New Problems of Accountability for Federal Programs

Published by the Government Accountability Office on 1971-04-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


    s   I

                                                ADDRESS BY
                                                           4T    e                 '    *               1Il1l1l1111

                                              ELMER B. STAATS
                                              APRIL 21, 1971


                         [NEW     PROBLEMS OF ACCOUNTABILITY              FOR FEDERAL PROGRAMS            1
                     I f I were t o ask you as p u b l i c a d m i n i s t r a t o r s and p o l i t i c a l

            s c i e n t i s t s w h a t p r i n c i p a l l y comes t o mind when one r e f e r s t o

            a c c o u n t a b i l i t y , I suspect t h a t most o f you would r e p l y i n terms o f

            accountabi 1it y as i t r e l a t e s t o our c o n s t i t u t i o n a l separation o f
        .   powers--principal l y between t h e executive and t h e l e g i s l a t i v e branches.

                     A r t i c l e I 1 o f t h e C o n s t i t u t i o n provides t h a t t h e President " s h a l l

            take care t h a t the laws be f a i t h f u l l y executed             **    *.'I    It further
            provides t h a t "he s h a l l from time t o time g i v e t o t h e Congress i n f o r -

            mation on t h e s t a t e o f t h e Union."            I n o t h e r words, he i s accountable

            t o t h e Congress f o r c a r r y i n g o u t l e g i s l a t i o n enacted by i t .

                     T h i s aspect o f a c c o u n t a b i l i t y i s certain1.y a t i m e l y one.       The

            temptation i s g r e a t t o develop i t a t length.                 We hear much these days

            about "executive p r i v i l e g e , "      questions as t o t h e P r e s i d e n t ' s a u t h o r i t y

            t o commit our armed forces t o combat, c r i t i c i s m o f t h e President f o r

            impounding funds a p p r o p r i a t e d by t h e Congress, charges o f a c r e d i b i l i t y

            gap i n i n f o r m a t i o n made a v a i l a b l e t o Congress, and so on.            Concurrently,
            we hear more and more f r e q u e n t l y t h a t Congress has l o s t i t s "coordinateii

            p o s i t i o n w i t h t h e executive branch, t h a t Government has become t o o
            large and too complex f o r adequate l e g i s l a t i v e o v e r s i g h t , and t h a t
            the President--thanks t o TV--overshadows                     any s i m i l a r f i g u r e or group
<'        ,


                  o f figures i n the legislative branch, and thus has an overpowering

                  natural advantage in molding public opinion.
                       An equally chall engi ng and tempting aspect of accountability is
                  whether the Congress has weakened i t s capabi 1i t y t o exercise adequate
                  legislative oversight because of i t s outnioded procedures and because
                  of i t s preoccupation w i t h d e t a i l s and hence insufficient attention t o
     1            major program issues.     This i s a familiar story t o a l l of us.       Perhaps
     1            some of you have made these charges yourself.
                       B u t , I shall r e s i s t these temptations.   In the brief time I have
                  today, I want t o develop a different b u t increasingly significant
                  aspect o f accountability.      I t i s not unrelated t o accountability of
                  the Congress to the electorate, nor t o the subject of separation of
                  powers.   Indeed, i t is impossible to separate them.         I am referring
                  t o the problem of accountability as i t relates to the increasing use
                  of organizations outside the Federal establishment i t s e l f i n carrying
                  out governmental programs.
                       The idea of carrying out governmental programs through non-
                  governmental organizations i s not a new one i n our history.           I t is as
                  old as the Erie Canal, l a n d grants t o the railroads, and the Morrill

                  Act t o support 1and-grant coll eges    .
     t!                What is new i s the sharply increased dimension i n recent years
                  o f the use of instrumentalities not directly administered by Federal
                  employees--the private corporation, the quasi-governmental organization,
                  non-profi t groups, international organizations, and s t a t e and local
                  governments.    The forms o f sponsorship are many, ranging from Federal
                  charters t o subsidies, froni contracts t o grants.       B u t , they a l l have
    a common denominator i n t h a t they are not administered directly
    by Federal employees ; they share accountability to thei r own management
    and t o the Federal Government.
           The need f o r accountability t o the Government stems from the
    simple b u t basic consideration t h a t an organization, supported wholly
    or i n part from public funds, o r established as a r e s u l t o f governmental
    charter, must be accountable in some manner t o the executive branch
    and t o the Congress.             I t is a fundainental tenet of democratic society
    t h a t individuals, agencies, or groups entrusted with public funds and
    responsibilities, must render an account of their a c t i v i t i e s .
           Some have described this mixture of governmental and non-governmental
    arrangements as the "contract s t a t e . "           Others have described i t as a
    b l u r r i n g of the lines between the public and private sectors.               Still
    others see i t as a dangerous and unhealthy situation i n which the
    Government i s i n danger of losing--or has l o s t - - i t s a b i l i t y t o a c t i n
    the public i n t e r e s t .      The phrases--"military industrial complex,"
    "educational industrial complex , I ' and "medical i n d u s t r i a l complex"--
    a,re used t o describe what some consider t o be an unholy alliance between
    government and industry under which the taxpayer and the general public
    come out as losers.              S t i l l others f e a r t h a t accountability will bring
    w i t h i t governmental controls and the seeds of destruction of our
    p l u r a l i s t i c society.
           For others, the issue--whether the growing trend is or i s not
    desirable--is an academic one.                They conslder i t inevitable and t h a t
    the future will see an even more extensive use o f such organizations,
           As these people view i t , the issue, therefore, i s how the
    Government can hold these organizations accountable w i t h o u t 1osing

        t h e e s s e n t i a l s o f i n g e n u i t y , creativeness and i n i t i a t i v e which we

        have associated throughout our h i s t o r y w i t h independent groups

        i n our society.        This i s t h e view which I hold.

