As you may have already heard, the Pentagon is desperate eager to score a clean audit opinion for the first time in history. In June, Secretary of War Pete Hegseth swore they’ll deliver one by 2028 and on Friday, they quietly announced that EY had gotten the nearly $1 billion contract to deliver it to them. Well, EY will deliver an opinion, it remains to be seen whether it’ll be the one they want.
And today, Deputy Secretary of War Steve Feinberg signed a memorandum, Fostering One Strong Industrial Base, that directs the department to ditch cost accounting and go GAAP where possible in its supply chain. As part of this, the DoW announced via press release that they wish to “remove the accounting, audit, and compliance barriers that have separated the companies serving the warfighter from the rest of the American economy.” The accompanying memorandum “set deadlines for the Department’s senior leaders to open competition, confine government-unique cost accounting to the narrow set of work that requires it, and rely on the financial controls and audits companies already maintain.” We’ve embedded a PDF of Fostering One Strong Industrial Base including its appendix below for those seeking a bit of advanced restroom reading today.
The press release reads:
For decades, the Department walled the most dynamic economy on earth off from the industrial base that serves the warfighter. The wall was built from cost accounting rules, duplicative audits, and compliance obligations that attach to entire companies rather than the work procured. It was built to control contractor costs; instead it limited who competes and raised prices. The memorandum moves the Department from government-unique Cost Accounting Standards to the accounting every American company already uses – Generally Accepted Accounting Principles – and pushes those benefits to every tier of the supply chain. [emphasis ours]
“Selling to the Department of War should be a line of business, not a corporate identity. Our nation’s greatest strength is its private sector, and our defense industry must harness and mimic it – unleashing industry first, and protecting taxpayers by confining our most burdensome oversight tools to the narrow set of work that genuinely demands them,” said Deputy Secretary of War Steve Feinberg. “Transparency and partnership runs both ways: the Department opens its buying to market forces, pays fair prices with honest margins, and in exchange industry shares, when asked, the cost and pricing information it already keeps.”
Three objectives drive the change:
- Compete continuously for speed and volume. Carry several performers to production, send real orders to those who deliver, and keep future opportunities open.
- Attach rules to contracts, not companies. One award that carries an oversight regime must not force a company to remake itself. No company should be barred from this market, or trapped in it, by government-unique requirements.
- Audit only what matters, only when risk exists, and never twice. Rely first on the independent audits companies already pay for; reserve government-unique oversight for high-risk work where the Department has no alternative.
Apparently this change was long overdue, at least according to the CEO of Society of Defense Financial Management who told Federal News Network last month that cost accounting is “vestige of an industrial, rules-based era of accounting that is increasingly outdated in today’s technology-driven economy.”
We’ll leave it to people way better versed in government contracting and auditing to discuss what this could mean for the government and the private companies that serve it in the comment section.
