Mr. BROOKS. Assuming the idea Mr. Costello had in mind with reference to authority that you want, if the General Accounting Office reserves the right to any final audit in effect doesn't that give the G. A. O. the right to veto any of the rules and regulations set up by the War Deparment?

Mr. YATES. Well, it would certainly give the General Accounting Office the authority to determine finally what is to be paid and in that way it would, I suppose, properly be said to be a veto over the recommendations of the department.

Mr. BROOKS. Because if the War Department or the Navy or any of the other 23 departments would begin a policy of allowing a certain type of claim which you frowned on then in effect you would be vetoing their policy; isn't that correct?

Mr. YATES. That is absolutely correct, sir.

Mr. BROOKS. If that is the case then should not the G. A. O., under your suggestion, write up the rules and regulations in advance?

Mr. YATES. We would have to write up some rules and regulations, Mr. Brooks, to chart the way.

Mr. BROOKS. And those regulations would cover the 23 agencies of Government that have authority now to settle these contracts?

Mr. YATES. That would be no different so far as it concerns a settlement of a claim by the General Accounting Office than the present practice of the General Accounting Office which has endured since the Budget and Accounting Act of 1921.

Mr. BROOKS. But if that is the case as a matter of fact, the policy would be set by the General Accounting Office, wouldn't it?

Mr. YATES. That is true of claims submitted by all these departments to the General Accounting Office now.

Mr. BROOKS. And the matter of adjusting would be a matter of detail and routine by the 23 agencies?

Mr. YATES. Up to the point of making the administrative recommendations as to what amount should be paid, and that too is similar to present practice with respect to the settling of claims generally.

Mr. BROOKS. Most of the cases covered by Mr. Warren are cases which seemed to me to cover questions of laxity in the enforcement of the rules and regulations rather than in the rules and regulations themselves; isn't that right?

Mr. YATES. Of course, those cases, Mr. Brooks, represented the expenditures, or failures to make collections under contracts, existing contracts. They had no connection with termination settlements but were offered merely to show the record of some contracting officers as indicating their inability to be entrusted with this kind of program.

Mr. BROOKS. As I heard them they referred largely to a question of laxity in the enforcement of the rules and regulations rather than in the rules and regulations themselves, although in several instances they did refer to the regulations themselves.

Mr. YATES. I describe it rather as-if I had to describe all of these items with a few general terms-I would say that they indicate carelessness, laxity, and overgenerosity on the part of contracting officers with contractors.

Mr. BROOKS. That is the point I am getting at. Now, have you put in the record anywhere your objections to the present rules and practices of the 23 departments?

88467-43-pt. 2――31

Mr. YATES. Under war contract termination settlements?
Mr. BROOKS. Yes.

Mr. YATES. We have criticized the regulations of the War Department and so far as we know the War Department is the only one of the war contracting departments which has as yet promulgated complete regulations on the subject.

Mr. BROOKS. You have not covered any of the other 23 departments at all?

Mr. YATES. So far as we know they have not issued regulations on the subject.

Mr. BROOKS. And insofar as the War Department regulations are concerned, as you state, your criticism is largely in the enforcement of the regulation rather than in the regulations themselves?

Mr. YATES. No, Mr. Brooks. Our criticism is that these regulations are so open as to leave to the determination of the contracting officer most any and everything that might be considered as payable items to the contractor. That they leave more power in him to take final and conclusive action than should be left.

Mr. BROOKS. Are you prepared then to give this committee considering this bill some idea in concrete form of the type of rules and regulations you think should cover these 23 agencies of Government?

Mr. YATES. Yes; we could lend our assistance to the departments and to the committee. We could point out very clearly to you wherein we think the regulations of the War Department are too open and too loose. When the committe is ready to advise the General Accounting Office to what extent it is going to be concerned with these settlements. and on what basis, then, of course, we could give the committee some idea what we would require. Until we have that indication it is impossible.

Mr. BROOKS. Don't you think that your suggestions ought to include in your rules or regulations you propose some idea as to just how far you think the Accounting Office ought to go?

Mr. YATES. In what respect?

Mr. BROOKS. In respect to the responsibility in closing out these war contracts.

Mr. YATES. We have said that.

The CHAIRMAN. If they close them out at all, they want to close them out.