               This l a t t e r t h e s i s has been a b l y voiced i n a c u r r e n t p r o j e c t

        sponsored by t h e Carnegie Corporation and t h e D i t c h l e y Foundation

        under t h e heading o f " A c c o u n t a b i l i t y and Independence."           Through j o i n t

        United States-Bri t i s h conferences, through a s e r i e s o f papers commissioned

        f o r a conference a t D i t c h l e y Park i n B r i t a i n , and through a d d i t i o n a l

        papers commissioned f o r an upcoming meeting i n Williamsburg t h i s f a l l ,

        t h e Carnegie Corporati on and t h e D i t c h l e y Foundation have underscored

        and high1 i g h t e d t h e importance o f preserving both accountabi 1 ity and

        independence     .
               I n t h i s 50th anniversary year o f t h e Budget and Accounting Act,

        i t i s p a r t i c u l a r y t i m e l y t o focus our a t t e n t i o n on t h i s apparent

        dilemma.      While the s u b j e c t i s n o t e x c l u s i v e l y one o f Federal concern,

        t h e e x t e n t o f delegation or c o n t r a c t i n g w i t h e x t e r n a l groups has gone

        f u r t h e r i n t h e Federal Government than i n S t a t e and l o c a l governments.

        I t i s a l s o an area o f i n t e r e s t t o me as head o f t h e United States

        General Accounting O f f i c e - - a major concern o f which i s t o a s s i s t t h e

        Congress i n i t s 1egis1 a t i v e o v e r s i g h t responsi b i 1it i e s .

              A l i s t i n g and h i g h l i g h t i n g o f t h e p r i n c i p a l forms o f delegation
        w i l l h e l p emphasize t h e importance and r a m i f i c a t i o n s o f t h e subject.
              Since World War 11, the United States has been a major c o n t r i b u t o r
        t o various i n t e r n a t i o n a l organizations, e s p e c i a l l y t h e United Nations


i         and its specialized agencies, and the international financial
                Let me cite a few statistics:
                      --United States subscriptions i n the International
                        Monetary Fund stand a t $5.2 b i l l i o n ;

                      --United States subscriptions t o the World Bank now
                        total $6.3 b i l l i o n ;
    Ls                --Over the l a s t decade, U.S. contributions to other
                        international lending i n s t i t u t i o n s , such as the
                        Inter-American Development Bank, the International
                        Development Association, and the Asian Development
                        Bank, totaled more t h a n $4 b i l l i o n ;
                      --Direct contributions t o the United Nations and i t s
                        special ized agencies, and other international organizations
                        totaled more t h a n $3.2 billion.
                In recent years there has been a pronounced tendency toward
          transferring a greater portion of United States foreign assistance funds
          t o international organizations.           Certain characteristics of these
          organizations, particularly the -
                                          f a c t o f t h e i r being international,
          create perp exing problems i n devising adequate techniques t o o b t a i n
          accountabi 1 ty.    We must start by recognizing that membership presumes a
          wi 11i ngness on the p a r t o f member nations to rely heavily upon the manage-
    . !   ment o f the organization or institution.           e have entered into an agreement
                 ___             -   -   -            --        _.-

