out and work with them directly in their offices over these drafts and get their comments and suggestions and problems that they have, so we can minimize the number of meetings we have to have and the length of those meetings.

We are not against the idea of having these meetings open, and any way we can find to deal with it, we will deal with it.

The part of the process which is probably most likely that we could make public would be the final stages; that is, after a proposal has gone to publication in the Federal Register and we have public comments in, then it is possible we could explore that avenue. But this is still a matter under discussion in our Board, and we will do something along these lines if we possibly can.

Senator METCALF. I know you will, and you have.

We have had some criticism during the course of these hearings in trying to make an analogy between the activities of the Cost Accounting Standards Board and the activities of the FASB in the private sector. There has been an assertion that if we adopted the system of standard making that you have in the CASB, we would have a bureaucratic inflexible standard-setting procedure that would be so rigid and unworkable that it would hinder the progression of standard setting.

Now, your experience in the 6 years of the Cost Accounting Standards Board, where three of the five CASB members are from the private sector, has been that you do have flexibility; you can set standards. Somebody the other day said that the standards set by the CASB, because of the relationship between the Defense Department and contractors, is a standard set for the whole industry.

Do you think the CASB can be criticized as bureaucrats establishing standards that are out of touch with the realities in the rest of the accounting world?

Mr. STAATS. No, sir, I do not. The reason I have gone into the length I have here to describe our process is I think it has been a flexible process. I think it has been an open process. We have operated with a very small staff in doing it. But, at the same time, having said that, I want to emphasize the point I made in the statement; that is. we see our function as being quite different from that of the FASB in that we are representing the buyer of a commodity in determining the way costs should be allocated between the Government's procurement and the commercial work of a company.

The reason for the Board's coming into being in the first place was the feeling that the cost accounting standards applied by the armed services procurement regulations were too loose. They were not specific enough and there were uncertainties about costs on both sides Government and the contractors' side-resulting in a lot of controversies, disputes, and delays.

So in a sense what our Board is doing is performing a function which might have been performed by the procuring agencies themselves. We are in the business of setting the rules by which the Government buys for its own needs.

The FASB, on the other hand, is concerned with financial reporting, financial disclosure and the rules by which financial operations are made available to the public, to the investor, to the whole public com

Now, I indicated in my statement that I felt that this latter function can be and I hope will continue to be done in the private sector. But I also emphasize it ought to be done under close surveillance by the SEC. I think it is important the SEC monitor that very closely, because there is a governmental interest, the public interest, in how those standards are established.

But on the bureaucratic side, I would not accept the criticism as being applicable as far as we are concerned.

Senator METCALF. What you are saying, as I understand it, is that you have a special client-that is, the Government of the United States-and that CASB standards coverage is 75 percent from the Department of Defense and 25 percent from other Federal agencies. And that is quite a different narrow, and very special approach rather than the approach that the FASB has in the private sector, administered and regulated by the SEC.

Mr. STAATS. That is correct. We have many of the same kinds of problems the FASB has, because any time you start narrowing the options that a contractor has as to how you are going to allocate his costs, you are going to require him to change his practices. That is the whole function of the Board, to bring about greater consistency and uniformity in the way these costs are allocated on these negotiated

contracts.

We are not at all surprised we have a lot of people who are critical of our Board's operation, because they feel the way they have been doing their cost accounting is a good way to do it, and we are requiring them to change the way they have allocated costs in the past. All that we can do in any given situation is try to be fair and equitable, and develop professional standards.

Senator METCALF. Thank you, very much.

Senator Percy?

Senator PERCY. Thank you very much.

General, it is always a pleasure to have you back here. We appreciate your help very much indeed.

I wonder if you have had a chance to look over Admiral Rickover's testimony he is going to give immediately following your own? Mr. STAATS. No, sir, I have not.

Senator PERCY. You have not. I find it very hardhitting. He is not an easy puncher and this time he really lets go and his recommendations are very, very strong and seems to be diametrically opposed to the approach you are recommending.

If it would be possible for someone from your group to stay and listen to that, I think that we would like to have the benefit of postanalysis, then, of his testimony, too.

Have you spent a great deal of your life working with major accounting firms?

Mr. STAATS. I have only since I have been Comptroller General. I have had a great deal of contact with these firms, big and small, since I have been Comptroller General, and particularly since the Cost Accounting Standards Board was set up back in 1971. But we have had need for close relationships with the accounting profession all through the history of the General Accounting Office.

Mr. Scantlebury here is in charge of the work we do in the whole accounting systems field, in the auditing standards that we have issued

and developed in conjunction with the accounting profession, Government people, State, and local people. We have issued standards which are now in use to a very considerable extent by all of the public accounting firms who audit State and local governments and Federal assistance programs.

We have worked with them in trying to improve the standards of financial reporting for State and local governments.

All I am trying to say is we have had need for close relationships on the GAO side, Mr. Scantlebury particularly, with the accounting profession.

Senator PERCY. So that the basis of your recommendations that the profession really in a sense be given the opportunity for self-reform, is that you would really prefer that to a mandated, regulated, legislative approach to this, is based on working experience that GAO has had with our accounting firms in the private sector. And you feel that though there are some serious problems which they have brought forward and testified to, they are not the kind that, with proper determination and will and maybe the breathing down their back a little bit, of the Congress, that they cannot do this job themselves. Is that right?

Mr. STAATS. The acceptance of modification in the rules in the accounting profession is a very difficult matter. It has been difficult for industry to accept modifications that our Cost Accounting Standards Board has developed. But they can understand that a little easier if the Government itself is the buyer of that commodity and the Government has to set the rules, as against going out for advertised procurement.

