The CHAIRMAN. We had better insert your entire statement at this point, and then you may proceed with your oral statement. (The matter referred to is as follows:)

STATEMENT OF ROBERT F. KELLER, ASSISTANT TO THE COMPTROLLER General: ACCOMPANIED BY KARNEY A. BRASFIELD, ASSOCIATE DIRECTOR, ACCOUNTING SYSTEMS DIVISION, GENERAL ACCOUNTING OFFICE

Mr. Chairman and members of the committee, the General Accounting Office appreciates the opportunity of appearing before you on H. R. 8832, H. R. 9834, and H. R. 9835, 83d Congress, all of which would establish a means to control or limit commercial and industrial-type activities of the Government which are in competition with private industry.

At the outset I want to say that we do not feel it is a proper function of the Comptroller General to flatly recommend that the Government should or should not engage in activities which possibly could be carried on by private industry, or to spell out which activities should or should not be performed by the Government. These are matters of policy for decision by the Congress and by the Executive. There is no doubt, however, that there is a need for a reexamination and perhaps a continuing examination in the area of participation by the Government in business activities. That Government is in the field of business is true in quite a number of instances. The reasons for getting into the area vary greatly. I doubt if the Government will ever wholly withdraw from all commercial and industrial activities. However, those that are necessary ought to be able to stand the test of reappraisal from time to time.

In attacking the problem of Government activities in competition with private business, three separate classifications seem to be apparent. The approach to each may call for quite different rules.

First, where the Government makes, processes, or stocks goods for its own use, either in the same or another department. Examples-paint, coffee, rope. Many more could be added, such as shipbuilding, military clothing, mailbags, brooms, securities printing, bookbinding, and warehousing. Related are services such as transportation, including MATS, MSTS.

In all of these fields private, taxpaying enterprise is also in operation and might conceivably be in position to deliver the goods as and when needed. The policy question of which to use may be decided by Congress when the activity is authorized or its budget approved; more often, perhaps, Congress prefers to leave the question for management to decide. We hope always that cost will be the first determinative. But there are others. Military necessity may dictate that the department do the job itself, as the best guaranty it will get done. This may be most serious in time of emergency, or when there is a risk of critical material shortages or stoppages due to labor troubles.

Social policies may also dictate Government performance. The Federal prisons furnish employment to prisoners, as a means of human rehabilitation essential to an enlightened penology. To avoid competition of its products in the market place, the law tells the departments to buy first the products of the Federal Prison Industries.

Other activities may be so technical, scientific, secret, or sensitive as to prevent the employment of independent contractors, whose workers might not be under such immediate or possible effective control.

In the second class of Government activities paralleling commercial enterprise are the numerous agencies selling a product or service to the general public. In order to adopt the flexibility and freedom of control common to private business, it became customary to charter these activities as Government corporations. The TVA sells power, VICO sells sugar, FNMA buys mortgages, FHA insures mortgages, CCC buys and sells grain, and Export-Import Bank and others make loans. The Government Corporation Control Act, 1945, provides that Government corporations be audited by the General Accounting Office in accordance with the principles and procedures applicable to commercial corporate transactions. Stated as simply as possible, the primary purpose of the audits is to determine how well the corporation under audit has discharged its financial responsibilities. Since 1945 the Comptroller General has submitted to the Congress numerous audit reports and recommendations on these corporations, consistently advocating that these enterprises should show all costs. Whether these costs are actually paid or merely imputed is not particularly important, so long as they are accurate figures and given proper consideration in setting sales prices or other charges for

services.

If items are omitted in cost calculations, a fictitious financial picture may be reported. Goods and services may be sold at a loss or if the activity is a loss operation the true cost to the taxpayer may not be shown.

In the third class of Government activities paralleling private enterprise are the many and widely scattered services which the Government furnishes some of its own employees, particularly those stationed in the field or abroad and those in the military branches.

One example is civilian employees' housing, which is provided to very roughly 6 percent (or 122,000) of the employees in the field. For military personnel, based perhaps upon the comparative isolation of many military posts, it has been the practice to furnish a wide variety of goods and services, for so me of which a charge is made. A significant part of our program for inspection of these activities' costs is checking to require the assessment and collection of charges reasonably calculated to recover the Government's costs. This may include cost of meals, conmissaries, post exchanges, and a variety of other items. It can hardly be said with confidence as to any one of the items that the Government recovers its costs, or that all of these activities are not in competition with private business.

The Budget and Accounting Procedures Act of 1950 places upon the head of each executive agency the responsibility to establish and maintain systems of accounting and internal control fitted to the management needs of the agency, provide reliable reports which disclose the financial results of its activities and accomplish those other purposes that accounting should serve in any well-run business. In carrying out this responsibility, the agency is required by statute to observe principles and standards prescribed by the Comptroller General.