          which Iseverely 1imi t s action . t h a t can be taken u n i 1ateral ly
                For example, developniental assistance carried out through the
          speci a1 i zed agencies of the Uni t e d Nations involves the international
sovereignty, so t o speak, of these agencies.           B u t this sovereignty must
somehow be reconciled w i t h the need t o o b t a i n sufficient financial,
management, and program data t o assure the c o n t r i b u t i n g nations t h a t
the programs of these agencies are being carried out effectively.                 This
inforniation i s needed, o f course, f o r the United States t o determine
the type and level of support i t should provide these agencies.               The
General Accounting Office has reviewed many of these programs and i n
many instances concluded that not enough information i s available t o the
United States t o make a valid assessment of t h e i r operations or results.
      What is needed t o overcome these inadequacies? We considered the
possibility of a u d i t s by t h e United States and other member nations b u t
discarded the idea as unwise and impractical.            We concluded t h a t the
better course f o r providing accountability l i e s i n pushing for better
financial controls, program evaluation, and budgetary systems within
these organizations.       We recommended, and the Department of S t a t e is
recommending, t h a t the United States support the establishment of a
single United Nations review body t o make independent evaluations of
United Nations developmental a c t i v i t i e s .
      Following the recent announcement by the President t h a t the
United States would seek increasingly to channel i t s development
assistance through mu1 t i l a t e r a l organizations, the Department of State
reorganized i t s Bureau of International Organization Affairs t o strengthen
the Bureau’s a b i l i t y t o monitor and evaluate the programs and a c t i v i t i e s
of the United Nations and i t s specialized agencies.           T h i s reorganization
followed closely a plan recommended by our office t o the Department and
t o the House Foreign Affairs Committee. This reorganization will provide
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                greater assurance t o the Congress t h a t channeling more a i d through m u l t i -
                lateral bodies will s t i l l afford reasonable oversight of expenditures
                channeled through these organizations.
                      W i t h respect t o the international lending i n s t i t u t i o n s , GAO has
                similarly been concerned t h a t there be a top level management review
                body i n each international i n s t i t u t i o n reporting t o i t s governing board,
                as contrasted w i t h the 1imited lower level audit a c t i v i t i e s reporting
                to the operating o f f i c i a l s of the banks.    This goal has already been
                accomplished a t the Inter-Ameri can Development Bank.
                  '   The national debate now t a k i n g shape,on grants-in-aid and revenue
                sharing is o f special i n t e r e s t t o those interested in the subject of
                accountability.       Grant-in-aid programs have increased i n the past 20
                years from $ 2 . 3 billion i n 1950 t o an estimated $30.3 billion i n 1971.
                Grants-in-aid have increased over t h i s period on an average of 12 percent
                a year.       By comparison State and local revenues have increased about
                9 percent a year.       Approximately one-quarter o f a.11 State and local
                funds are now derived from Federal g r a n t s .
                      An analysis of the Catalog o f Federal Domestic Assistance compiled
                by the Office o f Economic Opportunity f o r 1970 shows t h a t human
                resource programs--education, manpower, health , and income maintenance--
                account f o r more t h a n half o f a l l Federal grant funds.        In 1970, the
                Department of Health, Education and Welfare alone made 265 grants
                totaling over $10 b i l l i o n .   This compares t o 528 grants made f o r the
                entire Government i n '1970, w i t h obligations amounting t o nearly $24 billion.
      For the future the new budget for 1972 s t a t e s t h a t "this year
promises t o be a t u r n i n g p o i n t i n the history of our Federal system,"
noting t h a t the President's proposals f o r financial assistance t o
State and local governments , including revenue sharing f o r f i s c a l
year 1972, total $38.3 b i l l i o n , an $8 billion increase i n one year.
     In the debate on grants-in-aid and revenue sharing the basic
question focuses on the primary purpose of such assistance.            Is the
primary purpose to support programs f o r specific national needs ,
financed i n substantial part with national revenues and accounted f o r
t o the national Government? Or i s t h e i r prime purpose equalization
of the t a x burden under a sys tern of Federal ly-coll ected, local ly-
administered revenues?
     The President, i n his February 4 message t o Congress on general
revenue sharing, took note of the issue of accountability.            He pointed
out t h a t many people believe t h a t the best way to hold Government
accountable t o the people "is t o be ce tain t h a t the taxing autho 4ty
and the spending authority coincide."        He disagrees.     His conclus on
i s that accountabi 1i t y real l y depends n the end "on how easily a
given o f f i c i a l can be held responsible f o r his spending decisions    ***
not where the money comes from, b u t whether the o f f i c i a l who spends i t
can be made to answer t o those who are affected by the choices he makes."
In b r i e f , the President concludes t h a t the spending rather than the
taxing i s crucial i n the accountability issue.
     The dilemma is posed by the f a c t t h a t the President recommended
against allowing the application of the c i v i l rights and equal
    employment laws t o be determined b y State and local government.               These
    would continue t o be subject t o Federal a u d i t and Federal control.
          "Special revenue sharing," essentially, is a program t o consolidate
    categorical grants.      The President's proposal      , however, contemplates
    vastly increased local discretion t o a1 low'local determinations on
    program p r i o r i t i e s w i t h i n broad categories t o replace judgments of
    Federal agencies and t o provide f o r minimum'accountabi l i t y t o the Federal
    Government as to how these'funds a r e extiended.
          I doubt i f there is any issue i n our generation which has posed
    the issue of accountability more sharply.
          Will the Congress, which must raise the taxes, be willing t o s e t t l e
    f o r the discretion and delegation t o State and local government which
    the President's proposals contemplate? Can we find alternative ways of
    achieving accountabi 1 i t y short of the detailed and burdensome requirements
    which we have today i n so many of our g r a n t - i n - a i d programs? Will the
    speci a1 interests--concerned wi t h , f o r example, chi 1d care , aid t o the
    mentally retarded, or water pollution control--be s a t i s f i e d t o allow the
    need for these programs be made by the State and local governments?
         Whichever way the issue turns , our attention has been focused
    sharply on the c a p a b i l i t y of State and local government t o a u d i t programs
    and t o evaluate their effectiveness.
         The GAO is currently taking the leadership i n an e f f o r t t o
    develop a u d i t i n g standards which will more clearly define the nature
    and quality of a u d i t i n g of these programs needed t o provide managers
    and policymakers, including l e g i s l a t o r s , w i t h information and independent
          evaluations on what is done and what i s accomplished w i t h the funds
          expended.       We also expect to develop a model s t a t e a u d i t law.     If

     i    revenue sharing, as proposed by the President, is adopted, the
          application o f such standards may well become the major--perhaps the
          only--accountabi l i ty tool remaining f o r the Federal Government.
                 Closely a l l i e d w i t h the issues associated w i t h the grants-in-
          a i d and revenue sharing, is Federal Government assistance t o
          s c i e n t i f i c research.   During the l a s t 20 years, the Federal Govern-
          ment's assumption of expanded responsibility f o r s c i e n t i f i c research
          has led t o increased reliance on contracting with private non-profit
          organizations.         The f i r s t of these was the RAND Corporation, managed
          by a group of private citizens established a t the Douglas Aircraft
          Company i n 1946, t o provide systems analysis through a PROJECT RAND
          contract w i t h the Army Air Corp.         From this evolved the RAND Corporation
          i n 1948.
     l.          By the early 1960's, the number of similar nonprofit corporations
          created by the defense agencies had expanded greatly.                The increased
          need for strategic analysis led to the formatign i n 1956 of t h e I n s t i t u t e
          o f Defense Analysis, used by the Joint Chiefs o f S t a f f .           Other well
          known nonprofit corporations sponsored by the defense agencies include:
                        --Analytic Services, Inc.         (Air Force)       1958
                        --Logistics Management I n s t i t u t e    (DoD)   1961
                        --Research Analysis Corporation            (Army)   1961
                        --Center f o r Naval Analysis       (Navy)          1962

