NDAA 2020 - Eliminating the Defense Cost Accounting Standards Board

Section 820 of the 2016 NDAA created the Defense Cost Accounting Standards Board, an independent board within the Office of the Secretary of defense. This provision was later codified as 10 USC 190. This seven member board chaired by the Defense Department's CFO with three Government and three private sector members was established to review and recommend changes to existing CAS standards (Cost Accounting Standards) and to implement new standards for Defense contractors to achieve uniformity and consistency for measurement, assignment, and allocation of costs to DoD contracts.

Section 820 also required DCAA (Defense Contract Audit Agency) to accept the contract auditing work of commercial auditors without further audit. That provision didn't last long as it was eliminated in the 2017 NDAA (Section 804).

The idea of a DCASB (Defense Cost Accounting Standards Board) was essentially a shot at the CASB (Cost Accounting Standards Board) for its inactivity for a long period of time. In fact, from 2011 until after President Trump was inaugurated, the Board did not meet once. That has since changed and it appears the CASB is once again active.

Not too many people thought the idea of a DCASB was a good idea. The Section 809 panel included a recommendation to eliminate it and DCAA forwarded a legislative proposals with that recommendation.

Perhaps the end is near for the DCASB. Section 834 of the Senate version of the 2020 NDAA seeks to repeal 10 USC 190, the Defense Cost Accounting Standards Board. Most likely, this provision will survive the Senate/House compromise committee deliberations.

Law Allowing Contractors to Procure Their Own Incurred Cost Audits Rescinded

Sec 804 of the 2018 NDAA (National Defense Authorization Act) repeals a provision that became law under the 2017 NDAA. 10 USC 190 was a new section that requires the creation of a Defense Cost Accounting Standards Board (DCASB). But appended to DCASB coverage was a new requirement that concerned the use of commercial auditors to perform audits of Defense contractors. Specifically, section (f) reads (paraphrased):

Defense contractors may present, and DCAA shall accept without performing additional audits, a summary of audit findings prepared by a commercial auditor if the auditor previously performed an audit of the allowability, measurement, assignment to accounting periods, and allocation of indirect costs and such audit was performed using relevant commercial accounting standards and relevant commercial auditing standards established by the commercial auditing industry.

Further, DCAA may audit direct costs and shall rely on commercial audits of indirect costs without performing additional audits, except in the case of companies or business units that have a predominance of cost-type contracts as a percentage of sales, DCAA may audit both direct and indirect costs.

The intent of this provision is to allow contractors to go out and retain their own auditors for purposes of expediting audits of incurred costs and closing old contracts. The provision becomes unnecessary with Sec 803 commercialization initiative we discussed the past three days. Anyway, no one could ever articulate a practical implementation of the provision. Its not practical to separate audits of direct and indirect costs. Auditors need to assess both in order to make recommendations concerning final indirect expense rates.

The remaining portion of 10 USC 190 dealing with the Defense Cost Accounting Standards Board has been retained.

Defense Cost Accounting Standards - Part 4

We've spent this week covering most of the provisions of Sec 820 of the fiscal year 2017 National Defense Authorization Act (NDAA). On Monday we discussed how Congress intends to rejuvenate the CAS (Cost Accounting Standards) Board. On Tuesday, we discussed the new Defense Cost Accounting Standards Board (DCASB) and yesterday, we discussed the impending privatization of a significant portion of DCAA's (Defense Contract Audit Agency's) workload, e.g. audits of contractor indirect costs.

The whole idea of a Defense Cost Accounting Standards Board (DCASB) began with the Senate version of the 2017 NDAA. The House version did not have a similar provision. The Senate had no confidence in the current CAS Board structure. It wrote:

The committee is disappointed that the Federal Cost Accounting Standards Board does not currently have a quorum of members and has not met in over three years. Due to this situation, it is doubtful that any credible reform will emanate out of the board in the future and the committee believes that a DOD board will be better suited to meet national security needs.

The Senate also expressed the following concern:

...the current cost accounting standards favor incumbent defense contractors and limit competition by serving as a barrier to participation by non-traditional, small business, and commercial contractors. To level the competitive playing field to access new sources of innovation it is in the governments interest to adopt more commercial ways of contracting, accounting, and oversight.

When the bill went to compromise committee, the Senate version prevailed although it was somewhat watered down from what the Senate had proposed initially. Instead of giving up on the CAS Board, the compromise language seeks to improve the workings of the CAS Board and supplement it with a Defense CAS Board (DCASB) to address DoD-unique cost accounting standards (whatever those might be). Instead of promulgating new standards under the Senate version, the final NDAA allows the DCASB to advise the CASB on cost accounting standards that need changing.

The idea of privatizing some of DCAA's workload was retained in the final NDAA even though the Executive Branch opposed it, stating that audits by both DCAA and commercial audit firms would create burdens and inefficiencies for both contractors and Government agencies.

Although not part the of the NDAA, the conferees included language in its explanation of the compromises to "encourage the Director, Defense Contract Audit Agency (DCAA) to examine the potential for electronic quality management systems to improve the ability of DCAA to conduct thorough and timely audits." Not sure what the conferees had in mind here but perhaps we'll learn more later.

Defense Cost Accounting Standards - Part 3

This week, we've been covering various provisions of Sec 820 of the 2017 NDAA (National Defense Authorization Act). Monday we covered how the new law is designed to get the CAS (Cost Accounting Standards) Board moving once again. Yesterday we discussed the formation and duties of a new Defense CAS Board (DCASB). Today we another aspect of Sec 820 that moves to privatize some of the contract auditing function by moving certain audits from DCAA (Defense Contract Audit Agency) to commercial firms.