In the private sector, it seems to me the acceptance of the changes in the rules that have to be brought about to get greater consistency in the financial reporting practices will come easier if industry and the accounting profession and the public organizations work together to try to narrow options and develop those standards. I think the acceptance will be greater than anything that could be done by the Government to impose them.

Obviously, the Government could do this. Nobody in or out of Government, I think, questions it. It is a question of which is the better approach.

I have come to the conclusion that the SEC ought to monitor this. They ought to encourage it. They ought to try to help. But this ought to remain primarily in the private sector.

Ultimately, if that is not successful, then, of course, the Government may have to take action. But I am not persuaded by any of the experience to date of the FASB, although they have had problems. I think the new structure committee that Mr. Palmer chaired is a good move, and if those recommendations are accepted for the most part, I think they could go a long way to meet the kind of problems FASB

has had.

Senator PERCY. The reason I suggest that someone from GAO stay for Admiral Rickover's testimony-I don't want to preempt that testimony at all-he gives 13 specific recommendations. The essence of them is that the profession will not and cannot do it. Their associations are protective associations, in a sense, to protect them against the outside

I think we would appreciate very much your analysis subsequently to those recommendations and putting your expertise to work on them and giving us the benefit.

Mr. Chairman, if we could hold the record open to the General's subsequent submission in writing to be immediately following Admiral Rickover's testimony. I almost would have preferred to have Admiral Rickover come first and have you have a chance to hear him, because he is a highly respected man and he is hitting pretty hard in this area. But I think this is the best alternate approach. I didn't know his testimony was going to be of this hard-hitting nature. But it is thought-provoking, without any question.

I would like to explore with you further a more descriptive and hopefully quantitative analysis of the cost benefit related to CASB's activities thus far in the short history. Could you expand on the assumption used in DOD's estimates referred to on page 7 of your testimony?

In your mind, what are the real benefits of CASB's efforts? Would it be appropriate to have a separate study conducted as to the additional cost of the private sector versus savings to the public sector? What are your critics saying in this regard? Will any additional costs, if any, be passed on to the Government anyway?

Mr. STAATS. I think there had been some misunderstanding among those who have been critical that this has been all cost and no benefits. That certainly is what the Aero-Space Industry Association report indicates. When the Board was first established, it was established as a result of a feasibility study which the GAO was asked to make. Frankly, when the idea first was discussed, we didn't know whether it was a feasible thing to do or even a desirable thing to do.

But we conducted an 18-month study where we had the benefit of the advice we could get from people throughout the country, and we concluded it was both feasible and desirable to have these standards, primarily from the point of view of getting better cost information available to be used at the negotiating table. This was to be the real benefit, the primary benefit of cost accounting standards so that you could have understood ground rules of how you are going to allocate pension costs, overhead costs, all these other costs which involve the company that is doing commercial work as well as Government work. We felt there would intangible benefits in terms of reducing the time required in handling disputes because of the arguments about cost allocation, and in maintenance of records which many companies kept for many years because of the danger of having to go to a contract appeals board.

There are many things of this type which we felt would be beneficial, including making audits easier. In these categories are where there are benefits.

I don't know of any way you can quantify the benefit that comes from having better cost information around the negotiating table with the Government on one side and the contractor on the other side go into the negotiating process. This has been the reason it is so difficult to measure these benefits in any quantifiable way.

Having said that, we haven't ignored the problem in any sense of the word. About 3 years ago we had an evaluation conference, as we

John Andersec

SODILATE ON this is sponsored by Congressman neems that he heard also about the

problem of er fra mama nas In each of the s reportlane, we have a section, now in the prefatory titers that of or with the standard saying how the Board reached eve that the benefits outweigh the costs of that staniari. Fit 200 easy to deal with it in a way that adds up in two columns an I say the rst-benefit ratio is 2 to 1 or any other figures.

Senator PERCY. In your support of private sector self-reform in your testimony, you specify Surger Bass Palmer's Structure Committee recommendations. One of these recomendations is that FASB Board meetings be open to the publis, an i I had difficulty reconciling this with the position you have taken in your testimony on page 13 that the sunshine regulation is not appropriate for CASB's regulation. When this committee reported out sunline legislation, we had longextended negotiations, as you know, with Arthur Burns in certain areas that are highly sensitive. But could you reconcile what appears to be a contradiction here then, if you support those recommendatons and yet point out the dangers of sunhine legislation applying to them 4

Mr. STAATS. We discussed this a while ago when you had stepped out. You might want to refer to appendix C of our statement which outlines in some detail the problems that we have. These are not probems of principle. They are problems of practicality, how we can operate in such a way that we don't disclose confidential company inFormation which is made available to us on a voluntary basis and wet we would have difficulty sorting out in a discussion in open ceng how to retain that confidentiality in an open discussion. As I mentioned to Chairman Metcalf we are giving some thought to the possibility in the final session before promulgating a standard at that session might be open to the public. But most of the work that takes place prior to that stage. I think, is properly characterized as reseek and fact-finding analysis rather than policy discussion.

Senator Pracy. I understand that one of the current issues facing De CASB and which you refer to actually on page 19 of your testimony involves increasing exemptions for smaller contractors. Would you expand on the problem facing the Board on this issue? How do you see the issue being resolved, particularly if there are separate units of large firms!

Mr. Seyars. The Congress had great difficulty, as did the GAO, in the beginning, of finding a cutoff or threshold, and there were various proposals made for exempting certain categories. Congress finally left it to the Board except to say contracts under $100.000 would not be covered. They were getting at a cost-benefit type of a judgment. The Board was left with the guidance that we should take into account costs and benefits in establishing the exemption threshold or exemption