We didn't need it. All we had and all we needed, was the power to criticize. We used that power positively but fairly, gentlemen, and it got results. That is the power that we think the Comptroller General ought to have and the only power he ought to have, as far as independent auditing is concerned.

Senator MUNDT. If you maintain complete independence in that office, that power probably would be adequate.

Mr. ANDREWS. That is right. We maintained a completely independent attitude toward RFC, and it worked. It works in business and it will work here. The Comptroller General in that case exercised an authority which nobody in the world could possibly question, and he got results. Moreover, he got immediate action from Congress. He wasn't responsible for anything that was done by the administration.

The CHAIRMAN. Gentlemen, the Senate is now in session, and we have no authority to continue the hearing longer. I want to thank Mr. Andrews for his presence and his testimony this morning. I believe the Chair, who was a member of the Hoover Commission, in view of the testimony given by the witness, should state for the record that he is not the member of the Commission who discussed the matter with the witness.

Mr. ANDREWS. No, Senator; I must say that is true.

The CHAIRMAN. So by process of elimination we may not have to call any names.

Mr. ANDREWS. I haven't had the pleasure of such close contact with you before.

The CHAIRMAN. Thank you very much.

I should like to insert in the record immediately following Mr. Andrews' testimony a telegram that I received from Mr. John W. Hanes.

(The telegram referred to follows:)

Senator JOHN L. MCCLELLAN,

Washington, D. C.:

NEW YORK, N. Y., March 1, 1950.

Sorry cannot comply your request of February 21 to appear this week testify Senate bill 2054. However, Mr. T. Coleman Andrews, who worked with me on my task force, will appear tomorrow in my behalf.

JOHN W. HANES.

The CHAIRMAN. We had another witness that I was very anxious to hear this morning, and I am sorry we cannot get to him. Is Mr. Stewart present? Mr. Stewart, would you like to appear before the committee at some other time? We shall resume hearings in the morning. I understand maybe you can not be here tomorrow.

Mr. J. HAROLD STEWART (Boston, Mass.; president, American Institute of Accountants). I have another engagement. I shall be glad to write you my views, if you would like them.

The CHAIRMAN. Would you then be willing to prepare a statement to submit to the committee?

Mr. STEWART. Yes, sir.1

The CHAIRMAN. We shall be glad to make it a part of the record. I am sorry, we never know how much time is going to be taken by each witness. I do not like to cut any witness short.

1 Subsequently, the committee was advised that, due to pressure of business, Mr Stewart would be unable to submit a statement for inclusion in this hearing.

63233-50-9

I should like to announce, also, that former President Hoover will appear next Tuesday morning and testify on this measure before the committee.

Is Mr. Peloubet here? What is your pleasure, Mr. Peloubet? Would you like to come back and testify tomorrow?

Mr. MAURICE E. PELOUBET (Pogson, Peloubet & Co., certified public accounts, New York City). I expected to be in Washington tomorrow anyway, and I can switch my tomorrow morning's engagements, I think, to this afternoon all right.

The CHAIRMAN. If you will do that, we will try to hear you the first one in the morning.

Mr. Gary?

Mr. T. JACK GARY, Jr. Yes, sir.

The CHAIRMAN. Will you be present in the morning?

Mr. GARY. Yes, sir.

The CHAIRMAN. We will try to hear you then in the morning.
We are in recess until 10 o'clock in the morning, gentlemen.

(Whereupon, at 12 o'clock noon the committee recessed until 10 a. m., Friday, March 3, 1950.)

TO IMPROVE BUDGETING, ACCOUNTING, AND AUDITING METHODS OF THE FEDERAL GOVERNMENT

FRIDAY, MARCH 3, 1950

UNITED STATES SENATE,

COMMITTEE ON EXPENDITURES IN
THE EXECUTIVE DEPARTMENTS,
Washington, D. C.

The committee met, pursuant to recess, in room 357, Senate Office Building, Senator John L. McClellan (chairman of the committee) presiding.

Present: Senators McClellan, Smith, and Schoeppel.

Also present: Walter L. Reynolds, chief clerk.

The CHAIRMAN. The committee will come to order.

We will resume hearings on S. 2054 this morning. Is Mr. Peloubet present? Mr. Peloubet was scheduled to be heard yesterday, and we were unable to reach him. I am very sorry you had to come back, sir. STATEMENT OF MAURICE PELOUBET, OF POGSON, PELOUBET & CO., CERTIFIED PUBLIC ACCOUNTANTS, NEW YORK, N. Y.

Mr. PELOUBET. Mr. Chairman, I was not at all inconvenienced. The CHAIRMAN. Mr. Peloubet, we have three others to testify this morning. I know it is difficult sometimes, when we get into a discussion, to be as brief as we should like to be, but I am hoping that we can accommodate those who are present this morning. If we can refrain from asking too many questions here, I am sure the witnesses will conclude in time.

Mr. PELOUBET. I do not think I will require much more than, say, half an hour.

The CHAIRMAN. You may proceed, then.

You do not have a prepared statement?

Mr. PELOUBET. No, sir. I merely have some notes.

The CHAIRMAN. Will you give the reporter your name and background and so forth, please?

