In addition, the requirements for filing statements of financia interest have been expanded. Specific changes include deletion from the directive of the provisions on gratuities which previously per mitted: (1) customary exchange of social amenities between persona friends and relatives when motivated by such relationships and extended on a personal basis; and (2) transactions between and among relatives which are personal and consistent with the relation ships. The revised directive also adds the following categories of military and civilian personnel to the list of those already required to submi statements of employment and financial interests: (1) All civilian officers and employees paid at the level of grades GS-16 to GS-18 (2) all officers of flag or general rank; and (3) commanders and deputy commanders of major installations, activities, and operation: as determined by the respective secretaries of the military depart ments and directors of the defense agencies. These changes have strengthened our directive to the point there shouldn't be any question as to the Defense Department's policy or acceptance of gratuities or other questionable transactions betweer our military and civilian personnel and major defense contractors. Potential loopholes regarding exchange of social amenities no longer exist. A copy of the amended directive is submitted for the record. [See Appendix IV (C), p. 260.] Certain other actions have also been initiated in regard to the Northrop Corp. For example, the Air Force has recovered $564,013 in improper costs charged to the Government. A table detailing that recovery is submitted for the record. AIR FORCE RECOVERIES COST RESULTING FROM NORTHROP AUDIT REPORTS ON APR. 4, 1975, AND AUG. 6, 1975 Initiating date and action Nov. 13, 1974-Office of the Secretary of the Air Force Jan. 6, 1975 May 8, 1975 Jan. 17, 1975-Northrop determines Government due Oct. 6, 1975-CACO letter to Northrop demanding addi- Oct. 6, 1975-Government share of overhead credit found to be improperly calculated-$3,522 additional owed the Government. Oct. 20, 1975-Air Force Special Review Team chartered to ascertain any further recoveries due the Government as a result of costs classified as questionable in the Aug. 6, 1975 audit report.. Total to date........ July 8, 1975 Oct. 13, 1975 Oct. 13, 1975 Senator PROXMIRE. Would you just hold up for just a minute, Mr. Secretary? The chairman would like to inquire briefly and then we will go back to your statement. Mr. CLEMENTS. Certainly. Mr. PATMAN. Thank you, Mr. Chairman. The figures of the amount recovered from the Northrop Corp., I believe it's about $500,000, does that include hospitality or gratuity costs or just political contributions? Mr. CLEMENTS. Those are political contributions, Mr. Chairman. Mr. PATMAN. This $500,000? Mr. CLEMENTS. I beg your pardon? Mr. PATMAN. Is $500,000 near the exact amount? Mr. CLEMENTS. Well, in my statement I have $564,013. Mr. PATMAN. We will insert that amount instead, with your approval. Mr. CLEMENTS. That is the amount that's in the statement, Mr. Chairman. Mr. PATMAN. All right, sir; fine. Why precisely were these Northrop cost claims disallowed? Mr. CLEMENTS. Because they were improper and illegal. Mr. PATMAN. Have the moneys actually been returned to the government? Mr. CLEMENTS. Yes, sir, they have. Mr. PATMAN. Was an interest penalty assessed? Mr. CLEMENTS. There was interest, yes, sir. Excuse me, Mr. Chairman. This is Mr. Lynn with the Defense Contract Audit Agency and this is our General Counsel, Mr. Wiley of Defense. Mr. PATMAN. Thank you, sir. Now I have the exhibit-I believe it's filed in connection with your statement about the expenses that were recovered and how they were assessed. They will appear in your statement I assume. Mr. CLEMENTS. Yes, sir, and I have said that they would go into the record. Mr. PATMAN. Yes, they will. One of your lines on the exhibit is blank. In fact, there are three of them. Will you be able to supply the information for those lines in a reasonable time? Mr. CLEMENTS. Mr. Chairman, I don't think that the first item that you're referring to as being blank will require any filling in of the spaces. Mr. PATMAN. What about the last one? Mr. CLEMENTS. I'm not sure that there will be any information in regard to the last one that will be inserted, but if it's appropriate and if there is information obtained it will certainly be inserted. Mr. PATMAN. But you have no information at this time that leads you to believe that there will be any? Mr. CLEMENTS. No, sir. Mr. PATMAN. Is it associated with entertainment? Mr. CLEMENTS. I didn't understand your question. Mr. CLEMENTS. No, sir, I do not think so. Mr. PATMAN. Is it subject to negotiation? Mr. CLEMENTS. It could be; I just don't know. It depends on what we determine. Mr. PATMAN. That's all. Senator PROXMIRE. All right, sir; proceed. Mr. CLEMENTS. May I take up, Senator Proxmire? Mr. CLEMENTS. The Air Force is also presently conducting a detailed review of the August 6, 1975, DCAA draft audit report on the special review of consultant costs and other matters concerning the Northrop Corp. Until the ongoing audits involving the Northrop Corp. have been completed, we have suspended final payment on all contracts other than firm fixed price contracts with Northrop until February 29, 1976, when, if necessary, the suspensions will be extended. In addition, Northrop's contractors' weighted average share [CWAS] status was suspended indefinitely, thereby requiring the corporation to demonstrate the reasonableness of all indirect overhead cost charged to government contracts. In aggressively pursuing this matter we have not limited our effort to the Northrop Corp. The Office of the Secretary of Defense has been conducting an informal, confidential inquiry of the chief operating executives of 43 other major defense contractors regarding their entertainment activities. The results of that inquiry are still under review. However, I can assure you that the industries which have been contacted are aware of our concern and of our desire to insure that our relationship with them must be in strict compliance with our published standards of conduct. The response by these chief executive officers within their corporations-internal audit and special outside audits-involve many thousands of man-hours and great expense on their part. They look upon this as serious business and are not doing a superficial job. In addition, the Defense Contract Audit Agency is expanding its normal audits of the Washington offices of 10 major defense contractors, all of whom were contacted in the above inquiry, to determine if reimbursement has been sought or obtained for entertainment costs not allowable under Department procurement regulations. The contractors being audited are: Raytheon Co., North American Rockwell Corp., Hughes Aircraft Co., Martin Marietta Corp., Boeing Co., General Dynamics Corp., Lockheed, Sperry Rand Corp., Grumman Corp., and LTV Corp. These audits are still under way. Upon completion, all