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Note of Transmittal

OCTOBER 21, 1948. Mr. John W. HANES, Director, Fiscal, Budget and Accounting Project, Commission on Organization of the Executive Branch of the Government,

Washington 25, D. C. DEAR MR. HANES: The Accounting Policy Committee of the Fiscal, Budget, and Accounting Task Force, consisting of the writer as chairman and Messrs. Harry Howell, Edward A. Kracke, Maurice E. Peloubet, Weston Rankin, J. S. Seidman, and Donald F. Stewart, has completed its study of the accounting and auditing of the Federal Government and presents herewith its report. As you are aware, the writer and the other gentlemen named constitute the Committee on Federal Government Accounting of the American Institute of Accountants.

In accordance with the Commission's and your instructions, the Accounting Policy Committee directed its attention primarily to matters of principle and only incidentally to matters of procedure. Specifically, the scope of the undertaking of the Committee has been to determine upon and recommend such a plan of accounting and auditing as will assure, as reasonable costs:

(a) Ready and timely preparation and issuance of integrated summary financial reports by the Federal Government that will meet the managerial needs of the Executive Branch of the Government and the legislative needs of Congress and afford the people clear and understandable disclosure of the use made of the money they provide for the running of the Government.

(6) A sound basis for development of appropriate accounting (including internal control) and financial reporting within the numerous departments, establishments, agencies, and other organizations of the Government. (c) Comprehensive auditing of all the accounts of the Government. Respectfully yours,

T. COLEMAN ANDREWS, Chairman,

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ACCOUNTING POLICY

This report contains a number of recommendations. Some of these recommendations have been made before and are given our support because we believe that the interests of the people would be better served if they were adopted. Most of them challenge established and, in some cases, highly cherished traditions of the Executive Board of the Government or the Congress. All of them are aimed at producing a record that will tell promptly, clearly, and conclusively what happens to the money that the people put up for the running of their Government.

The deficiencies that prompted our conclusions and account for our recommendations as to accounting are numerous; but they all have the same root:

1. There is no formal accounting plan for the Government as a whole.

2. No one is charged with the duty of developing such a plan.

3. There is no one who would have power to install such a plan and compel compliance with its provisions if one were developed.

4. The statutes make no provision for either a complete accounting system or a chief accounting officer to direct accounting activities.

Hence, the shortcomings of the Government's accounting are traceable directly to inadequate statutory provisions for the accounting function. One of the most serious results of these deficiencies is that the accounting is not integrated. In spite of much duplication of account-keeping, a complete set of books is not kept anywhere.

| Consequently, there is no place in the Government where the whole financial picture can be seen. Another result is that some of the accounts are not kept in accordance with principles whose observance would assure the recording of all essential information. Still another is that the accounts do not afford a ready basis for the preparation of complete, conclusive, and understandable financial reports.

An excellent statement of the objectives of accounting was expressed by the House Committee on Expenditures in the Executive Departments in its report of July 31, 1946—Report No. 2713 of the House of Representatives, Seventy-ninth Congress, second session-as follows:

Adequacy of accounting implies the establishment of procedures that will assure timely, orderly, and accurate recording, in books of account, of all assets, liabilities, capital, income, and expense, Dot merely cash receipts and disburse Inents, and timely preparation of statements from the accounts that show how the corporation's capital is being employed and afford the directors and managers of the corporations and the Congress a clear basis for operating and policy decisions. The Committee recognizes that accounting is not the sole objective of administration, but it believes that the Congress has a right to expect the acounting of the Government's corporations to be equal to, if not better than, the best found in private corporations.

While this statement pertains to the accounting of the Government's corporations, it has general validity as a declaration of some of the important objectives of accounting: and it affords a basis for measuring how far short of required standards the Government's accounting falls.

Incidentally, the Government's standards of accounting and financial disclosure suffer greatly in comparison with those that the Government sets for others. In its regulation of private enterprises the Government not only requires full disclosure of financial transactions but also, in some cases, even imposes highly exacting requirements as to how these enterprises shall keep their books. Thus, there is quite a difference between the Government's own accounting and reporting and what it requires of the enterprises of the people who compose the Government.

Our recommendations as to auditing are, like those as to accounting, prompted by deficiencies that stem from faulty statutes. When the office of Comptroller General of the United States was created, it undoubtedly was intended that the holder of it should function as an independent auditor acting as an arm of Congress. However, the Comptroller General was given not only auditing duties but also accounting and other administrative duties that are inconsistent with his auditing duties in that they make him a party to administrative determinations and decisions of the Executive Branch of the Government that he must later review in his capacity as auditor.

Thus, the Comptroller General has been cast in a dual role. He is both a part of the Government's management and this management's auditor. He also is his own auditor. This involves the Comptroller General in the handling of matters that should be left to the sole discretion of the Executive Branch of the Government and makes it impossible for him to function with complete independence as the Nation's auditor. It also makes the General Accounting Office a party to much of the red tape that precludes prompt dispatch of the Government's business.

In addition, when the office of Comptroller General was created, the statute by which this was accomplished did not require that the holder of the office make audits of broad scope. It appears that as far as auditing was concerned, the framers of this statute apparently had nothing more in mind than that the Comptroller General should check

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