Mr. YATES. We have covered that. If you mean, Mr. Brooks, what degree of supporting evidence or data the General Accounting Office would require, we can, of course, do that in proper season. We cannot do it now.

Mr. BROOKS. I refer to the exact responsibility which the General Accounting Office might want to asume in reference to closing out the audit.

Mr. YATES. We do not wish to assume any authority unless the Congress should give us a part in the picture which could be performed effectively to safeguard the interest of the Government. Unless, therefore, the Congress should determine that the General Accounting Office is to make the final settlement after the administrative determination and record are forwarded to the General Accounting Office and after advance payments are made, we are of the opinion it would

be a waste of money to place the General Accounting Office in any part of the picture; that the results flowing from the money expended would not justify the cost.

Mr. HARNESS. I would like to ask Mr. Warren just one question that I would like to try to get straight. Judge Patterson, the Under Secretary of War testified, and I think you heard the testimony of the gentleman who preceded you, Mr. Bodman, counsel for this Automotive Council for War Production, they say that the contracting agency should be given the authority to finally and conclusively settle all of these terminated contracts subject only to review by your Office for fraud and bad faith. Now, as I understand, they contend that is a very simple matter for you to review those contracts to find any fraud or bad faith. I understood you to say a few minutes ago it would be impossible for you to find any fraud unless you were permitted to make the final settlement.

Mr. WARREN. Now, Mr. Harness, whoever wrote those regulations I put in the record, of the War Department, his conscience ought to hurt him. I will tell you now that under those regulations it is utterly impossible for us to detect fraud in any way, shape, or form. It would be just a mockery, as I stated before, to send to the General Accounting Office the record that they propose to send. Do you know what they propose to send? They propose to send over there the termination agreement between the War Department and the contractor containing just whatever they might want it to contain. They are terminating the contract and say, "Here, we will pay $5,000,000," and they accompany it by a voucher. That's all it is. Now, I stated before that a $1,200 clerk could look here and see that this agreement provided for the payment of $5,000,000. And there is the voucher for $5,000,000. Check! That ends it. It would not be any audit.

Mr. HARNESS. As was suggested, would it be possible to keep a complete record of the transaction which you could review to determine whether there was fraud?

Mr. WARREN. Of course, it would be possible. But they do not require it. They say, "Oh, no. That takes time. We cannot have any record."

The CHAIRMAN. Are there any further questions?

Mr. JOHNSON. In your proposed review would you review some matters which were the judgment of the contracting officer in the settlement?

Mr. YATES. We would review the entire record made to support the termination or rather the determination of what final figure is due. Mr. JOHNSON. In that determination there there are quite a few intangible things that really rest on what their combined judgment is as to what should be paid.

Mr. YATES. Those things, intangible things, in cost-plus contracts operations, we are not going to have trouble with that.

Mr. JOHNSON. Would you accept their judgment as to that? For instance, this morning one man testified it would cost his plant $3,000,000 to get back on a basis to manufacture what they manufactured before the war. Now, he might logically claim you would put him out of business, and that you ought to reimburse him the $3,000,000 to get him back where he was in 1938 and 1939. If the Army gave him

$575,000 for that, is it your idea that item would be reviewed by you? There is no supporting data for it except his voucher.

Mr. YATES. I can only answer that by stating, as merely my personal opinion, Mr. Johnson, that would not be the way to approach the problem at all. The question here is what losses has that contractor suffered because of termination of his contracts by the Government, and not what it is going to take him to get back into business. If the Government wants to give him that $3,000,000, it would have to give it under some other authority or program.

Mr. JOHNSON. In other words, in many factories many of those figures would not be supported by the actual cost of goods, you realize that?

Mr. YATES. By receipts you mean?

Mr. JOHNSON. Yes.

Mr. YATES. We would have to require a reasonable record, as the Comptroller General stated. What we would require is a requisite minimum. We fully understand that.

Mr. JOHNSON. It would be a rather detailed accounting so you could could render a just decision in your own mind?

Mr. YATES. We cannot get into that now because I do not know the

answer.

Mr. JOHNSON. I want to renew the question put to Mr. Marks; if we authorize the Comptroller General to appoint an officer, called a termination officer, to work with the contracting officer and the contractor, and they sat down and negotiated the whole deal and when the two of them agreed on any item or on the final item, if one of them was an appointee of the Comptroller General, would that satisfy your ideas? Mr. YATES. Who would the other two be?

