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Principal materials which each State contributes to shipbuilding


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New Jersey
New Mexico..
New York
North Carolina
North Dakota..
Rhode Island,
South Carolina.
South Dakota..
West Virginia..

Our program contemplates orderly construction over a period of 18 months to 3 years. It is intended that the program shall be elastic, and the numbers and types of vessels listed above will, of course, be subject to the needs of the routes which will be served.

Attention is directed to the fact that ships built under title V require the payment of 25 percent of the American cost (exclusive of the cost of national defense features) by the applicant. The remaining 75 percent is paid by the Government to the shipbuilder, the applicant obliging itself to repay with interest the foreign cost

of the vessel less the down payment, within 20 years. The only part of the construction cost of these ships which the Government does not recover, therefore, is the difference, if any, between the foreign cost and the actual American cost.

It is the desire of the Commission to carry out the policy of Congress declared in the Merchant Marine Act of 1936, and to place on a sound basis the relationship between the Government and the shiping industry.



No independent audit or appraisal of the Commission's properties and finances has been made since 1922.

I cannot stress this too strongly. When I came to the Commission on April 16 I asked for the last independent audit that had been made, and they gave me one that had been made in 1922. There has not been an audit of the Commission's affairs made by an outside concern since that time, in spite of the fact that its operations are like those of a private business, and different from other Government agencies.

Mr. BOYLAN. Are they making one now?

Mr. KENNEDY. No; what we are doing now is this. I immediately got in touch with the Comptroller's office and asked for permission to hire outside auditors. The Comptroller, after a discussion, decided that we could not hire outside auditors under the act.

I will cite here some of the things that we asked him, to substantiate our position. He said that he would send over some of his staff to make an audit. But he could not give us anybody who would appraise our assets. He told us that the only way we could do that would be to hire people and make an appraisal ourselves.

I told him I did not think I wanted to be responsible for a balancesheet audit made by our own employees. He said there was no other way that it could be done, but that they would go ahead and check the financial part of the audit.

I am still unconvinced that that audit will be satisfactory. I find the books of the Commission in a very bad condition. The general ledger has not been posted for almost 8 months.

So far as the audit now in the making is concerned, they are checking from journal books of entry and not from the final books of account.

Mr. CANNON. How do you account for that negligence?
Mr. KENNEDY. I am sure I do not know.
Mr. SNYDER. Did you say since 1922?

Mr. KENNEDY. Yes, sir; I have a balance sheet with some 200-oddmillion dollars on it, and there is no assurance that it reflects accurately the financial condition of our organization.

Mr. SNYDER. Do you have all of the necessary papers from which to check?

Mr. KENNEDY. I imagine that we have the papers and that theoritically the audit could be brought up to date. But I cannot place any confidence in an auditing organization which has permitted such a condition to obtain whereby the general ledger has not been posted since last October. We are now over a year and a quarter back on checking voyage statements. However, we are putting in day and night shifts in order to bring these matters up to date.

Mr. SNYDER. Have you any suggestions to help correct this situation?

Mr. KENNEDY. Yes. We have here a suggestion that we be permitted to hire outside auditors who will come in here and see if our books are in shape.

Mr. Bacon. Perhaps a resolution of the Congress to permit you to hire outside auditors might be necessary. That would cover the objection of the Comptroller.

Mr. WOODRUM. The language in this estimate will provide for that.

Mr. KENNEDY. I have with me Mr. Slacks, whom we secured from the R. F. C., a certified public accountant. If you could spare a minute, Mr. Chairman, I would like to have him tell you what he thinks of this present method.

Mr. WOODRUM. There is suggested language here that is sufficiently comprehensive to give you what you want. Do you want Mr. Slacks to make a statement now?

Mr. KENNEDY. I can continue with my statement, if you wish. Mr. WOODRUM. Please handle it the way you think best.

Mr. KENNEDY. Mr. Slacks, will you just explain exactly what is being done and what we would like to have done?

Mr. Slacks. The Comptroller General has been making, of course, a continuous audit. I think he has four men on the job now that are making a sort of a balance-sheet audit. They are going over what they find in our books.

Nr. Kennedy spoke to you about the general ledger being away behind. The Commission's accounting staff is just now beginning to post it. The reason for that delay was that they did not know what classification of accounts they would use when the new commission took office and they delayed until just a few days ago the posting of the ledger.

We decided that we would get it up to date rather than wait until later and make such changes in our system as we may find necessary after a few weeks.

We have several men who have come in fresh, completely unbiased and none of us feels that the Commission has an adequate accounting system. We have had considerable experience, before coming with the Government, with financial accounting and business firms. All of us feel that we ought to have at least 15 or 20 men on the auditing job right now. The Comptroller has four.

We do not like to criticize, of course, the way the Comptroller may wish to do his particular work. He may be sufficiently familiar with all the records to make a thorough check unnecessary. But we feel, to have a thoroughly independent check, involves employing an outside accounting firm.

Mr. WOODRUM. The suggested language permits you to do that, and the fund will permit you to do that?

Mr. KENNEDY. Yes, sir.

Mr. LUDLOW. How far back does this laxity go in keeping up these records?

