We have since raised that $100,000, partly because of reasons of inflation, to $500,000, and we have made certain other very limited types of exemptions.

But the concern that has come to us has been of two kinds: One is from small business who find that this is imposing a heavy paperwork burden on them, and we find that a relatively easy concern to understand. We think they made a pretty good case. We still are at the problem of where do you cut it off? What is a small business?

The other concern has come from companies that have a number of divisions or profit centers, many of whom have been acquired since the initial company was established and still operate quite independent of a parent company, and they are heavily involved in commercial work and they don't understand why they should change the whole accounting system for that division or that profit center simply because they have taken a small percentage of Government work.

This has been the more controversial area because these tend to be divisions of companies which have other divisions or profit centers that do a great deal of Government work. But the concern we are trying to deal with here has to do with the company that has a division or profit center with a very low percentage of its sales to the Govern

ment.

We have proposed an exemption threshold that has been out for comment about 60 days.

Mr. SCHOENHAUT. The comments were due April 18. We are still getting comments. We have received them as recently as yesterday.

Mr. STAATS. We have about 130 comments so far. We are analyzing those comments now, and the Board will be faced with making some decision. We are not committed in any sense to a particular threshold or category of exemption, but we do think we have to respond to the criticism that has come from small business.

You could raise the question of why is the Board interested in that profit center or division that sells mostly to the commercial sector and very small to the Government? We have to be concerned with maximizing competition for Government work. The Government benefits when you get more and more competition.

Then the question is, Do you want to force that company that has 90 percent or 95 percent, 98 percent of its work commercial, and a small part of it Government, out of the Government picture?

Senator PERCY. The reason I am anxious to have your commentary on Admiral Rickover's testimony is, in the case of the Board, he takes very strong exception to it. He says in part, "The Board's recent proDosal to liberalize its exemption criteria for cost accounting standards is an excellent example of an area where the Cost Accounting Standards Board has gone astray." Then he outlines why he thinks that.

Mr. STAATS. We are getting strong statements on both sides. We are getting strong statements from Congress, evenly divided between. those who say we are off the track and those who say we are on the track.

Senator PERCY. I thank you very much, General, and appreciate your being here. Maybe as you drive back to your office you can take a copy of the testimony along and read it. It is most helpful.

I agree with the Senator from Illinois that the record should be kept open. And if you do wish to respond further on your statement or respond to Admiral Rickover or any of the other evidence that is presented here, you have the same privilege that we have offered to everybody else to put your remarks in the record, because we want it to be as complete and thorough as possible.

Mr. STAATS. We appreciate your hearing us this morning, and if there is anything we can do as you proceed with your further work in this entire area, we would be more than happy to work with you.

Senator METCALF. This committee regards you as our special agent. and we respect your professional ability, and we will continue to call on you for help and advice and counsel.

Thank you very much.

Members of this committee, and the chairman especially, are extremely pleased to have as our next witness, Adm. Hyman G. Rickover, the father of the nuclear powered Navy.

As Admiral Rickover will remember, we first started working together at the time that he was trying to get a nuclear powered Navy launched. He was working with Congressman Sid Yates from Illinois, who is a very close personal friend of mine, when I was pleased to first meet and work with Admiral Rickover.

Since that time, we are aware of his contributions of more than half a century to the Nation. He has spoken out forthrightly about problems with defense procurement, education and other matters of interest to the public. And not only forthrightly has he spoken out, but I think he is unable to pull a punch.

Therefore, every time he makes a statement, it is a forthright and sometimes very challenging statement.

Admiral Rickover was the father of the Cost Accounting Standards Board. I can recall it was his testimony which eventually resulted in legislation establishing the Board. This was a particularly noteworthy achievement because, at the time, the accounting profession and Defense Department strongly opposed his proposal. The General Accounting Office study confirmed that what the admiral said was right.

He has been totally vindicated. Because of his familiarity and long years of experience in defense contracting, we have invited him here today to give us the benefit of his views on the subject we are now addressing.

Admiral, you have a prepared statement. You may proceed in whatever manner you wish. Please feel free to revise and extend your remarks for the record so the subcommittee will have the benefit of your best views on the subject.

Behind you are many people who are just as interested in your comments as the members of the committee. Many representatives of defense contractors are in the audience today. So you are speaking to not only the members of this subcommittee, but also to some of the people with whom you worked over the years.

I want to call on Senator Percy for a statement.

Senator PERCY. I join the chairman in welcoming you. My adminis trative assistant, Joe Farrell, who was a submarine officer, has great

And I welcome you as a fellow member of the Navy at a diminutive level. I came in as a seaman. I could hardly see Admirals because of all the braid there. But I developed a great respect for the service in my 3 years and a great respect for you.

I have gone through your testimony very carefully this morning. It is extraordinarily provocative. It disagrees with the approach we have taken in this subcommittee to challenge the industry itself and profession to self-reform and to monitor the steps that they are taking.

We certainly welcome your appearance this morning. I know you are off tomorrow to take the President on a trip in a submarine off the coast of Florida.

I am sorry to tell you that I will have to leave shortly before 12 o'clock, but I did want to be here to hear you particularly. And obviously, if your testimony is 32 pages, any part of it you want to put in the record, the entire thing will go in the record. But certainly the committee will give you all the time you want. I am just sorry I can't stay later than 12.

Admiral RICKOVER. Thank you.

Senator METCALF. Again, Admiral Rickover, we are delighted to have you here. You go right ahead with your prepared statement, or any way you wish.