                                                                                                -1 0-
           During this period, the Air Force's need f o r systems engineering
     and technical management resulted in the creation of the MITRE Corporation
     i n 1958, t o serve i n developing electronic and command control systems.
                                                                                          . ,

     The Aerospace Corporati on was formed i n 1960 t o provide technical
     direction in missile and space programs.         The System Development
     Corporation was spun-off from RAND i n 1956, t o provide computer
     information programming and processing.          Finally, the John tlopkins
     Univers'i ty Applied Physics Laboratory, established i n 1942, has been
     used by the Navy f o r technical advice on'missile and space programs;
     the Laboratory i s a Government-financed laboratory, operated as a
     d i v i s i o n of the University.   Nondefense agencies such as AEC, NASA
     and NSF a l s o sponsor nonprofit research corporations.
           6y 1967, the Office of Science and Technology and the Federal
     Council f o r Science and Techno1og.y had identified 68 Federal contract
     'research centers including 17 sponsored by the Department of Defense
     w i t h varying degrees o f autononiy and having highly differing purposes.
     Funding of these Federal Contract Research Centers increased from
     $1.1 billion i n 1962 to over $1.5 billion i n 1970.
           One of the most recent nonprofit research corporations is the
     Urban I n s t i t u t e established i n 1968 to study urban problems.   Broadly
     speaking, the relationship of the Urban I n s t i t u t e will be t o the
$    Department of Housing and Urban Development as the RAND Corporation
     is t o the Air Force.      Recently announced are plans t o create an
     Environmental Protection I n s t i t u t e to provide a similar role for
     the Envi ronmental Protection Agency.
          Much has been written and s a i d as t o the merits of these centers
     sometimes referred to as "captive" organizations.          The word "captive,"
a t l e a s t i n the early days, was appropriate since most were not per-
mitted a t that time t o undertake work o r receive funds from any
organization other t h a n the sponsoring agency.          The policy has since
changed f o r most o f them,
      Supporters o f these centers argued i n behalf of their establishment
t h a t they could be organized more quickly t h a n a new u n i t i n the
governmental establishment; they frequently could borrow personnel
and resources already available a t a university location; and, most
importantly i t was argued, they would not be subject t o the painstaking
accountabi 1 i ty , and admi ni s t r a t i v e requirements o f the bureaucracy
w i t h respect t o salaries , budgets , reporting, etc.--matters o f long-
s t a n d i n g concern t o governmental in-house establishments.
      B u t this very independence has also been the source of problems.
How truly independent can an organization be, i t i s asked, i f i t s

l i f e depends upon a year t o year budget allowance from an agency o r
even a subordinate u n i t w i t h i n an agency.     Why should an organization
f u l l y o r chiefly supported w i t h Federal funds be permitted special
privileges or advantages not given to those i n the Federal establishment?
One student of the subject summed up the dilemma of the Federal Contract
Research Centers i n these ironic terms:            the principal issue w i t h them
currently, he said, i s how t o preserve the strengths which caused these
centers to be established i n the f i r s t place; t h a t i s , how t o preserve
professionalism and independence when their future i s t i e d up so closely
w i t h the funding o f a particular sponsoring organization.
     W i t h increasing scrutiny and restrictions        , especially from the
House Appropriations Committee, these centers have been pushing f o r
                                                                                   -1 2-
diversification o f support and a t l e a s t one has been cut loose from
Government sponsorship and functions in the private sector.
      And, the end o f the story may not have been told.             The question
is asked--if we have the ingenuity t o create a special purpose Tennessee
Valley Authority, or a Langley Research Center, or a National I n s t i t u t e
of Health, why can't we likewise establish the necessary f l e x i b i l i t y and
autonomy w i t h i n Government? Can the sponsored research center, i n short,
have i t both ways--freedom from market-place competition on the one hand
and freedom from accountability t o Government on the other?
      Another significant measure of Federal support o f science is
the growth o f g r a n t and contract funds t o universities.         The National
Science Foundation plays a major role in such support.' Statistics
compiled by the NSF show t h a t obligations f o r research and development
conducted by colleges and universities more than doubled from
$800 million in 1962 t o $1.7 billion i n 1970.           The 1972 budget
contemplates nearly $2 billion.         I t s goal i s very broad:     to insure
the v i t a l i t y of research e f f o r t s ; t o develop and support research
e f f o r t s t o increase our understanding of the problems of society and
t h e i r solution; and t o advance the Nation's economic growth and welfare.
      T h i s research also provides f o r d h e t r a i n i n g of science and
engineering graduate students through employment on the research
projects and helps develop needed capabilities in academic institutions
t o undertake r e s e a r c h on important national, r e g i o n a l , and local problems.
                                                                                   -1 3-
            Assessments o f t h e management and r e s u l t s o f these e f f o r t s have

    l o n g challenged those managing and a u d i t i n g these expenditures.


            I n o b t a i n i n g t h e goods needed by t h e Government t o c a r r y o u t
    i t s programs, the question o f whether t o make o r whether t o buy i s

    t h e f i r s t question t h a t must be answered.                  When i t decides t o make,

    t h e Government o f t e n i n v e s t s i n p l a n t s and equipment and then c o n t r a c t s

    w i t h the p r i v a t e s e c t o r t o operate t h e p l a n t s .

