Recommendation No. 10 contains a proposal for the establishment of a new position in the Treasury known as an Accountant General, with authority to prescribe accounting procedures in the various departments and establishments, subject, however, to approval of the Comptroller General of the United States. It is not believed that such divided authority would be in the public interest. The lines of authority with respect to accounting and auditing in the Federal Government are of highly controversial character. The experience of the Treasury indicates that the most fruitful results can be achieved only through cooperation by the various agencies interested in and concerned with accounting. Accounting is primarily a tool of administration, but at the same time is an important instrument for the control of the public funds through executive direction and independent audit. Having in mind the multiple purposes of accounting, the Comptroller General of the United States, the Secretary of the Treasury, and the Director of the Bureau of the Budget have formally agreed on the basic principles to be followed in a joint undertaking to improve the accounting and auditing system of the Government. This program has been under way for about a year. As evidence of the progress thus far made, the Comptroller General, the Secretary of the Treasury, and the Budget Director have agreed on the following basic principles as the foundation upon which future accounting developments will rest: 1. The maintenance of accounting systems and the producing of financial reports are and must continue to be functions of the executive branch. 2. There must be an audit independent of the executive branch which will give appropriate recognition to necessary features of internal audit and control. Properly designed accounting systems are a vital factor to the effectiveness of such independent audit. 3. Full opportunity is to be afforded to the executive branch for participation in the development of accounting systems as an essential to meeting the needs and responsibilities of both the legislative and executive branches in the establishment of accounting and reporting requirements. Recommendation No. 11 asks that the practice of sending millions of expenditure vouchers and supporting papers to Washington be stopped, as far as possible. Treasury has been aware of this problem for a considerable time and firmly believes that the potential of the site audit has not in the past been exploited to the full. Certainly the practice of submitting millions of expenditure vouchers to Washington is an expensive and tedious way of auditing. The Comptroller General has indicated, however, that his staff is vigorously pursuing new techniques in auditing. Treasury believes that the site audit of accounts is especially important and vigorously supports the adoption of it by the Federal Government. The accounting function tells much more of the management of Federal business than the auditing of expenditure vouchers. The Comptroller General, it may be noted, has been using the site audit with increasing frequency. Recommendation No. 12 merely endorses the accrual basis of accounting for both revenues and expenditures, recommends simplification or elimination of the present warrant system, and proposes uniform practices, procedures, and nomenclature, as well as other improvements to reduce staff and improve efficiency. Treasury endorses all of these desirable objectives. The CHAIRMAN. Thank you very much, Mr. Bartelt. * I believe that is a quorum call. I cannot consult other members at the moment, so I will take the liberty of recessing these hearings until Thursday morning at 10 o'clock. (Whereupon, at 12 o'clock noon the hearing was recessed until 10 a. m., Thursday, March 2, 1950.) TO IMPROVE BUDGETING, ACCOUNTING, AND AUDITING METHODS OF THE FEDERAL GOVERNMENT THURSDAY, MARCH 2, 1950 UNITED STATES SENATE, COMMITTEE ON EXPENDITURES IN The committee met, pursuant to recess, in room 357, Senate Office Building, Senator John L. McClellan, chairman of the committee, presiding. Present: Senators McClellan (chairman), O'Conor, Mundt, Smith, and Schoeppel. Also present: Walter L. Reynolds, chief clerk. The CHAIRMAN. The committee will come to order. We shall resume hearings on S. 2054 introduced by Senator McCarthy. I believe we have four or five witnesses scheduled for this morning. We shall do our best to accommodate all of you who have come expecting to testify today. I am sorry that we are getting started a little late, but the committee work here at this particular time in the Senate is heavy and we have to try to accommodate more than one committee each day, it seems. Will Mr. T. Coleman Andrews please come forward, if he is present? Mr. Andrews, you may be seated if you like. STATEMENT OF T. COLEMAN ANDREWS, T. COLEMAN ANDREWS & CO., CERTIFIED PUBLIC ACCOUNTANTS, RICHMOND, VA. Mr. ANDREWs. I do not have a prepared statement, sir. The CHAIRMAN. Will you give us, then, your background and tell us whom you represent, what industry you represent or whom you are speaking for, government, business, or any organization or groups? Mr. ANDREWs. Mr. Chairman and members of the committee, first as to my background. I am a certified public accountant. I have been practicing for more than 30 years. My experience has included 2 years and 3 months as auditor