Mr. JOHNSON. They would be the contracting officer and the contractor and the officer appointed by the Comptroller General called the termination officer. Those three would sit down and go over the whole thing. Your appointee would be there to participate and have available to him data from both parties and finally they arrive at a conclusion, and whenever two of them agreed, one of them having to be the agent of the Comptroller General, that would be binding. Would that be a satisfactory way to handle that, do you think?

Mr. YATES. I do not think so, sir.

Mr. ELSTON. If that is true then the original contracting parties of the Government and the War Department, on the one hand, and the contractor, on the other hand, could completely overrule anything that the General Accounting Office might decide upon?

Mr. YATES. And furthermore you would be injecting the General Accounting Office authoritatively into the administrative field of contracting where the Congress said it shall not be.

Mr. ELSTON. It might as well not be there at all.

Mr. KILDAY. It would also destroy any audit if they did agree because then they would be in the position of defending the agreement. Mr. YATES. Yes.

Mr. CLASON. As a matter of fact, they do not ask for that. They want to have a review of their contracting officers. As I understand it they have boards of higher officials too, do they not?

Mr. YATES. I think the War Department probably would object to that.

The CHAIRMAN. Let me again thank you, gentlemen, for your appearance. We think you have been very helpful.

Mr. MARBURY. May I offer for the record a letter from the Under Secretary?

The CHAIRMAN. Yes, sir; when was it written?

Mr. MARBURY. It was addressed to you today.

Mr. THOMASON. I think, Mr. Chairman, we ought to read this letter. I have an idea it is some kind of reply to what the Comptroller General has been testifying about. There ought to be some end to this somewhere.

Mr. WARREN. I have read it. I have no reply to make. It answers nothing.

(Whereupon the committee went into executive session.)

(The statement of George W. Stratton, chairman of the Stratton committee of The Aircraft Parts Manufacturers' Association of Los Angeles, is filed herewith and made a part hereof:)

TERMINATION OF WAR CONTRACTS

Submitted by The Aircraft Parts Manufacturers' Association (Stratton

committee)

The Aircraft Parts Manufacturers' Association believes that the Government must adopt policies regulating the termination of war contracts that will be equitable for the Government, prime contractors, and subcontractors.

We favor prompt establishment of uniform policies and procedures which will assure speedy and equitable settlements of terminated contracts by the procurement agencies of the Government. The overly expanded aviation industry is especially concerned with the problem of settling terminated contracts and terminations already experienced have proved the inadequacy of the present procedures to cope with the much larger number of terminations which may be expected.

Appropriate termination procedures cannot be established in the absence of legislation granting to the various persons and bodies concerned adequate power to accomplish certain desired results, and consequently the immediate adoption of enabling legislation of sufficient scope to insure the establishment of appropriate policies and procedures is imperative. We believe that such legislation should include the following points:

1. A broad declaration of national policy regarding the settlement of war contract termination claims. Such a policy should embrace the prompt payment to contractors and to subcontractors of fair, full, and reasonable compensation, including profit as the result of costs and obligations incurred in connection with the war effort and should recognize the fact that the post-war prosperity of the country will be dependent in large measure upon the carrying out of this policy. 2. Provision insuring the continued availability, notwithstanding the termination of a contract, of advance payments and partial payments.

3. Express recognition of the right of contracting officers to enter into negotiated settlements of the amounts due under terminated contracts, which settlements will be final and binding upon the Government in the absence of fraud. We agree with the statement made by the Under Secretary of War and the provision in H. R. 3518 introduced by Mr. Vinson that termination adjustments can be made promptly only by negotiation. Any veto review by the General Accounting Office would vitiate the advantages achieved by negotiation. Contracting officers are better trained and more familiar with the problems involved than any accountant or engineer that General Accounting Office could provide for this task. Obviously, someone who had administered a contract and has followed the production and manufacturing problems of a particular contractor and who is familiar with his accounting procedure is better qualified to determine cancelation problems than a total stranger to the individual point. We feel that if the contracting officer is capable of protecting the Government's interest while the contract is being performed he should likewise be capable of protecting that interest upon cancelation. Further, the procurement agencies have an established