            The Department o f Defense and t h e Atomic Energy Commission

    both make extensive use o f p r i v a t e c o n t r a c t o r s t o operate Government-

    owned i n d u s t r i a l p l a n t s .   I n f a c t , most o f t h e work i n v o l v e d i n

    achieving AEC goals i s performed i n Government-owned f a c i l i t i e s under

    c o n t r a c t s w i t h i n d u s t r i a l and educational o r o t h e r n o n p r o f i t organizations.

    By t h e end o f f i s c a l year 1970, these AEC c o n t r a c t o r s had approximately

    106,000 employees engaged i n operations and 9,000 i n c o n s t r u c t i o n work.

    This compares w i t h 7,548 f u l l - t i m e AEC employees.                    Contracts w i t h 350

    prime i n d u s t r i a l c o n t r a c t o r s i n 1970 amounted t o $1.6 b i l l i o n .          I n the
    same period, t h e Department o f t h e Army had 28 a c t i v e GOCO i n d u s t r i a l

    p l a n t s whose o p e r a t i n g expenses exceeded $1.1 b i l l ion.

            I t can be seen t h a t t h i s technique i s , e s s e n t i a l l y , t h a t o f pro-

    c u r i n g t h e management t a l e n t s of t h e p r i v a t e sector.           The Government

    has a g r e a t deal o f c o n t r o l over t h e a c t i v i t i e s o f c o n t r a c t o r s who
    operate GOCO p l a n t s .          The question i s the e x t e n t t o which t h a t c o n t r o l

    should be exercised.                The t r a d i t i o n a l measure o f t h e e f f i c i e n c y o f t h e
    normal i n d u s t r i a l enterorise--whether i t makes a p r o f i t , i s n o t present

    w i t h the GOCO's.   Government must therefore f i n d the yardsticks to
    measure the management effectiveness of these contractors.
          The Federal Government i s the private sector's biggest customer.
    Since 1949, when the Federal Property and Administrative Servi ces
    Act centralized c i v i l i a n procurement, the dollar va ue o f a l l U.S. purchases
    of supolies and equipment has increased from $9 bil ion t o $55 billion.
    T h i s i s nearly one-fourth of the Federal Government s total budget.
    Nearly 90 percent of these purchases is i n the form o f negotiated
    rather than formally advertised b i d procurement.        About one-half i s
    negotiated w i t h a single supplier, known as sole-source procurement.
          Where the Government can buy competitively i n the market place,
    the normal market mechanisms can generally be relied upon t o assure
    t h a t the goods are procured economical ly.     B u t negotiated procurement--
    especially negotiated sole-source procurement--requires other controls
    t o insure reasonable prices t o the Government.
          Some have even raised the question as t o whether the major
    defense contractors, whose enti re business depends upon Government
    consumption and whose sales to the Government are predominately
    negotiated , are losing t h e i r status as private corporations.
         A great deal o f i n t e r e s t has been stimulated i n improving

    Government procurement procedures.        For example, DOD i s increasing
    i t s use o f " f l y before you hu.y" procurement.   GAO has recently
    reconimended greater emphasis on "should cost" analysis t o f i n d ways
    i n which the Government and the contractors can reduce the cost of
    weapon systems by applying improved management and engineering
                                                                                   -1 5-
techniques i n c a r r y i n g o u t t h e c o n t r a c t .       The i n t e r e s t o f t h e Congress

i s c l e a r l y demonstrated by t h e establishment o f t h e Procurement

Commission and t h e Cost Accounting Standards Board which i s concerned

w i t h b e t t e r c o s t i n f o r m a t i o n i n n e g o t i a t e d defense procurements.


       A r e l a t i v e l y new and d i f f e r e n t technique f o r a t t a i n i n g Federal
o b j e c t i v e s o t h e r than through grants and subsidies t o p r i v a t e

i n s t i t u t i o n s , i s t h e c h a r t e r i n g o f separate and independent organi-

zations which may o r may n o t r e c e i v e i n i t i a l o r c o n t i n u i n g funding

by t h e Federal Government.              Many a r e intended t o be s e l f - s u p p o r t i n g .

Here a r e some r e c e n t i l l u s t r a t i o n s o f t h i s technique.

Job Opportunities i n the Business Sector                      -
  JOBS Program
       The JOBS Program, i n i t i a t e d i n 1968, represents a j o i n t e f f o r t

by t h e Government and t h e p r i v a t e s e c t o r t o f i n d meaningful employment

f o r disadvantaged persons.              The N a t i o n a l Association o f Businessmen

(NAB) was e s t a b l i s h e d as a p r i v a t e , independent, n o n - p r o f i t c o r p o r a t i o n

f o r t h e purpose o f s t i m u l a t i n g p r i v a t e business f i r m s t o h i r e and t r a i n

t h e disadvantaged.          The present goal o f t h e JOBS Program i s t h e employ-

ment o f 614,000 hard-core unemployed i n 125 c i t i e s by June 30, 1971.

NAB seeks t o a t t a i n t h i s o b j e c t i v e by c r e a t i n g awareness, involvement

and commitment i n t h e business community to s t i m u l a t e them t o p r o v i d e

jobs and t r a i n i n g f o r such persons and advise t h e Secretary o f Labor
on how the Government can help meet t h i s o b j e c t i v e .

