broad enough to authorize us to begin the work in that way and continue it for the few weeks only that it has gone on.

Mr. SHERLEY. When was this division, as you call it, created?
Mr. NICHOLSON. About a month and a half ago, probably.

Secretary REDFIELD. And in that time we are saving these sums of money which I have read to you.

Mr. SHERLEY. You have what personnel?

Secretary REDFIELD. Five.

Mr. SHERLEY. At what salaries?

Mr. CUTLER. Mr. Nicholson, will you please tell the salaries they receive?

Mr. NICHOLSÓN. The salary of the chief of division is $3,600.
Mr. SHERLEY. Can you give his name?

Mr. NICHOLSON. J. Lee Nicholson, and we have two staff men at salaries of $2,400, and one at a salary of $1,800, and then we have one at $1,400, and one stenographer at $1,000.

Mr. SHERLEY. Now, this organization was created on what date? Mr. NICHOLSON. Well, officially, I guess some time in June. I have been working on it perhaps since about the 1st of June, but just in a general way.

Mr. SHERLEY. Were these five men engaged in governmental work prior to this time or have they just been gathered into this service! Mr. CUTLER. They have been gathered into the service. Some of them were already in the department, two of them. The other three are volunteers. That is, in the sense that they have accepted merely nominal compensation to do very important work. They are rated as the best cost accountants in the United States. They have volunteered.

Mr. SHERLEY. That is, three men from commercial auditing companies who volunteered their services to the Government have been doing certain work?

Mr. CUTLER. Yes, sir; as individuals they volunteered.

Secretary REDFIELD. And are paid a salary?

Mr. CUTLER. Yes, sir; a nominal salary.

Mr. SHERLEY. What do you mean?

Mr. CUTLER. They could easily make from $5,000 to $8,000 a year, and all we can pay them is something between $1,800 and $2.400 a year.

Mr. SHERLEY. On that basis they volunteer?

Mr. CUTLER. Yes, sir; that is true, except that they have no means of livelihood outside of their own personal services. Their income ceases when they stop work.

Secretary REDFIELD. There has been formed in the technical sense no division at all. We have to have some language by which to speak of this work.

Mr. CUTLER. It is merely a subsection. That might, perhaps, be a better term-a subsection in the bureau.

Mr. SHERLEY. The Army and Navy are employing regular accountants in connection with their cost-keeping accounts with various corporations and individuals doing business for the Government. Is it the plan to create a division that shall take over that work; is that contemplated here?

Mr. CUTLER. The accountants employed by the Navy and Army have certain duties to perform; that is, to inspect costs when the

contract is in operation. We, on the other hand, do quite different work. They have all agreed that there should be basic principles by which to guide the auditors as to the cost methods in operation. They are strictly auditors; we are not auditors.

Mr. SHERLEY. You are scientific creators of a system of cost keeping?

Mr. CUTLER. Yes, sir. Those accountants represent all the contracting officers and experts in the Government.

Secretary REDFIELD. It is a case of cooperation.

Mr. SHERLEY. These men simply met for an informal conference and discussion of the standardization of cost-keeping methods?

Mr. CUTLER. That is true. They were delegated by their own secretaries to perform just that work as being highly essential to the emergency.

Mr. SHERLEY. They having done that, what is the need of creating a division to do it?

Mr. CUTLER. They have acted entirely under the guidance of the division. They can take no action except as volunteer advisers, committeemen.

Mr. SHERLEY. Presumably they were men with some experience as to the cost of doing various work?

Mr. CUTLER. Yes, sir.

Mr. SHERLEY. They met in a cooperative effort to standardize certain methods?

Mr. CUTLER. Yes, sir; under our leadership.

Mr. SHERLEY. I do not quite understand what you mean by that. Mr. CUTLER. "Under our leadership"?

Mr. SHERLEY. Yes, sir.

Mr. CUTLER. Mr. Nicholson, the chief of the division, being, perhaps, the leading cost accountant in the United States, was able to organize their efforts and to guide them along definite lines. He was the chairman of that conference, and they were all very glad to consult with him in that respect.

Mr. SHERLEY. Of course, I have not had an opportunity and can not read this report which has just been handed me. They have agreed on certain standardized methods?