Mr. PELOUBET. My name is Maurice E. Peloubet. I am a certified public accountant and have had about 40 years' experience, the first 9 of which were with Price, Waterhouse & Co. in New York and London and Europe, and the remainder of the time with my own firm. I have been active in the accounting societies and professionally and have written a good deal. I do not think the details of that are especially pertinent here. I think what is pertinent here is that I have had a certain amount of Government experience.

In the spring of 1944 I went with the OPM, that later became the WPB, as a dollar-a-year man in the Accounting Advisory Branch.

We did some work for the Quartermaster Corps, and prepared a cost manual for use with Government contracts. Then I spent about 3 months in the Navy under Admiral Baldwin, helping in the reorganization of the cost-inspection service. I did a little work in the Office of Contract Settlement. I was the head of a combined British and American mission in Europe to examine into the accounts for the spearhead money that was issued and also the civilian supplies that were issued in the program to prevent disease and unrest.

After that I was on the Account Policy Committee of the Hoover Commission, and am at present on the Advisory Panel to the Comptroller of the Army.

I may have done a few other odd jobs for the United States Government in between that I have not mentioned, but that is the general background.

The CHAIRMAN. That is all right. I do think it is well, in these matters that are highly technical, for the witnesses to give some of their background, so that those who listen may have some idea. Mr. PELOUBET. I can give more, sir, if you need it.

The CHAIRMAN. I do feel that when a person is testifying on a bill, one who has had experience, he should disclose some of his professional background.

You may proceed.

Mr. PELOUBET. I propose to do three things in this presentation. First, I want to amplify and explain a little the four different elements of accounting and auditing and how they are distinguished. Then I want to go into the four ways that I think we can strengthen the General Accounting Office, make a recommendation for setting up a Government accounting officer, and then I want to give a little description of how some things are actually being done now in the Army.

I know that Secretary Johnson and Mr. McNeil testified for the Army. I have read their testimony and will not repeat or conflict with it.

Now to go into the four elements of accounting, I think those can be described as control first, accounting second, auditing third and system determination fourth. When we talk about control we mean taking care of things before they happen. Any well-run corporation has an apparatus to see that payments are not made until goods are received and that payments are not made improperly.

The CHAIRMAN. That is really the preventive treatment.
Mr. PELOUBET. That is correct, the control treatment.

The question is: Can you do the thing that you intend to do? The control authorities see to it that the expenditures are useful, that they are advantageous, that is, that you are getting the best price for materials, that they are not paying outrageous salaries and that they are paying a fair rate for services.

The other part of that control is to see that your property does not get away from you, to see that your machinery, equipment, buildings are there and that they are taken care of and that you have a record of them, and also to determine in whose custody they ought to be and who is responsible.

Now, that, I think, is control. Your second function is accounting; that is, you have to make a record. You put it down somewhere. You have to substantiate what you have done and you have to have

a voucher for it, some document to show what has been done. Then you make your statements from it, you prepare statistics, you prepare statements, you may consolidate the statements. You have to get your figures together so that your management will understand them, so that third parties who are entitled to them, stockholders, the public, regulatory commissions, any people like that, can understand your statement. Then you have to get statements for budgets and forecasts for the management purposes.

As a matter of fact, most accounts that management uses are looking to the future.

Then after you have your record made, comes the auditing. Auditing is after the event, it is critical, it is analytical. A great deal of auditing is done by internal auditors in the Government and in private business. It has to be done that way. If it were not done that way it would be inefficient, cumbersome, and very expensive.

The internal auditor can often do his particular job better than an independent auditor. He does not have the breadth of view or the experience to do the work of the independent auditor, but his own auditing job he can frequently do better.

The independent auditor who works with the internal auditor, does the work that is not covered by him. He scrutinizes the work of the internal auditor, his program, his personnel, and satisfies himself as to the extent to which he can rely on the internal audit work.

In auditing, we do not check all transactions. We work on the basis of reasonable probability. There is one point on that which is I think very interesting in Government. In ordinary business you generally do not have enough work, you do not have enough volume of transactions, to apply real statistical methods. You have to have a big volume to work by samples. In the Government I think there are probably a great many places where statistical methods could be used in auditing and where you would reduce the volume of work substantially without any danger.

Now when the auditor is through he makes a report. He makes a report on the business to the people who operate it and to the people who own it. In the Government he makes a report to the operators of the department and to the Congress. Sometimes it will be the same report and sometimes the report to the operator needs to be a little more detailed for special purposes but the ultimate end of an audit is a report of some kind which determines whether the accounts can be accepted or cannot be accepted and what ought to be done about them.

The work on systems is really not the final responsibility of an accountant or of an auditor. It is a responsibility of management but it is one of those responsibilities of management that it can get some help on. Management gets some outside advice on this and sometimes management gets something that is a little stronger than advice. If it is a public utility, management is told how its accounts are to be kept. If it is a railroad, it is told how the accounts are to be kept. The accountant can always give advice on systems. That is very different from operating a system. The work that an accountant does on a system generally does not, should not, imply any administrative responsibility and of course no auditor should audit himself but setting up a system does not imply that.