2017 National Defense Authorization Act’s Impact on Audits and Cost Accounting Standards
Section 820 of the National Defense Authorization Act for Fiscal Year 2017, Pub. L. No. 114-238, 130 Stat. 2000 (NDAA), makes three significant changes to the federal government’s future use of cost accounting standards (CAS). First, it empowers contractors to avoid Defense Contract Audit Agency (DCAA) audits by employing private auditors to audit their rates. Next, it creates a new and independent Defense Cost Accounting Standards (DCAS) Board to oversee cost accounting standards across the Department of Defense (DoD). Finally, it provides direction to the federal government’s existing CAS Board.
(1) Section 820(f) of the NDAA authorizes defense contractors to present commercial auditors’ findings to the DCAA, which must accept them without performing additional audits so long as indirect costs were audited and the commercial auditor used a relevant accounting standard, e.g. Generally Accepted Accounting Principles (GAAP). This development could be of great significance, and may enable contractors to accelerate the audit process and reduce the risk of protracted and inaccurate audits performed by the DCAA.
(2) The newly-created Defense Cost Accounting Standards (DCAS) Board will ensure “uniformity and consistency in the standards governing defense contracts.” Id. at § 820(b). The DCAS Board will have three primary duties: 1) reviewing cost accounting standards created by, and recommending changes to, the CAS Board; 2) implementing cost accounting standards across the DoD; and 3) developing standards to ensure DoD’s adherence to standards established by the CAS Board or GAAP. Id.
The seven-member DCAS Board will be located within the Office of the Secretary of Defense and consist of DoD’s Chief Financial Officer, who will serve as chair, and six representatives selected by the Secretary of Defense–three from the private sector and three from within DoD. Membership requirements for private sector representatives are rigid: of the three, one must represent a “nontraditional defense contractor” and another must represent a public accounting firm. Id. Therefore, at any given time the DCAS Board will contain at most one representative of a “traditional defense contractor.” The only restriction placed on membership from within DoD is that a member so appointed may not continue to serve on the DCAS Board if he or she ceases to be a DoD employee. Id.
(3) Although § 820 is titled “Defense Cost Accounting Standards,” its first order of business is to amend the existing CAS Board’s implementing statute, 41 U.S.C. § 1501. Specifically, it mandates that the CAS Board meet at least once per quarter, publish notice of each meeting and the meeting’s agenda in the Federal Register, and report annually to multiple congressional committees regarding how it has conformed its accounting standards to GAAP and minimized the burden on contractors. Moreover, the NDAA directs the CAS Board to “ensure that the cost accounting standards used by Federal contractors rely, to the maximum extent practicable, on commercial standards and accounting practices and systems.” Id. at § 820(a)(1)(C). Finally, it increases the minimum value of waiver-eligible contracts from $15 million to $100 million, id. at § 820(a)(2), meaning agency heads may waive the CAS Board’s and, presumably, DCAS Board’s standards for contracts valued at less than $100 million.