Mr. CUTLER. Yes, sir.

Mr. SHERLEY. What do you gentlemen expect to do-make another standardization?

Mr. CUTLER. For the future work.

Mr. SHERLEY. You are asking for $65,000. What is the purpose to which that is to be devoted?

Mr. CUTLER. The Quartermaster General and the food administration have asked us, as part of our future duties, to investigate the cost of about 400 commodities. They give us 2 or 3 at a time.

Mr. SHERLEY. What becomes of the Federal Trade Commission? Mr. CUTLER. The Federal Trade Commission investigates the accuracy of the costs. We only investigate methods by which they are brought together.

Mr. SHERLEY. How do you think the Federal Trade Commission determines the one question without determining the other?

Mr. CUTLER. They could not very well, since our work antedates theirs.

Mr. SHERLEY. The character of your work would be preliminary to their work?

Mr. CUTLER. Yes, sir.

Mr. SHERLEY. In what regard?

Mr. CUTLER. We promulgate the proper system of bringing the costs together. We say, for instance, maintenance, depreciation, and so forth, should be found in the cost. They come along and say, "Those figures you have brought in representing those items are correct or incorrect," they go back to the finding of the correct figures. Mr. SHERLEY. Cost accounting is not a new system?

Mr. CUTLER. No.

Mr. SHERLEY. Why the need to create a bureau to determine the fundamentals by which you shall arrive at cost accounting?

Mr. CUTLER. Frequently the Government has found it impossible to place contracts because they did not have proper items placed before them on which to submit proposals.

Mr. SHERLEY. That may be. The ordinary layman supposed that the countrty was supplied with a great many experts as to costs, and they have certainly held themselves out as such to the public and have done very large transactions in the financial world with satisfaction to themselves and their clients on the theory that they knew their business.

Mr. CUTLER. That is true. We are only helping them in that respect.

Mr. SHERLEY. What I am endeavoring to ascertain is whether the Government is going into the business of creating methods of business touching which it has had infinitely less experience than the business world.

Mr. CUTLER. I see what you mean. The Government does not undertake to do anything of that sort. May I give you a concrete instance?

Mr. SHERLEY. Certainly.

Mr. CUTLER. If a Government contract is placed for a ship or for a lot of guns or for food, they say, "We can not place that contract intelligently unless we know that when you bring us the costs, particularly if it is a cost plus percentage contract, that those costs are properly assembled. We have not the time to go into all the various particulars." We say, "Here is a form which you should follow." We have devised that form for the Government, with the consent of the contracting parties.

Mr. SHERLEY. What they have done is simply to employ a body of accountants to check up the costs for a particular work that was to be paid for on a cost plus percentage basis?

Mr. CUTLER. Yes, sir.

Mr. SHERLEY. If the accountants know their business, there does not appear on the surface a reason for a third agency in the matter? Mr. CUTLER. The Government accountants are only auditors. Mr. SHERLEY. I am not talking about auditors who simply audit vouchers. For instance, Gen. Crozier is expending very large sums of money and some of them will be expended on a cost-plus percentage plan. My understanding from the testimony furnished by him was that he would secure the services of an expert auditing house whose business it was to do that, and they would do it. If they are qualified, I do not see just the function of the third agency.

Mr. CUTLER. Right there, if I may be permitted to repeat myself, they are only auditors with respect to the accuracy of figures. We are the checkers in the matter of the form.

Mr. SHERLEY. That sounds well, but is not necessarily very illuminating. What do you mean?

Mr. CUTLER. The contracting officers, under our guidance, have expressed a preference for certain forms of contract as applied to certain lines of business. They have said in certain lines where the project is uncertain in respect to its cost that the contract might be better if it were on a cost-plus percentage basis. We have for that purpose devised a form of contract with all the items. It is in that book. After that contract is placed, then the auditors for those departments on the basis of the contract ascertain the accuracy of the cost as applied.

Mr. SHERLEY. That form of contract has been created and the auditors are to check up the compliance with it. I still do not see why a third agency needs to come in.

Mr. CUTLER. That was a part of our work.

Mr. SHERLEY. That is done?

Mr. CUTLER. Yes, sir.

Mr. SHERLEY. You are asking for a large sum of money. What do you expect to do?

