal Government that would show the consolidated financial position of the Federal Government and the results of its operations on the accrual basis. We have been working with the Treasury Department on this project. A preliminary statement was published for fiscal year 1975 for the purpose of obtaining comments. A more complete set of statements is being prepared for fiscal year 1976. These statements will be available sometime in August. In subsequent years, the timetable for preparation will be

much shorter.

To return to the situation regarding accounting within Government Agencies, it is by no means perfect but not as bad as many believe who see only the horror stories that appear in the newspapers. Under the Budget and Accounting Procedures Act of 1950 the Comptroller General is charged with prescribing the accounting principles and standards to be followed by the Federal Agencies. We require use of accrual accounting as a part of our accounting principles and standards. By recent

Government.

The accounting principles and standards for nearly all

--98 percent--of these systems have been approved by us as conforming to our standards and thus then have accepted the accrual basis for their accounting systems.

We give formal approvals when the accounting systems have been designed in accordance with the approved principles and standards. About 52 percent of the executive branch systems have now been approved. To the best of our knowledge, the remainder are largely operating on the accrual basis but have one or more features which do not conform to our principles and standards and we are working to get changes made to make it possible to approve these systems too. Our goal is to have them all approved by 1980, provided, of course, the agencies qualify them for approval by that time.

Approvals, of course, do not guarantee that the systems will remain satisfactory since there are constant changes. Consequently, we also maintain an audit effort to be sure that any changes do not make the systems unacceptable under our principles and standards.

I wish I could assure you that Government accounting systems are all functioning effectively. Of course, I cannot, but there are some very good systems now operating in the Government and the level of competency increases from year to year.

If you desire I will be pleased to discuss the above with you in more detail.

Sincerely yours,

SIGNED) ELMER B. STAR

Comptroller General
of the United States