       GAO r e c e n t l y reviewed t h e o p e r a t i o n o f t h e JOBS Program and

concluded t h a t , i n s p i t e o f growing pains and many remaining problems,
i t has been effective i n focusing the attention o f businessmen on
the employment problems o f disadvantaged persons and i n e l i c i t i n g
broad responses and commitments by many private employers t o hire,
t r a i n and retain the disadvantaged.   By the end o f June of l a s t year,
more t h a n 15,000 companies had hired persons under the JOBS Program
and almost one-half niillion jobs had been pledged t o be placed.
Medicare Program
      The Medicare program was established i n 1966 to provide persons
over age 65 w i t h hospital and physician care.      Physicians' services
and other medical and health care i s provided through a voluntary
Supplementary Medical Insurance Program.        T h i s program is administered
by private carriers through contracts w i t h the. Secretary o f HEW.         The
c a r r i e r s ' functions include:
      --Determining the rates and amounts of payments on a
         reasonable charge basis;
      --Determining the medical necessity o f the payments ; and
      --Receiving, disbursing, and accounting f o r Medicare funds.
      By the end of l a s t year, 19.2 million persons were enrolled i n
this program and 49 carriers had made benefit payments of about
$1.5 billion.
      I t h i n k we can look forward t o even further use o f the private
sector f o r a range o f social-purpose programs.      In his Health Message
to the Congress e a r l i e r this year, the President called f o r the
establishment of health maintenance organizations--known as HMO's--
t o upgrade the delivery o f health services to U.S. citizens.         The
HMO's are intended t o b r i n g together a comprehensive range o f medical

services in a single organization so t h a t a patient i s assured of
convenient access t o a l l of them.   These medical services are provided
for a fixed contract fee which i s p a i d i n advance by a l l subscribers.
There i s thus a strong b u i l t - i n incentive for greater efficiency.
     An advantage o f using private organizations f o r social-purpose
programs is the a b i l i t y to develop flexible relationships w i t h the
persons being served.     B u t to the extent that delivery of services
is decenfral ized, accountabi 1i ty problems become more acute.
"Bui 1t-i n" accountabi 1i ty--such as the p r o f i t incentive of the
proposed H~lO's--thus~
                     becomes highly important.
     In addition t o the utilization of private enterprise f o r social
purpose programs, a number of quasi public organizations have been
established t o carry out functions which traditionally have been
who1 ly committed t o the private sector.     These quasi pub1 ic organizations
were created to f i l l the gap between what the private sector had been
able to deliver and what the Government f e l t was required i n the
public interest.    Here are three examples:
Corporation .for Public Broadcasting
     In 19 7 Congress established the Corporation f o r Public Broad-
casting t o provide financial assistance f o r non-commercial educational
TV and rad o broadcasting.      T h i s nonprofit corporation seeks to
strengthen and improve educational radio and TV by providing an
independent source o f funds.     I t also operates and interconnects i t s
own stations. A1 though independent from the Government i n i t s operations,
i t t h u s f a r depends upon appropriations by Congress to finance i t s
                                                                              -1 8-
    operations.     Having no independent source o f income, i t remains
    subject t o influence by the President and the Congress through
    the apwopriation process beyond that contemplated when established.
    Communications Sate1 l i t e Corporation
          A t the dawn o f the space age i n the early 1 9 6 0 ' ~the
    Communications S a t e l l i t e Corporation (COMSAT) was incorporated as
    a profit-making corporation w i t h the goal o f establishing, i n
    cooperation w i t h other countries, a commercial communications
    s a t e l l i t e system as part o f an improved global communications
    network.    Financially, this corporation is completely independent of
    the Government since i t finances i t s operations through issuance of
    capital stock t o the public.
          Dual responsibility t o i t s stockholders and the Government can
    cause a dichotomy i n i t s operations--for example, the State Department
    can d i r e c t COMSAT t o provide communications f o r areas of the world
    t h a t are unprofitable and therefore not i n the i n t e r e s t of i t s
    shareholders.     COMSAT also must depend upon NASA f o r launching o f i t s
    s a t e l l i t e s , and i t s operations are regulated by the Federal Communications
    National Rai 1road Passenger Corporation- (RAILPAX) (Renamed AMTRACK)
         The most recent quasi public corporation, created by the last
    Congress--the National Railroad Passenger Corporation was established
    t o provide i n t e r c i t y railroad passenger service.   T h i s was i n response
    t o the threat t h a t railroad passenger service might disappear.            By
    1970, there were only 500 passenger trains compared t o 20,000 i n 1929.
    RAILPAX i s chartered as a private, p r o f i t making organization financed
                                                                                       -1 9-
p r i n c i p a l l y by common and p r e f e r r e d stock; i s a u t h o r i z e d t o operate

i n t e r c i t y t r a i n s and make c o n t r a c t s w i t h r a i l r o a d s o r o t h e r companies

f o r use o f f a c i l i t i e s and equipment; and can r e l y on r a i l r o a d s t o

p r o v i de manpower.

        A1 though t h e a c c o u n t a b i l i t y problems associated w i t h t h e quasi

p u b l i c c o r p o r a t i o n s a r e s i m i l a r t o those r e l a t i n g t o p r i v a t e e n t e r -

p r i s e o r g a n i z a t i o n s e s t a b l i s h e d f o r s o c i a l purpose programs--that i s

p r e s e r v i n g independence and t h e advantaqe o f market mechanisms--an

a d d i t i o n a l f a c t o r t o c o n s i d e r i s t h a t they compete w i t h o t h e r p r i v a t e

sector corporations.                Thus t h e r e i s i n e v i t a b l y a danger t h a t Federal
support o f t h i s t y p e o f quasi p u b l i c c o r p o r a t i o n , i f n o t c a r e f u l l y

c o n t r o l l e d , may tend t o undermine t h e e f f e c t o f p r i v a t e s e c t o r

c o m p e t i t i o n which may be t h e v e r y reason f o r being o f t h e quasi

public corporation.                One way t o a v o i d t h i s danger i s t o i n s u r e t h a t

these quasi p u b l i c c o r p o r a t i o n s a r e n o t f i n a n c i a l l y dependent upon

income from t h e Federal Government.


