May 25, 2016

Senate Proposes Yet Another Cost Accounting Standards Board for Government Contractors

Arnold & Porter Advisory

The Senate Armed Services Committee (Committee) has recommended establishment of a new Cost Accounting Standards (CAS) Board to be housed within the Department of Defense (DoD). National Defense Authorization Act For Fiscal Year 2017, S. Rept. No. 114-255 § 811 (2016). The Committee premises its recommendation on a colorably laudable goal of expanding the base of competition. It bases its concern on presumed barriers that the CAS impose on "non-traditional, small business, and commercial contractors." These entities, however, are already exempt from the CAS, so it is unclear what problem the Committee seeks to resolve. The new Board would:

  • be chaired by the Chief Financial Officer of DoD;
  • prescribe, amend, and rescind CAS as they affect operations at DoD;
  • align the CAS with Generally Accepted Cost Accounting Principles (GAAP) to minimize government-unique systems; and
  • apply the managerial and cost-based accounting structures from the CAS to the financial operations of DoD.

The Committee had no kind words for the existing CAS Board. The Committee noted that the CAS Board has not met in more than three years, does not have a quorum, and that "it is doubtful that any credible reform will emanate out of [the CAS] Board in the future ... ." The Committee also asserted a need for a DoD-based CAS Board to meet national security needs better.

The proposal raises more questions than it answers. Accordingly, it is unclear whether the new CAS Board will be a welcome relief to contractors or, more likely, create even more headaches. The recommendation does not identify the makeup of the DoD CAS Board. The current CAS Board consists of government and industry representation. Presumably, the DoD CAS Board will consist wholly of DoD representation – likely to include the Defense Contract Audit Agency (DCAA), which will assure that the standards are skewed, despite an obligation to align with GAAP. In this regard, the existing CAS Board's Statement of Objectives, Policies and Concepts already provides that the CAS Board seeks to avoid conflict with other bodies, including the Financial Accounting Standards Board responsible for GAAP.

Furthermore, the recommendation does not explain, among other things, whether the:

  • existing CAS Board would be dissolved;
  • DoD CAS Board promulgations would supersede all existing CAS Board pronouncements applicable to defense contracts;
  • DoD CAS Board promulgations would be in addition to existing CAS and regulations;
  • failure to comply with DoD CAS Board pronouncements would be subject to contract price adjustments and interest as in the current CAS Board structure – and similarly for changes to cost accounting practices;
  • DoD CAS Board will require an independent disclosure statement; or
  • DoD CAS Board would contemplate a transition process from the existing CAS to the DoD CAS and whether the costs incurred to any such transition will be recoverable.

Because the CAS apply to civilian agency and defense contracts, those contractors who perform contracts in both arenas would be subject to two sets of CAS, making compliance more complicated instead of less so. And, defense contractors may be put in the nightmarish position of having to decipher a new set of CAS, while applying the original CAS to existing contracts, and potentially maintaining a combination of the original CAS and DoD CAS to future contracts -- both of which may be subject to different compliance ramifications.

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