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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 net 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.

Secretary REDFIELD. It is challenged, because it is only a half truth. What is the other half-what is the need for this organization?

Mr. NICHOLSON. If public accountants are going to be employed for the Government, not by the client of the Government but for the Government, it would cost the Government probably fifteen times more than it would cost them through having a bureau here in Washington or a division who could do this work as governmental representatives.

Mr. SHERLEY. That depends somewhat upon the division, and, perhaps, we have had more experience as to the cost of divisions in Government work than even the expert accountants have.

Mr. CUTLER. It is utterly impossible for any individual concern to secure the sympathy of the industries of the country. We frequently have the benefit of the advice of the largest concerns, who are very glad to cooperate with the Government.

Mr. SHERLEY. Is there any difference between men who are acting for the Government and a private concern who is acting for the Government in the sympathy with which they would be received? Mr. CUTLER. Very much so.

Mr. SHERLEY. I can not see it.

Mr. NICHOLSON. May I suggest one more thought which should be taken into consideration. Perhaps, out of 10,000 or more firms of certified public accountants throughout the country there are probably not more than 150 of them that do what we call cost work or who have cost experts on their staffs. So it would be rather a difficult thing if the Government was employing certified public accountants throughout the country to really find those firms who could do this work, even if they were willing to pay the regular professional

rate.

Mr. SHERLEY. Of course, you appreciate that the Government usually, and most of us trust shortly again, will buy through competitive methods in which the protection of the Government comes by virtue of the competition between rival bidders. In that instance, the contract price is not related directly to the cost. Right now the Government is buying very largely. Some departments have been able to get along and take care of their load, though the load has been very heavy, whereas other departments, with a less load, have broken down and have apparently had to go out and get assistance from all sorts of sources to help them perform the functions for which they were created.

Mr. NICHOLSON. Most of the work we have done has been in connection with cost, plus contract. If the Government were making straight purchases it does not seem to me that we would be called into the proposition at all.

Mr. SHERLEY. That is it. The question comes up as to the extent of the work resulting from purchases by the cost plus plan and the facility of the Government to perform that work through existing agencies or through the employment of commercial agencies that exist for that purpose.

Mr. CUTLER. You are asking whether an individual concern could do the work which our so-called division is doing. It would be utterly impossible for any individual or any individual firm to bring

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together, for instance, all the canners in the United States within a few hours and get them to agree to give the Government the benefit not only of low prices, but of quick service, which they did when they came before us as an intermediary of a Government department.

Mr. SHERLEY. That is the very function for which the Council of National Defense exists. Washington is so filled with committees that none of us can keep up with them.

Mr. CUTLER. The council is represented there on the departmental manual. They have three of their members there.

Mr. SHERLEY. The Council of National Defense has an advisory committee on the subject of accounts, has it not?

Secretary REDFIELD. Yes; in cooperation with us.

Mr. SHERLEY. No; that existed before you came into being.
Secretary REDFIELD. They are not doing this work.

Mr. NICHOLSON. They are not doing any field work. They simply act in the capacity of advisers. They have an officer in Washington and they advise on questions which are brought up. They do not do any field work of any character.

Mr. SHERLEY. As I understand, they do not undertake to check the books of the contractors with the Government; but their function, so far as we have been able to ascertain that has been one of the unsolved riddles growing out of the war-is to get together the various men engaged in a particular industry, the particular committee dealing with it being composed of large producers, manufacturers, or buyers who have the technical knowledge that enables them to ascertain the extent of production, the time in which it can be had, and what would constitute a fair price. The very theory of their existence has been to do these things. If I understand you aright, it is your purpose to check them?

Secretary REDFIELD. To do the field work for them. They come to us for that work, because they can not do it themselves. That is exactly the point.

Mr. SHERLEY. The purpose for which they have been called into existence they are unable to perform?

Secretary REDFIELD. Not at all. That is an entirely unfair conclusion, not meant to be, and incorrect. They are not constituted for the purpose of doing the field work. They are constituted for the purpose of coordinating, as the law says, and when they need information which their force does not permit them to get, they come to us for it and we aid them to do it, and then the work is coordinated. It seems to me the question here is this, whether there are private means of doing this work on behalf of the Government at a corresponding cost. If there are such they are not known and are not in use, except in certain departments that have their own force. Then has the work proven economical and effective in the saving of money? It is saving in the cost of milk alone, through the investigation of the costs, double the total amount of the cost of the milk. Mr. SHERLEY. A contract has been let at a price less than that offered by the milk producers, and the conclusion is that that means a saving to the Government.

Secretary Redfield. The inference is not correct.

Mr. SHERLEY, I am trying to obtain the information.

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