        A s p e c i a l t y p e o f quasi p u b l i c c o r p o r a t i o n i s t h e f e d e r a l l y
sponsored f i n a n c i n g agency.             From t h e i r i n i t i a t i o n i n 1917, t h e i r

r o l e has grown t o t h e e x t e n t t h a t t h e i r o p e r a t i o n s p l a y i m p o r t a n t

r o l e s i n t h e a l l o c a t i o n o f monetary and f i s c a l resources.                  The f i v e

p r e s e n t l y i n e x i s t e n c e are:

        Federal N a t i o n a l Mortgage A s s o c i a t i o n

        Federal Home Loan Banks

        Federal I n t e r m e d i a t e C r e d i t Banks

        Federal Land Banks, and

       Bank f o r Cooperatives

             Each was, a t one time, e i t h e r wholly o r partly Government-

       owned.    Wow they are entirely privately owned, and are not included

       i n the budget of the Federal Government.        They were established by
       Congress t o meet national objectives i n the area o f agriculture
       and housing and, although now privately owned, are s t i l l under
       Government supervision.
             The Federal National Mortgage Association i s presently the
       1arges t in scope o f the federal ly sponsored f i nanci ng agencies,
       being involved mainly i n the purchase and sale of FHA insured and
       VA guaranteed mortgages.        In 1970, the outstanding debt of these
       agencies totaled $35.8 b i l l i o n .   Over fiscal years 1970 and 1971,
       the estimated net increase i n outstanding d e b t of these agencies
       amounted t o more t h a n $18 billion.
             Besides affecting the housing and agricultural programs they
       were designed to a i d , the policies of these agencies are affecting
       overall economi c s tabi 1i zati on pol i ci es of the Government.    Some
       fear t h a t these agencies, created to supplement the a c t i v i t i e s of the
       private sector, are .becoming the dominant institutions i n these
       areas.   These people would prefer t o have the operations of these
       institutions subject t o Federal budgetary control.
            The accountability issue i s clouded and made more d i f f i c u l t
       by the f a c t t h a t the Government, in the various forms of delegation
       o r contracting outlined above, is seeking to accomplish, i n many
       cases, more t h a n one public purpose.      In most if not a l l o f these
                                                                                     -21 -
    arrangements, the Government has the option o f d i r e c t operations.
    I t s decision not to do so may be influenced heavily by the f a c t t h a t
    other objectives are sought by the use o f external organizations:
1          --Strengtheni ng private enterprise.
           --Supporting educational institutions.
           --Fostering i nternati onal coopera ti on.
           --Encouraging private investment as a means o f
               lessening public expenditure requirements.
           I would n o t argue, as does Peter Drucker, t h a t Government is
    inherently incapable of e f f i c i e n t management, and thus should 1imi t
    i t s e l f t o a policy role, b u t many thoughtful students of Government
    argue t h a t pluralism i n carrying out Government programs, l i k e
    pluralism i n the private sector, may i n and of i t s e l f be an objective
    which should be encouraged.         I t would be d i f f i c u l t t o conceive o f
    a situation where we attempted t o carry on a l l Federal a c t i v i t i e s
    through direct Federal operations.
           There must be a bal ance between accountabi 7 i t y and delegati on.
    We now realize the Defense Department's total package procurement
    concept, for example, which resulted i n Lockheed's problems with the
    C5A a i r c r a f t and the Cheyenne helicopter, is not a viable arrangement.

    We now recognize that the Government must have a continuing, intimate,
    day t o day relationship i n monitoring development and production
    problems when a weapons system is being purchased which pushes the
    " s t a t e o f the a r t . "
           The opposite extreme i s the extent t o which the National Science
    Foundation once insisted on over-detai led accountability by requiring
    "total e f f o r t " reporting f o r academic s c i e n t i s t s who received grants
    from the National Science Foundation.           Either extreme is t o be avoided.
              Perhaps some of you t h i n k of the auditor as the accountant
        whose role is limited t o certifying as t o the adequacy and completeness
        of financial statements.       In such terms, his role i s important b u t
        limited t o making certain t h a t there has been an adequate disclosure o f
        financial data t o the Congress, t o the executive, and t o the p u b l i c .
              This aspect of accountability, which I r e f e r t o as f i s c a l
        accountability, is only a p a r t of the auditor's role.         The National
        Association for the Advancement of Colored People complained t o our
        Office t h a t a financial a u d i t of grant-in-aid programs' by State
        auditors was of l i t t l e value i f the auditor was unconcerned as t o
        whether the program achieved the congressional ly intended purpose.
        The stockholders of a major corporation n o t long ago sued a public
        accounting firm who c e r t i f i e d as t o the adequacy of the firm's
        financial accounts shortly before the company went bankrupt,                Their
        o p i n i o n was too limited, i t was argued, i n that i t d i d n o t analyze
        bas c management problems o f the company.
              Indeed, the Budget and Accounting Act of 1921 contemplated t h a t
        the a u d i t o r would be concerned broadly with the "receipt, disbursement,
        and application of public funds       **   *.I'   Similarly, the Legislative
        Reorganization Act o f 1946 directs the Comptroller General to make
        expenditure analyses t o "enable Congress to determine whether funds
        have been economically and e f f i c i e n t l y administered and expended."
        More recently, the Legislative Reorganization Act o f 1970 c a l l s on the
        Comptroller General t o make studies of costs and benefits o f Federal
     The responsibility of the auditor i n the GAO, and elsewhere,
embraces three aspects of accountabi 1i ty:
     --fiscal accountabi 1 i t y , which includes fiscal integrity,
        disclosure, and compliance w i t h applicable laws and
     --nianageri a1 accountabi 1i ty , concerned w i t h the e f f i c i e n t
       and economical use of personnel and other resources; and
     --program accountability, designed to assess whether programs
        are achieving t h e i r intended objectives and that the best
        program options have been selected to achieve these
        objectives from the standpoint of total cost and outputs.
     An accountability system should embrace a1 1 three elements:
There must be public confidence as t o fiscal integrity i n the
spending o f public funds; there must be assurance that waste does not
occur through mismanagement; and, there must be a way t o assess
whether programs are accomplishing t h e i r intended objectives w i t h
the l e a s t cost and maximum results.
     I do not intend t o imply that the auditor has an exclusive,
o r even necessarily the primary , responsibility f o r management and
program evaluation.      Other analytical s t a f f s and other systems o f
review are also available to the administrator.              Too frequently,

