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Sensible Rules Under Attack by Defense Contractors

April 13, 1999 

 

On Friday April 9th, a government-industry panel released its report on a government body that sets basic accounting rules for contractors to follow. The report plays into the hands of a campaign by defense contractors and the Defense Department - known as "Acquisition Reform" - to attack the rules and standards that help prevent overcharging of the government.

The report calls for limiting the use of widely-accepted accounting standards and opens the door to a takeover of the rulemaking body that establishes the standards, the Cost Accounting Standards Board (CAS Board), by the Pentagon. The Project On Government Oversight will issue an examination of the Cost Accounting Standards Board Review Panel report in the near future.

Establishment of uniform cost accounting standards and the Board that sets them were initiated by Admiral Hyman Rickover and Senator William Proxmire in the 1960s. Then, it was regarded simply as good business practice for the government. If the Defense Department's "Acquisition Reform" proponents now succeed in weakening the standards, taxpayers are likely to be paying billions of dollars more every year for the goods the Defense Department and other agencies buy.

Why Is the CAS Board So Important?

  • The Board's standards cover $125 billion per year in contracts - about $90 billion in defense.
  • The contractor accounting games that led to the need for the CAS Board in the 1970s added an estimated 5% to government contract costs. The equivalent today would now amount to well over $6 billion a year.
  • New developments, laws, regulations, and business practices continue to require new decisions and standard-setting by the CAS Board.

What Are Cost Accounting Standards?

Cost Accounting Standards are the accounting practices that contractors with the Federal government are supposed to follow when they bid on or perform a contract that is based on contractor costs. The Standards are set by the Cost Accounting Standards Board, which is part of the Office of Management and Budget.

Cost Accounting Standards do not apply to "fixed-price" contracts for "commercial" items - the type of contracts based on free-market prices that have been championed by the Defense Department's recent Acquisition Reform. The CAS Board standards only apply to contracts in which the government pays a contractor for all of its costs incurred in the contract, or to fixed-price contracts if the contractor supplies cost information in support of contract price negotiations.

Critics of the CAS Board in industry and the Defense Department claim that somehow Acquisition Reform has made standards and the Board outdated. But Acquisition Reform's big push to switch more government contracts to fixed-price commercial item contracts are not affected by cost accounting standards, which only affect cost-based contracts. Debilitating changes to CAS Board operations, such as current proposals to give defense contractors even more input in the development of standards, should therefore not be needed for Acquisition Reform. As long as there is Federal contracting based on contractor costs, the need continues for standards to establish basic accounting practices that are consistent and can be monitored by the government.

What Is Being Done to the CAS Board and Its Standards?

At the behest of the defense industry, three hostile initiatives are using the positive spin of Acquisition Reform to assault the Board and weaken good accounting practices:

1) An industry-stacked Panel has reviewed the Board. The panel was formed under GAO auspices at the request of some members of Congress, but is not a normal GAO audit.
2) The Office of Management and Budget (OMB) is making a variety of bureaucratic changes that weaken the Board and its staff, and increase industry influence.
3) The Department of Defense has asked for authority to exempt any contract or contractor it wishes from Cost Accounting Standards, and to takeover the Board itself.

The Review panel, formed under GAO auspices, suffers from blatant conflict of interest - half of its members are from industry, including members from Northrop Grumman ($3.5 billion in 1997 defense contracts), Motorola ($311 million), BTG Inc. ($139 million), and Allied Signal ($547 million). In recent years Grumman paid several million dollars to settle fraud claims against it under the False Claims Act, and Allied Signal was recently found by a Defense Department Inspector General investigation to have grossly overcharged the government for spare parts.

The Department of Defense is justifying its efforts to gut accounting standards for contractors by claiming that many companies are not doing business with the government because of the allegedly onerous burden of following the uniform standards. This echoes the rhetoric of a parallel initiative to put private industry interests ahead of public interests - the Defense Department's recent effort to cripple the protections against contractor fraud embodied in the False Claims Act. Leading the lobbying charge of contractors against these sensible rules, however, are the largest existing defense companies, who have shown little reluctance to bid for government contracts - including Lockheed Martin, Raytheon, Boeing, and associations that represent the major defense contractors such as the Aerospace Industries Association. Furthermore, recent figures on the high profitability of the defense industry compared to other industries do not support the argument that these basic rules are so burdensome as to make defense work unprofitable and unappealing.

Cost Accounting Standards and the Board that sets them continue to be an important tool in protecting the public purse, and should not be gutted simply to provide more corporate welfare for defense contractors.


Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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