Mr. KENNEDY. First of all, we have had no audit for 15 years. The posting of the ledger goes back to last October.

Mr. Ludlow. I am interested in Mr. Cannon's question; what is the explanation of that?

Mr. KENNEDY. Well, I have been here only since the 16th of April. I do not know what went on before.

Mr. Ludlow. I thought you might want to tell us, perhaps off the record, if you did not want to put it on the record.' But I will not press the question.

Mr. KENNEDY. I do not think I could give you a fair answer to that question.

Mr. TABER. I rather gathered from what Mr. Slacks said that the posting had been delayed because of the expectation of a new system of accounting under which there would be a different kind of a set-up. Did I understand that correctly?

Mr. KENNEDY. I think that is what Mr. Slacks said. But my own idea of running a business is not to wait for anybody else to post my books. I like my books up to date, even if I were going to change the system the following day.

Mr. WOODRUM. Will you proceed with your statement, Mr. Kennedy?

Mr. KENNEDY. Good business practice would seem to require that the financial affairs and property of the Commission be made the subject of a complete audit and appraisal. It is the opinion of the Commission that such an audit and appraisal should be made by independent outside auditors and appraisers. In view of the recent public criticism of the conduct of shipping affairs, it is deemed desirable that the Commission should secure an accurate picture of the status of its property and finances from an expert and independent source. I am informed that no agency of the Government is in a position to furnish this essential service to which all of the Commissioners feel they are entitled. The cost of this proposed audit and appraisal is not expected to exceed $25,000. The services of the auditing and appraising firms will, however, be obtained under regular sealed competitive bidding requirements.

EMPLOYMENT OF EXPERTS When a new business enterprise is begun, or an old one reorganized the services of individuals possessing special qualifications are often needed to advise on administrative matters and to assist in the inauguration of new policies. The Commission is such a business enterprise, and indeed it was so constituted by Congress. By section 207 of the Merchant Marine Act of 1936, Congress apparently intended to vest the Commission with necessary authority to carry out the contemplated reorganization, and it was assumed that the power to contract for special services was conferred by that section. The Commission is given the power to contractin the same manner that a private corporation may contract within the scope of the authority conferred by its charter.

However, the Comptroller General has recently placed so restrictive an interpretation on section 207 as to prevent us from securing the services of several experts whom the Commission desires to engage for special work.

These person are willing to make their assistance available to us, but they are not in a position to accept the status of regular employees under section 201 (e) of the act. Under that section, regular employees of the Commission are prohibited from engaging in a consulting practice outside the Government service, and, similarly, outside con. sultants are prohibited from becoming regular employees.

Since we will need the services of these special experts for a relatively short time, we have asked authority to contract for such services in an amount not to exceed $50,000.

The Commission believes that with the aid asked for it can make substantial progress in carrying out the mandate of Congress. Only with a comprehensive shipbuilding program, carefully worked out and executed in advance of emergencies, can we assure the position of American commerce on the high seas.

Mr. WOODRUM. The language here provides for a maximum of not exceeding $75,000.

Mr. KENNEDY. That is all together; $25,000 for one and $50,000 for the other.

Mr. WOODRUM. Does that complete your statement?
Mr. KENNEDY. Yes, sir.

Mr. Woodrum. Can you give us any more specific or detailed information about these experts; who they are, what they will be required to do, and so forth?

Mr. KENNEDY. Yes, sir. When we came in on the 16th of April, the first problem that we found was the settlement of the mail contracts. There were claims filed against the Government of approximately $450,000,000.

In addition to that, we had to negotiate by the 1st of July operating subsidies for all of these ship lines that had previously operated under mail-subsidy pay.

With that in mind, I tried to get in the best men that I could, and as quickly as possible. We went out and got from the various departments, the R. F. C., the P. W. A., and others, over 25 lawyers and accountants whom we could bring here temporarily, to work in order to get these records in shape.

In addition to that, I wanted some top side men to review these final decisions. With that in mind, I asked Judge Burns, who was the former General Counsel of the Securities and Exchange Commission, who had left the Securities nad Exchange Commission in January and had just gone into private practice, to come here.

I asked Archibald Graustein, who was formerly a senior partner of Ropes, Gray, Boyden & Perkins of Boston and formerly president of the International Paper Co., to come down.

I asked Jay Dunne, of Chicago, who was the man responsible for the uniform accounting practices when we were with the Securities and Exchange Commission, to come down.

I asked Grover Loening to come in as a special expert to make a study on aviation. The Congress, in their bill, asked for a recommenddation as to whether they should put airplanes and lighter-than-air ships under the same terms as ships.

I asked all these men to come down. They would all have served, I think, for from $35 to $50 a day. I asked Mr. Reed, an insurance expert, to come down also.

As I say, they would have come down and served for $35 to $50 a day. That, for all of them, was a very modest fee. Each one specialized in particular subjects. Graustein and Burns worked on the settlement of the mail contracts and the granting of new subsidies.

Dunne worked on the financial aspect of corporations, and the question of what they were entitled to get for subsidies.

Reed worked on the reorganization of our insurance set-up, which was far from satisfactory.

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