however, such s t a f f s have been primarily concerned w i t h budget
formulation and program planning and not sufficiently w i t h whether
on-going programs are achieving t h e i r intended result.            T h i s is the
area t o which the auditor has a major and increasingly important
contribution to make.      He has a tradition o f maki-ng his findings
                                                                                       -24   -
7 ' , ,   c

J   ,
              independent of the operating o f f i c i a l ; he is increasingly equipped
              with special s k i l l s which go f a r beyond t h a t required f o r financial
              audits alone; and, most importantly, he is increasingly looked t o
              by the legislature and by the executive for studies and recommendations

              on a l l three aspects o f accountability.
              EXECUTIVE BRANCH
                    I t should be emphasized t h a t , i n any accountability system, the
              l e g i s l a t i v e branch is concerned w i t h how well the manager i s informed
              w i t h respect t o his operations; whether he has the necessary s t a f f t o
              deal w i t h operating problems ; and whether he i s adequately evaluating
              his program accomplishments.         When the Congress, f o r example, uncovers
              vast i r r e g u l a r i t i e s i n the p o s t exchanges and commissaries of the
              Defense Department , i t s natural question i s why the Defense Department
              had not identified and dealt w i t h the s i t u a t i o n .   When the Congress
              i s frustrated as t o whether the economic opportunity and elementary
              education programs are working, a natural question is what evaluations
              have the agencies made and w h a t resulted from them.            When the Congress
              is called upon t o increase funding f o r international organizations,
              the natural question is how much does the State Department o r the
              Treasury Department know about the effectiveness of international
              loans and technical assistance.
                    I t i s important, therefore, that the legislative auditor carry
              out his responsibility i n part by auditing the agency's system of
              accountability-finding        out whether internal a u d i t i s on top of i t s
              job, whether management has the information i t needs t o prevent cost
1, :       over-runs     whether i t has the analyses t o jus,tify additional f u n d i n g ,
           and so on.     T h i s concept is fundamental i n t h a t i t places the emphasis
           on accountabi 1i ty a t the p o i n t o f primary responsi b i 1i t y , namely, the
           agency head or the President.
           BY WHAT TEST S H A L l X
                 Unl i ke the market-place t e s t of sales and profits , the Government

       1   auditor seldom can apply an equally concrete test o f costs and
           benefits.     Sometimes he can make cost benefit studies i n quantitative
           terms.     Usually he must search the l e g i s l a t i v e history, the appropriations
           hearings     and the translation of sometimes broad statutory charters into
           statements of program objectives of the operating agency.                  He must
           examine evidences o f program impact, of good or bad coordination, and
           a1 ternately, perhaps, he must exercise subjective judgments based on
           his own experience as a trained analyst, the conclusions 'reached by
           management, o r the recipient of the program i t s e l f .       In short, there
           is frequently no established "par f o r the course" by which t o judge
                The problem is even more sharply focused when Government operates
           through an external organization.
                --How do we assess the impact of a model c i t i e s or a community
       :            action program designed i n large part to promote citizen action
                    and social change, complicated s t i l l further by the f a c t t h a t
                    funds may come from several agencies--public and private--
                    under differing statut0r.y provisions?
                --How do we i s o l a t e the impact o f United States foreign economic

                    assistance f r o m the political climate and the economic
                    development e f f o r t s w i t h i n an underdeveloped nation?
y   I   .   k-

                         --How does the auditor reach a conclusion on how'well research

                           grants are administered i n a given university?
                         The form and extent o f accountability, moreover, cannot be divorced
                 from the legislative or the political climate a t a particular'point of
                 time.     All of a sudden people have discovered the meaning of the words
                 "ecology" and "environment.     I'   These have now become household and school -
                 room words.     Ralph Nader has become something o f a national ombudsman.
                 Cost over-runs and efficiency have become headline items, matters o f
                 concern t o the entire Congress, not just the Appropriations and
                 Armed Services Committees.
                         The conclusions for my remarks today can be summed up briefly:
                         --The trend toward using external groups by Government
                           will probably increase i n the years ahead.
                         --Congressional and public concern w i t h respect to accountability
                           systems will grow as Government increases i n s i z e and complexity.
                         --As the concern f o r accountability increases, we must seek new
                           ways t o evaluate management and program effectiveness,
                           keeping i n mind t h a t under our separation of powers the
                           executive branch will continue to have the primary task
                           in the accountabi 1i t y system, and
                         --Finally, a s we recognize the need f o r , and as we can provide
                           f o r an adequate and well-understood accountability system,
                          we will also be serving the objective of a more responsive
                           system of Government, and a more democratic society.