Under the new provisions, DoD contractors may present and the Defense Contract Audit Agency shall accept without performing additional audits, a summary of audit findings prepared by a commercial auditor if

1. the auditor previously performed an audit of the allowability, measurement, assignment to accounting periods, and allocation of indirect costs of the contractor; and
2. such audit was performed using relevant commercial accounting standards (such as Generally Accepted Accounting Principles) and relevant commercial auditing standards established by the commercial auditing industry for the relevant accounting period (presumably this means audits conducted according to GAAS (Generally Accepted Auditing Standards) and not according to GAGAS (Generally Accepted Government Auditing Standards) or "Yellow Book" audits).

Further, Sec 820 states that DCAA may audit direct costs of DoD cost contracts and shall rely on commercial audits of indirect costs without performing additional audits, except that in the case of companies or business units that have a predominance of cost-type contracts as a percentage of sales, DCAA may audit both direct and indirect costs.

These provisions will have a major impact on DCAA's workload. In recent years, DCAA has concentrated a significant portion of its manpower on performing incurred cost audits. Take that responsibility away and DCAA may not need its current staffing level. Contractors will have to go out and find their own independent auditors to perform the indirect cost effort at additional cost to them. However, to the extent they can charge this to Government contracts, the cost will be reimbursed. A lot depends upon the contract mix and the indirect rate structure as to how much will be reimbursed. Contractors who choose the privatization approach to indirect cost auditing will probably be able to close out contracts much quicker than they do currently.

Tomorrow we will conclude this series on Sec 820 with a few miscellaneous provisions and comments.

Defense Cost Accounting Standards - Part 2

We are continuing to unpack the Defense Const Accounting Standards provision (Sec. 820) included in the 2017 NDAA (National Defense Authorization Act). Yesterday we discussed Sec 820's provisions designed to reinvigorate the CAS (Cost Accounting Standards) Board (See Part 1). Today we discuss the section dealing with the creation of a Defense Cost Accounting Standards Board (DCASB), its purpose and composition.

The DCASB is to be established as an independent board in the Office of the Secretary of Defense. There will be seven members, chaired by DoD's Chief Financial Officer. The remaining six members, all of whom must have experience in contract pricing, finance, or costs accounting include three representatives from the Department of Defense and three from the private sector. The private sector representatives must include one member who is a representative of a nontraditional defense contractor and one of whom is a representative from a public accounting firm.

Don's confuse DCASB with CASB. DCASB is the newly constituted Defense Cost Accounting Standards Board. CASB is the regular Cost Accounting Standards Board which has been around since the early-1970s.

Duties of the DCASB. The DCASB -

1. shall review cost accounting standards established by the CASB and recommend changes to such cost accounting standards to the CASB.
2. has exclusive authority with respect to the Department of Defense to implement such cost accounting standards to achieve uniformity and consistency in the standards governing measurement, assignment, and allocation of costs to contracts with the DoD, and
3. shall develop standards to ensure that commercial operations performed by Government employees at the Department of Defense adhere to cost accounting standards (based on cost accounting standards established by the CASB) or GAAP (Generally Accepted Accounting Principles) that inform managerial decision-making.

We have no idea of the intent of item 3 above but we'll figure it out and let you know once we do.

Sec 820 does not set term limits for DCASB board members except for the provision that Government members can no longer serve after leaving Government service. Private sector members will be compensated at around $80 per hour for the time spent engaged in the actual performance of duties vested in the Board. Government members receive no extra pay.

Tomorrow we will look as specific provisions within Sec 820 affecting DCAA (Defense Contract Audit Agency) and the opportunities for contractors to reduce DCAA oversight.

Defense Cost Accounting Standards - Part 1

Late last Friday, when everyone had left work for the Holidays, the President signed the 2017 NDAA (National Defense Authorization Act). The President's signature was not unexpected though perhaps the timing of it took some by surprise. Today and in the next few postings, we will take a look at some of the provisions that are most likely to impact Government contractors. Of course the $618 billion spending will lead to a lot of work for contractors but after award, then what. We want to look as some of those provisions that not too many are focusing on right now.

The first topic we will discuss is Sec. 820 of the NDAA, Defense Cost Accounting Standards. This section has three main purposes: (i) revive the Cost Accounting Standards Board, (ii) establish a Defense Cost Accounting Standards Board, and (iii) privatize some of the audit work being performed by the Defense Contract Audit Agency.

Revive the Moribund Cost Accounting Standards Board. The Cost Accounting Standards Board (CASB) has been dormant for at least three years. The new provision establishes additional duties for the Board, requires them to meet periodically, and issue reports on their activities.

New duties of the CASB. The new rule establishes three new enumerated duties for the CAS Board:

1. The Board must ensure that the cost accounting standards used by Federal contractors rely, to the maximum extent practicable, on commercial standards and accounting practices and systems.
2. Within one year after the date of enactment (October 1, 2019) and on an ongoing basis thereafter, review any existing Cost Accounting Standards and conform them, where practicable, to Generally Accepted Accounting Principles, and
3. Annually review disputes involving such standards brought to the ASBCA or CBCA or Federal courts, and consider whether greater clarity in such standards could avoid such disputes.

Periodic Meetings. The new rule requires the CASB to meet not less than once each quarter and publish in the Federal Register notice of each meeting and its agenda before such meeting is held.

New reporting requirements. The new rule requires the CASB to submit a report to the congressional defense committees, the Committee on Oversight and Government Reform of the House of Representatives, and the Committee on Home land Security and Governmental Affairs of the Senate describing the actions taken during the prior year to (i) conform the cost accounting standards to GAAP and (ii) to minimize the burden on contractors while protecting the interests of the Federal Government.

Tomorrow we will look at Sec 820's provisions for a new Defense Cost Accounting Standards Board (DCASB).