The Comptroller General has prescribed principles and standards, in general terms, which deal with the development of adequate and effective accounting systems and the General Accounting Office works cooperatively with the agencies in the development of their accounting systems under the joint accounting improvement program. Through this working arrangement the principles and standards are supplemented by specific guidance and the GAO adds to its experience in the development and application of practical accounting improvements. The Comptroller General, in prescribing principles and standards, defines cost accounting as that method of accounting which brings together all appropriate elements of cost incurred to accomplish a purpose, to carry on an activity or operation, or to complete a unit of work or a specific job. The principles then indicate the necessity for and appropriate use of cost accounting under several types of situations, with emphasis on the ultimate test, i. e., will cost accounting in a given situation contribute to better management and economy?

One of these areas might best be described as responsibility costs. By this we mean cost data geared to assignments of management responsibility. Such data can be used to evaluate and improve administrative effectiveness in terms of work accomplished in relation to cost, to furnish a better basis for budget estimates and to fully inform the Congress what the program is costing the taxpayer. This is the widest use of cost accounting in Government today and much stress is being laid upon this use of cost data, particularly to improve budgeting.

A second area is the one of particular interest to this committee, namely, cost data upon which to base sales prices or reimbursements for intragovernmental services or cost of a product or service. For these purposes, the principles and standards prescribed by the Comptroller General state that in such instances * * * a substantially complete and precise use of cost accounting would be necessary. The use of cost accounting in this area is progressing satisfactorily in many Government agencies. Particularly noteworthy are accomplishments in the field of public power, some activities in the General Services Administration, the Bureau of Engraving and Printing and the Bureau of the Mint in the Treasury, and industrial funds in the Department of Defense.

Notwithstanding these achievements, much remains to be done and many improvements are underway. One source of some misunderstanding is worthy of discussion. Cost-accounting systems in government, as well as industry, deal with the dollars that flow through the business. In the case of industry, this usually results in a complete cost of the product or service because it includes depreciation, applicable personnel costs, taxes, interest, etc. Conversely, in government, the flow of dollars through the business may not result in arriving at a complete cost because the particular undertaking is frequently not permitted by statute to recover depreciation in its sales price, may not pay interest on its capital, may be furnished personnel without charge from appropriated funds, etc. Obviously, under such circumstances, the two sets of cost data are not comparable when confined to book figures, and yet each set of books is complete in the sense

that it reflects the dollars received and paid out by the enterprise. However, the answer to filling in the gap is a relatively simple one; namely, by the process commonly referred in industry as cost analysis. Stated differently, you start with book costs and add reasonably computed estimates for those factors which, for reasons previously explained, are not in the book figures. A good example of a factor for which a computed estimate should be added would be depreciation. If a private company was computing comparative costs between two of its own plants-one fully depreciated, the other not-it would follow a similar method. Cost accounting in government is being developed by the agencies as a part of a broader program to improve accounting in the interests of better financial management and much progress is being made.

It is possible that the objectives sought to be accomplished by the bills under consideration could be brought about without the enactment of legislation which would specifically set up the mechanics of operation. As you are aware, many of the commercial-type activities are established administratively and could be discontinued the same way. Those requiring a change in the law could be made the subject of recommendations to the Congress. One of the functions of the Bureau of the Budget is to be thoroughly conversant with the various activities of the executive branch. Therefore, one approach might be to enact legislation stating clearly the intent of the Congress concerning the continuance of commercial and industrial-type activities in competition with private business and directing the President, operating through the Bureau of the Budget to make a thorough examination as to the need for the continuance of those activities of the Government, or the establishment of any new activities, with a report to the Congress at specific intervals of action taken.

There are two points I would like to make with reference to the bills under consideration. First, if I understand H. R. 9835 correctly the President would be given blanket authority to (1) modify or abolish functions or activities, and (2) transfer functions and activities among departments and agencies in all cases where he finds, after investigation, that any commercial activity engaged in by the Federal Government can be carried on by private enterprise without substantially impairing essential activities of the Federal Government. This authority would apply whether a particular activity had been set up by the Congress or not. It would seem that the Congress would want to reserve to itself the right to decide whether an activity which it had established by law should be terminated, transferred, or consolidated.

Second, with reference to H. R. 8832, which would establish an Anti-Government Competition Board, we feel that as a matter of basic policy the Comptroller General should not be a member of the Board. From time to time the Comptroller General has been requested to serve on boards or commissions with representatives of the executive branch. We have consistently refused to do so for reason that we do not think the Comptroller General should participate in the making of executive decisions which he will later have to audit or examine. The Congress in establishing the office of Comptroller General made that officer entirely independent of the executive branch and responsible only to the Congress. For the Comptroller General to be in any other position would greatly weaken his effectiveness. Of course, if any such board is established, the General Accounting Office would expect to cooperate fully with the Board and furnish to it all assistance possible. It is noted also that the Secretary of Defense is not named as a member of the Board. Since a great number of activities in which this committee has shown interest arise through operations of the military departments it would seem highly desirable to include the Secretary of Defense as a Board member.

The CHAIRMAN. You may proceed.

Mr. KELLER. We point out that your objectives could be accomplished by a declaration of policy by the Congress, and directing that the President, operating through the Bureau of the Budget, carry out this policy.