TESTIMONY OF ADM. H. G. RICKOVER, DEPUTY COMMANDER FOR NUCLEAR PROPULSION, NAVAL SEA SYSTEMS COMMAND, ACCOMPANIED BY THOMAS L. FOSTER, SPECIAL ASSISTANT FOR FISCAL MATTERS

Admiral RICKOVER. Mr. Chairman, I know you plan to leave the Senate at the end of your present term. Unless I can prevail upon you to change your mind, this will be a great loss to the American public. You have an outstanding record as a defender of the public interest. You have repeatedly stood up for the ordinary citizen against the large and powerful public utility firms. You have led the fight in promoting open Government. You will be numbered among the great Senators of the past, such as Senator Thomas Walsh of your own State of Montana, who exposed the Teapot Dome scandal, and Senator George Norris, who was primarily responsible for establishing the TVA. Like those men, you have always been devoted to the public welfare.

Senator Metcalf, I deeply appreciate the service you have given to the people of this country. The review you are now doing of the accounting profession is extremely important. It will take more than your remaining term to correct the problem. Therefore, for the good of the country, I sincerely hope you will reconsider running for another term.

I also am personally grateful for the kindness and generosity which you have displayed toward me in the many years I have had the privilege of dealing with you.

Senator METCALF. May I interrupt a moment?

Thank you for those accolades. The statement urging me to run for

Congressman Bacus, heart failure over in the House of Representatives. [Laughter.]

Admiral RICKOVER. I know you are a humanitarian, but not to that extent. [Laughter.]

Senator Percy, you still have your way to make. I am sure you will succeed by emulating a very famous Congressman from your State. Do you know who I mean?

Senator PERCY. Well, Senator Dirksen was a Congressman at one time.

Admiral RICKOVER. Abraham Lincoln. [Laughter.] I am setting for you a much higher goal than Senator Dirksen. [Laughter.]

We are both Illinoisians. I remember my grammar school days when every day the teacher would have us sing "America" followed by the song "Illinois." Now, I could sing it, if you will join with me. [Laughter.]

Senator PERCY. Admiral, I will be happy to.

Admiral RICKOVER. How about us doing this: If I say the words, will you repeat them in song? [Laughter.] You don't want to do that, so I will just read the words.

Senator PERCY. As a matter of fact, I sang that last night at an Arabian dinner.

Admiral RICKOVER [reading].

By thy rivers gently flowing,
Illinois, Illinois,

O'er thy prairies verdant growing,
Illinois, Illinois,

Comes an echoing on the breeze,
Rustling through the leafy trees,
And its mellow tones are these:
Illinois, Illinois.

Its mellow tones are these:
Illinois, Illinois.

I just want to establish this rapport between us. [Laughter.] Senator PERCY. I hope you are allowed to use it and the American Musicians Association does not prevent me from singing it.

Admiral RICKOVER. Military music is to music, some other expres

sion.

You have asked me to appear today in connection with the study by the subcommittee staff on "The Accounting Establishment.”

Because I am a naval officer and an engineer, I cannot debate fine points of accounting theory. In defining the problems with the present system of accounting in the United States, it is difficult for me to add to the findings of your staff study. However, I can and will give you some observations from my own experience which I believe are relevant to the issues you are considering.

It is apparent from your staff study and from even a casual reading of the daily press that the accounting establishment is facing a crisis. Public confidence and respect in the accounting profession is eroding. There is growing recognition that accountants have not been meeting their responsibilities to the public.

The importance of these hearings to the public welfare is emphasized by the major findings of your staff study; the lack of ad

system of reviewing the work of independent auditors; the need for independence of auditors or publicly held corporations; the need for strict enforcement of a code of ethical standards for accountants.

I would like to make a point about Congress that seems to me historically significant. Congress was, as you know, not the first parliamentary body. The earliest was the Spanish Cortes which first met in 1250. The English Parliament was founded some two decades later. In short order, similar representative assemblies appeared in other European countries in response to the King's request for funds to finance extra-ordinary expenditures-usually wars.

In feudal law, the King was expected to live from his personal estates. If he needed more money, he had to request it from the representatives of the three feudal estates-nobles, clergy, and towns. These representatives used the King's demand for funds to obtain from him certain powers, the first of which was the oversight function-the right to check on whether the King used these funds for the purpose for which they had been granted.

After viewing the operation of the British Parliament, Edmund Burke said that ultimately the primary function of that body would be its oversight function. His observation is essentially true of all parliamentary bodies which began to acquire the right to legislate only in the 1300's-several decades after they acquired the right of oversight over the expenditures of funds and even assumed the right to impeach the royal councilors for improper use of these funds.

In England, Parliament obtained legislative power only because of the King's dependence on parliamentary grants of money. The King eventually had to concede first the right of Parliament to petition for specific laws, then to associate itself in lawmaking, until finally the right to legislate passed entirely from the King to Parliament.

Your staff study, and these hearings, are an excellent example of a legislative body discharging its oversight function in the field of accounting, a field that has been too long ignored.

Leonard Spacek, himself a prominent accountant, said 20 years ago: There is only one reason for misleading financial statments. It is the failure or unwillingness of the public accounting profession to square its so-called principles of accounting with its professional responsibility to the public.

His statement rings true today as it did then.

One of the fundamental issues being considered in these hearings is: Who should establish accounting and auditing standards for financial reporting? In my view, the Government must take a more active role in these activities.

For many years, I testified that the lack of uniform accounting standards was a serious deficiency in defense procurement because it allowed contractors to account for costs in almost any manner they chose. As a result, it was not possible to determine costs or profits on defense contracts without spending months reconstruction the contractor's books.

With the creation by Congress of the Cost Accounting Standards Board, and its requirement for standards and for company disclosures regarding their actual cost accounting practices, some progress is being made in this area.

However, rather than promoting such reforms, the accounting pro