Mr. CUTLER. Mr. Secretary, you have already spoken on that score. Secretary REDFIELD. There are 15 shipyards, which, at the request of the Navy, we are to examine with care to determine whether the methods of accounting in those yards are such as are protective to the Government. All that Price, Waterhouse & Co. could do would be to go in and determine the accuracy of the figures.

Mr. SHERLEY. They are limited in their ability, then.

Secretary REDFIELD. They do not consider it their province to act as counsel for the Government in preparing accurate forms of cost. The evidence of that is not an opinion, but a fact, which, I think, can hardly be set aside. It is a fact that in spite of all we saved in the investigation of the milk industry $10,000 a month to the Govern

ment.

Mr. SHERLEY. What do you mean by that, Mr. Secretary?

Secretary REDFIELD. Mr. Nicholson will give you the details.

Mr. NICHOLSON. I would say at the start that the Quartermaster General of the Army has no available force for making any investigation. It is different from the Ordnance Department and different from the Navy. They have a regular inspection board. The Quartermaster's Department, for instance, in buying milk for the months of May, June, July, and August had a committee of accountants who met here in Washington. The Army and Navy wanted a uniform price and the orders were then to be distributed pro rata among all of the milk canners. The milk canners, acting as a committee, not as an association, submitted a price on milk for May, June, July, and August. The Quartermaster General then requested us to investigate this price to see whether the price would be a fair one to the Government. To do that it was necessary to make an examination of a certain number of canners of milk, not only to consider the cost, but also to see what the milk had been sold for to the jobbers, etc.

In the month of July, for instance, they had set a price of $4.85. We recommended that the price for milk be $4.75; that that would be

a fair price, considering the method by which the canner of milk figured his cost, allowing him the same margin of profit he would have or as he would figure it; but in figuring his cost the canner was wrong. That is to say, he made mistakes in the compilation of his cost. Then, in the month of August the milkmen thought that $5.17 was the right price at which to sell to the Government, and if their figures were correct which they submitted, why, it would have been a fair price, but, again, they did not take certain items into consideration. The price for August has been fixed at $4.95.

Mr. SHERLEY. That is a saving to the Government by the fact that the Government entered into a contract at a less figure than the proposed figure by the suppliers of the milk?

Mr. NICHOLSON. That is right. I understand it is a tentative saving and that all the contracts that the Quartermaster Department makes for supplies shall be subject to revision.

For instance, at the present time they have made a contract for peas, and they are paying 75 per cent of that price to the canner. That price is subject to revision.

Mr. SHERLEY. The Committee of National Defense and the subcommittees under it and the Council of National Defense are endeavoring to devise and are devising for some of the departments of the Government forms showing the prices that should be paid for various and sundry commodities that the Government is buying. Is it the idea of this organization to supervise their figures?

Mr. NICHOLSON. The idea of the organization up to date has been to render assistance to those departments of the Government who did not have and were not in a position to handle these matters themselves. For instance, as to the Navy, the questions that we considered were questions which have gone from the cost inspection board up to what they call the compensation board of the Navy, which is headed by Admiral Capps. Such questions, for instance, as depreciation and reserve for extraordinary repairs, reserve for contingent expenses, and other items of that character which the shipyards were charging up to the Government. Some question was submitted by the cost inspection board. It was then referred to the board in Washington, and the compensation board requested us to make an examination along those particular points. It was not a matter of detail work; it was a matter of principle; and then the checking up of the items. Mr. SHERLEY. You are an accountant; that is your profession? Mr. NICHOLSON. Yes, sir.

Mr. SHERLEY. You are a member of what firm?

Mr. NICHOLSON. J. E. Nicholson & Co., of New York.

Mr. SHERLEY. If a private corporation employed that firm to do work they would do the work that you are outlining, and are able to do it?

Mr. NICHOLSON. My firm in New York?

Mr. SHERLEY. Yes, sir. They would be able to do this work?

Mr. NICHOLSON. Yes, sir.

Mr. SHERLEY. If they were employed to do that work, assuming that they did it well. there would be no reason for it being redone by an organization such as you speak of here?

Mr. NICHOLSON. That is correct.

Mr. SHERLEY. That seems to have been challenged.