There is another comment I would like to make on H. R. 9835. If I read it correctly, the bill would give the President authority to abolish, terminate, and transfer any agency.

I think Congress would want to reserve for itself the right to terminate an agency or activity which is set up by law.

The CHAIRMAN. You feel that the language of H. R. 9835 as originally submitted gave to the executive branch broader powers than Congress should give them?

Mr. KELLER. No. It is even broader than the power given in the reorganization acts which have been passed by the Congress, where you required reorganization plans come up and be considered.

Mr. OSMERS. Do you have the same objection to giving to the Secretary of Commerce certain authority as contained in H. R. 9890 that you do have to the broad language of H. R. 883??

Mr. KELLER. I do not recall that you gave the Secretary of Commerce the right to actually abolish anything.

Mr. OSMERS. I was changing the subject there, Mr. Keller.

I realize that we do not give him that power. I was talking specifically about the differences between H. R. 8832 and H. R. 9890. H. R. 8832 which this committee has abandoned for discussion at this time, provides for a board. H. R. 9890 delegates, or names in the executive department, the Secretary of Commerce, and cloaks him with the authority to receive complaints.

Mr. KELLER. I think the approach of H. R. 9890 is all right. I say that because the General Accounting Office does not favor setting up any board, commission, or new agency that is not absolutely necessary.

Mr. OSMERS. Do you feel there is anything impractical or risky or troublesome contained in the suggestion that before new competitivetype activities would be established in the executive department, that the department should go to the Director of the Budget and state its case?

Mr. KELLER. I see nothing wrong with that whatsoever. I think the Bureau of the Budget, as far as the executive departments are concerned, is probably a good one to have in the picture. When you have to make your case in order to get funds to operate with, or get your budget approved, you usually accomplish a means of control.

Mr. OSMERS. Do you feel that it would be helpful to the Congress and to the Office of the Comptroller General if the President each year was required to submit a report on the progress made in this field?

Mr. KELLER. I think definitely it would. If the Congress, as a matter of policy, wants to announce that the Government is not to compete with private industry, unless they have a very good reason for doing so, I think it is only right that the President should make a report once a year as to what he has done about it.

Of course, many of these activities can be terminated administratively.

They were set up administratively, and they can be discontinued administratively. Other activities were set up by statute. Congress is going to have to change the law to terminate them.

The CHAIRMAN. You were critical of the authority in H. R. 9835 which would give the President power to modify or abolish functions and activities, and transfer them. That was taken care of by the Lantaff amendment which was proposed the other day.

Mr. KELLER. I have not seen the amendment, Mr. Hoffman. The CHAIRMAN. I thought you probably had not, and the amendment has not been voted on, but the striking of those provisions was carried in that amendment.

Mr. KELLER. I pointed out the question of certain activities that the Congress set up itself. If they are to be terminated I think the Congress should O. K. it rather than to give the authority to the executive department to abolish them.

Mr. FOUNTAIN. I have one question.

Do you know of any authority which this legislation gives the executive department which it does not already have, to eliminate Government competition with private enterprise?

Mr. KELLER. Of course, H. R. 9835 would go further than that, but in answer to your question, I do not know any general law that says the Government has to compete with private industry.

In other words, activities have been set, administratively.

They can be discontinued the same way. I think what you want is some emphasis to get the job done.

Mr. FOUNTAIN. In other words, any legislation which we might pass would be, more or less, a declaration of policy; would it not?

Mr. KELLER. I do not see how you can do otherwise. I do not think Congress can take the time to go into the paint-and-rope business, and say "You shall do this, and you shall not do that."

It is up to Congress to establish the policy and then up to the executive to carry out the mechanics, make the decisions, and justify their actions.

Mr. OSMERS. Could there, however, be set up a simpler procedure to deal with the existing activities, and to deal with possible new activities to provide us and the public with a report?

Mr. KELLER. H. R. 9890 is not too complicated.

Mr. DAWSON. Did you hear the testimony of the gentleman from the Commerce Department?

Mr. KELLER. Yes, sir.

Mr. DAWSON. You heard his testimony as to what they are doing to eliminate competition with private enterprise.

Mr. KELLER. Yes, sir.

Mr. DAWSON. Do you not think they meet the situation, and do you not think that the Commerce Department is peculiarly the Department of Government which ought to be interested in business, large and small?

Mr. KELLER. I definitely agree that the Commerce Department should be in the picture and I think the Bureau of the Budget should be coupled in there with it.

Mr. DAWSON. That is professional jealousy.

Mr. KELLER. No, sir; I say that because in dealing within the Government a department cannot always tell another department what to do. It is a matter of persuasion. The Bureau of the Budget usually has the backing of the President, being located directly in his office. It could help break a deadlock.

I want to reiterate you are looking into a matter that can be done without legislation. There is a question of whether you want to put on emphasis by writing a policy in a law which makes it pretty clear what Congress wan's the executive departments to do in this field. Mr. DAWSON. Well, is it clear that the President now has too many reports to make, and we are trying to find means of relieving him of part of his responsibility to make reports?

It is such a killing job.

Mr. KELLER. That is true.