of public accounts of Virginia; 2 years as director of finance and comptroller of the city of Richmond; and 2 years and 4 months as organizer and first director of the Corporation Audit Division of the General Accounting Office. Each of these was a major organization or reorganization task. Under my direction, my firm, T. Coleman Andrews & Co., has handled many public administration engagements of one kind or another, principally in the field of accounting and finance. I also was asked by the Hoover Commission to join the task force headed by Mr. John W. Hanes, to study and report upon the account ing and auditing of the Federal Government. At my suggestion this task was undertaken by the committee on Federal Government accounting of the American Institute of Accountants. I was chairman of that committee. Each of its members had had extensive experience with the accounting of the Government. However, I am not here as a representative of the American Institute of Accountants. I suppose that I am here to represent the people who are interested in seeing the Hoover Commission's report adopted, specifically the Citizens Committee for the Hoover Report and, as I understand it, on the invitation of the chairman of the committee. I also appear in my own individual and professional capacity. The CHAIRMAN. The reason the chairman asked you for that information is because so many times someone is speaking not only his own views, but represents other groups or organizations. I just wanted to get the record clear. Mr. ANDREWS. I think, Mr. Chairman, that my views probably will be more my own than anybody else's, but they are shared, I believe, by the people whom I have mentioned. I want to make it very clear that the American Institute of Accountants has neither approved nor disapproved the findings of my committee. They have never been presented to the institute. However, I think it might be a fair assumption that, since our report was widely publicized and was published in the Journal of Accountants, which is the official publication of the American Institute of Accountants, that the members of the American Institute do not as a whole dissent from our views. Otherwise, we probably would have heard some objection to our report. But I wish to make it clear the institute itself has not acted upon our report as a body. I believe that about covers the first part. Mr. ANDREWS. Senator, and ladies and gentlemen of the committee: I find myself in a rather difficult position here this morning for several reasons. In the first place, this bill does not represent by any stretch of the imagination the views of either myself or my colleagues of the group that studied the Government's accounting and auditing needs. In the second place, we are conscious of the fact that there are forces at work here in opposition to each other, some of which are clear, some of which are not. We find ourselves unhappily in the position of being on opposite sides with people with whom we have worked arm to arm, side by side, in a friendly and constructive way toward the same ends. We regret that because we had hoped that in this opportunity finally to put the accounting of the Federal Government on a basis that would command the respect of the people, we would be unanimous in our views. However, I am not here in any antagonistic sense. I regret our disagreements with our friends, particularly those in the General Accounting Office. We are all aiming at the same end; I think there is no question about that. But we disagree as to the manner of obtaining that end. We think, of course, that our position is a sound one; and, now that the time has come to discuss it, I think that we have to be frank with this committee and speak out and tell you just how we feel about it and why. I hope that we may be able to express ourselves in a way that no one will take any personal offense, because I want to say that we certainly do not intend that. Speaking for myself alone, the time that I spent in the General Accounting Office following the war, while a rather difficult period, was one of the happiest associations of my life. I enjoyed it. I came to have a degree of respect for the gentleman who heads that office that is not exceeded by my respect for any other public officer I have ever known. I think he is one of the most conscientious, one of the most patriotic public officials that I have ever worked with, and I believe that he wants the Government's accounting and auditing to be all that they should be. But I disagree I have to disagree-with the method by which he seeks to make them so. Our committee worked for 14 months on this problem. We had the assistance of a very able research director, and we had one other special assistant for a short period on one phase of our work, for whom I also have high regard and who, I think, did a good job for us. Our committee sat from time to time to consider the findings of our research director. Personally, I spent a very large part of that 14 months, as chairman of the committee, reviewing what came before us, planning our meetings and considering what we should do. We thought we came up with a reasonable compromise of what most of us felt was the ideal solution. That compromise can be very simply stated. We said: Here is the Federal Government, the greatest business organization in the world, the