information will be integrated and evaluated so that a decision can be made on the proper direction that our investigations should then take. To insure that all of our defense contractors are aware of our desire to enforce the highest possible standards of conduct, I also sent letters to 106 contractors requesting their cooperation by informing their personnel of our directives with respect to standards of conduct. We have asked them not to tender that which the recipient is prohibited from receiving. A copy of a representative letter and a list of addressees is submitted for the record. [See Appendix IV (D), p. 314.] In order to insure that there is a complete understanding throughout the Department of Defense regarding our policies, we have reemphasized through various inhouse media, the need for strict compliance with standards of conduct by all Department of Defense personnel. To further reiterate the need for complete understanding and compliance with those standards, I sent letters to 74 project managers who manage over $183 billion of total program procurements for the Department of Defense, reminding them of their responsibility and have received very encouraging replies to my letters. A copy of a representative letter, a list of the addressees and some sample replies indicating a concern about and an understanding of the standards of conduct are submitted for the record. [See Appendix IV (E), p. 326.] In an effort to cover all areas of possible conflict of interest we also took action with regard to the conduct of defense personnel in connection with the activities of industrial associations. We have written to 47 such organizations and advised them of the conduct we deem necessary for the continued attendance of Department personnel at association activities. A copy of that letter and a list of addressees is submitted for the record. [See Appendix IV (F), p. 345.] We are finding that these associations are acting in a positive and constructive manner in their attempts to adhere to the letter and spirit of our more stringent policy guidance. I would like to turn briefly now to the other areas in which you expressed interest. In the first of these you asked about Department of Defense implementation of legislation intended to assure that information on the interchange of personnel between DOD and industry would be available to Congress. The Department has issued a directive and component regulations implementing section 410 of Public Law 91-121, which specifically requires the collection and forwarding to Congress of such information. Those documents were forwarded by the Department of Defense General Counsel in a letter to you of December 10, 1975, along with a detailed description of DOD procedures. I would like to have copies of this correspondence inserted for the record. [See Appendix IV (G), p. 354.] You have also asked about the effect that our contractors' weighted average share [CWAS] program might have on contractors' cost claims. I am particularly pleased to have this opportunity to explain the DoD CWAS program. Unfortunately it has been improperly identified as a contributing cause of improper cost reimbursements to defense contractors. The program was initiated in December 1966, and was based on the premise that under appropriate circumstances good management by industry, properly motivated by cost consciousness, can accomplish much more effective control of costs than can detailed review and overhead audits by government personnel. Under the CWAS guidelines, a contractor with a sufficiently high ratio of risk, generally represented by commercial or firm-fixed price work, can apply for a CWAS rating. The issuance of a CWAS rating, however, does not at all imply that costs submitted for reimbursement under a defense contract by a CWAS-qualified contractor are not reviewed. In order to obtain reimbursement, a cost must first be properly assignable to a particular contractor. Second, the cost must be allowable under terms of the contract and the provisions of the Armed Services procurement regulation. Some items of cost, such as entertainment expense are expressly identified as unallowable, and not subject to reimbursement. Finally, a cost must be reasonable in amount to be reimbursable. Reasonableness is defined as being that amount that a prudent businessman might incurr. It is only in this area of reasonableness that the CWAS concept is applicable, and then only to specifically designated types of indirect expenses. If a contractor has a satisfactory CWAS rating, that is, if he assumes the financial risk on sufficiently large portions of his business, then it is assumed that the designated types of indirect costs incurred under his defense contracts are reasonable in amount. They are still reviewed prior to reimbursement, however, to determine whether they are properly assignable. The Department is currently studying the criteria for evaluation of contracts under CWAS and we are reviewing the CWAS concept to determine whether it should be continued. In closing, I would like to return briefly to the subject of conflict of interest. Prior to the time of the disclosure of the use of the Northrop hunting facility by DOD personnel, both the Secretary of Defense and I had clearly stressed to the leadership of the Department, that no gratuities or favors should be accepted by anyone in the Department of Defense from any individual or firm that does business with this Department. Our intention and our instructions were intended not only to avoid conflict of interest but even the appearance of conflict of interest. Since the disclosure, in mid-1975, of conflict of interest violations with regard to the Northrop hunting facility we have undertaken, as I have already pointed out, a vigorous effort to further tighten our regulations, increase our audits, and to go on record with the personnel of the Department, with defense contractors, and with nongovernmental organizations that we are determined to maintain impartiality and objectivity in all of our dealings with contractors. Our efforts in this regard have been extensive and far reaching. In short, it has been a massive effort. Through a series of actions, formal and informal, written and verbal, we have contacted our key personnel, our project managers, and the leadership of industry and of nongovernmental associations. This is an enormous task. These contacts have been one on one, direct, by groups, by organizations and by industry. The response has been most gratifying. These persons in turn have passed on our guidance, our policies, and our concern to the membership of their associations, corporations, contractors, and subcontractors. All told, the message that the Department of Defense means business with regard to eliminating conflict of interest, and even the appearance of conflict of interest, has been transmitted to thousands of organizations and to their millions of employees and members. Our efforts will continue until both the Secretary of Defense and 69-394-76- -8 |