Full Disclosure of Disciplinary Actions Required by CPA Firms Engaged in Government Auditing

Last month, the Defense Department issued a "Class Deviation" that affects contractors performing contract audits for the Department. Contracting officers are now required to use a new clause (described later) when contracting with accounting firms providing financial statement auditing or audit remediation services to the Defense Department in support of audits. Or, in other words, incurred cost audits that were once the sole bailiwick of DCAA (Defense Contract Audit Agency).

Section 1006 of the 2019 National Defense Authorization Act (NDAA) requires that any accounting firm providing financial statement auditing or audit remediation services to the Defense Department in support of audits required under 31 USC 3521 (i.e. incurred cost audits) to provide DoD with a statement setting forth the details of any disciplinary proceedings with respect to the accounting firm or its associated persons before any entity with the authority to enforce compliance with rules or laws applying to audit services offered by the accounting firm.

Most likely, disciplinary proceedings contemplated in this provision would include those administered by individual State Board's of Accountancy in the states where firms are licensed. In California, for example, the State Board of Accountancy's quarterly newsletter details disciplinary actions taken during the quarter. There were about 40 actions listed in that newsletter. A lot of these disciplinary actions resulted from acts discreditable to the profession and resulted in suspension, revocation of licenses, fines, and remedial training.

The Government has a vested interest in ensuring that its contractors, including those that provide professional audit services, adhere to the highest ethical, moral, and professional standards. What is not clear is whether this disclosure requirement applies to on-going or interim review status or whether it applies when the case is closed/finalized. The class deviation also ensures confidentiality if the contractor so-desires.