biggest, the most complex. We felt that if the Government was to have any hope of attaining anything like proper satisfaction of its accounting methods, it must emulate the organization and management of the accounting of large business enterprises. There are differences between the Government and private enterprise, and obviously the exact pattern of the latter could not be followed. But we as accountants know that accounting is one of the important responsibilities of management. We also know that that responsibility has to be assumed and discharged by management, not by somebody else. We know that from our experience and from our observations. I do not know exactly how many years of experience was represented on our committee, but I would say roughly well over 150 years all told. I have been in the business myself for 34 years, and I have seen all kinds of Government problems from the national to the lowest level. I have dealt with a great many of them not only as consultant but also as one with the responsibility for solving them. We feel that first of all the Government should clearly separate its accounting and independent auditing functions. Everyone outside the Government, and a great many people in the Government, agree with this, including the House Committee on Expenditures in the Executive Departments. In the RFC case the Government declared that accounting is a responsibility of management, and that management must assume that responsibility, without dividing it with auditors who independently review management's stewardship. There are good reasons why this is so. One reason is that the minute responsibility for any managerial function is shifted to or divided with an organization's independent auditors, the auditors become reviewers of their own work and lose their independence. When independent auditors become involved in management decisions, they then become the auditors of them selves as well as of the other people involved in that management. It is highly improper, therefore, and utterly destructive of external audit control, to allow an independent auditor to become in any way responsible for any part of management's responsibilities. So we think that there should be a clear demarcation between accounting and independent auditing. That is why we recommended, first of all, that in order to establish the proper responsibility and authority for the accounting function of the Government, the Congress must set accounting up as a separate and distinct function, even if this means the creation of another establishment, as some said at the time. We don't agree that that would be the case because it would mean, rather, merely the supplying of a need that has been existing and never satisfied in our Government in all the one-hundred and sixty-odd years of its existence. We felt that it should be established. We also felt that it should be established in the Executive Office of the President, since, after all, the President is the general manager of the Government's business. It is his responsibility, as I see it and as all of us saw it, to accept the responsibility for, and fully discharge, the accounting function. We compromised on that unwillingly because of objections that we encountered to the idea that our plan would mean the creation of a new establishment. We did not want to put the accounting function in the Treasury Department. We objected to it on the general grounds that I have just stated. We objected to it on the specific grounds that one of the great troubles with the Government's accounting up to this time has been the fact that the over-all accounting of the Government has been confused with the accounting of the Treasury Department. The Treasury Department seems unable to visualize the necessity for any accounting but its own, let alone the need for separating its accounting from that of the Government as a whole. In support of that statement I refer you to a letter dated October 4, 1949, from Hon. E. H. Foley, Jr., Acting Secretary of the Treasury, to you, Senator McClellan, as chairman of this committee. (See p. 99.) In the fourth paragraph of that letter Mr. Foley opposed creation of the Office of Accountant General, as proposed in S. 2054, "for the reason that a statutory organization already exists to perform the accounting services for the Treasury." Mind you, this came many months after the General Accounting Office-Treasury-Budget Bureau joint effort to improve the Government's accounting generally had been organized and gotten under way. S. 2054 isn't a bill to appoint an accounting officer for the Treasury Department. It is a bill to appoint a chief accounting officer for the whole United States Government. We thought that to put the responsibility for accounting back in the Treasury Department was merely to continue what we regarded as an extremely unsatisfactory situation. Inevitably the over-all accounting of the Government, if placed in the Treasury Department, would become involved with that of the Treasury Department. Experience has proven this. The Treasury's own accounting problem is a tremendous one. So we didn't like the idea of putting the Accountant General in the Treasury Department. But we said reluctantly: "All right, put the accounting in the Treasury Department, if you want to; but give the head of it the status of an Assistant Secretary, |