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Project on Government Oversight

POGO's Statement to The Cost Accounting Standards Board

Related Content: Cost Accounting Standards
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December 2, 1998 | By: Danielle Brian

Thank you for this opportunity to appear before the Cost Accounting Standards (CAS) Board. The Project On Government Oversight (POGO) is a nonprofit, nonpartisan organization that has, for over 17 years, investigated, exposed and worked to remedy abuses of power, mismanagement and subservience to special interests by the Federal government.

As you may know, POGO testified this past June before the CAS Board Review Panel - a group that is trading on the General Accounting Office's (GAO's) good name, but which appears to be dominated by outside pro-defense industry personnel. Our testimony before that body, which is appended hereto, is the basis for our appearance before you today. In summary, POGO is very concerned that current "acquisition reform" initiatives are being used as a "stalking horse" by the defense industry and some Government contracting officials, in order to significantly weaken the applicability of the CAS, the Standards themselves, and the CAS Board more generally. Our testimony before the CAS Board Review Panel focused primarily on the generic issues related to the need for CAS and a call for CAS applicability not to be weakened.

It is intellectually dishonest to use "acquisition reform" and the promotion of "commercial" product acquisition to justify weakening the CAS Board or its standards, such as through exemptions now under consideration. Where cost-based contracting continues - and it does - the need for cost accounting standards remain.

Openness, Not Acquiescence

To the CAS Board, especially to the newer Members, let me say that in order to resolve the complex technical cost accounting issues that the Board is currently considering (as listed in the recent Federal Register open meeting invitation), an honest open exchange among all affected parties, including defense contractors, may prove essential to the development and eventual promulgation of CAS Board rules that adequately protect the taxpayers' interests and are equally fair to affected contractors. The use of open dialogue, in addition to the Board's formal rule-making procedures, can lead to a better understanding of the views being expressed by all interested parties and, hopefully, can facilitate acceptance and support of the Board's resulting promulgations.

In pursuing such openness, however, an accounting standards setting body must strive to maintain its independence from those governed by its rules. The emphasis on gaining "consensus" or "acceptance" by those subject to the CAS Board's promulgations indicates an excessive willingness to acquiesce to industry wishes. Those subject to the standards may not love them, but the purpose of the standards is not to make contractors happy, but to provide protections for the public purse. The CAS Board simply cannot compromise its primary accounting concepts and objectives specified in its enabling statute: to increase the uniformity and consistency with respect to cost accounting data that is supplied by contractors to the Government for the purposes of assisting in either negotiation, pricing, or administration of contracts; and, to preclude Government payment of increased costs, in the aggregate, due to contractor changes in cost accounting practices or contractor failure to comply with applicable Standards.

"Acquisition Reform" and CAS

The Federal Register notice included an inquiry regarding broader guidelines that the Board might follow in light of changes in the Federal cost-based contracting/accounting environment such as the impact of "acquisition reform." POGO does not believe that cost accounting environment has changed as a result of acquisition reform, nor that the reforms alter the CAS Board's concepts and objectives.

Acquisition reform is a procurement concept that does not involve the CAS Board, because it has not eliminated cost-based contracting, nor, therefore, the need to oversee contractor accounting of costs. Acquisition reform matters affect "commercial" and other non-cost-based contracting, and should be dealt with by the procurement community.

The procuring agencies, through their contracting officers, must first determine what type of contractual arrangement will best serve the Government's interests. If a non-cost-based acquisition contracting arrangement is selected, CAS simply does not apply, and the CAS Board's contract clause is not incorporated in the resulting contract. If an agency determines that a negotiated cost- based contract arrangement will best serve the Government's interests, it is that decision which makes the CAS applicable to the contractual arrangement. In fiscal year 1997, the Federal Procurement Data System reflected that the Government obligated $124 billion under negotiated cost-based contracting arrangements ($68 billion under cost-reimbursement type contracts and $56 billion under cost-based fixed-price type contracts). The contractor cost accounting practice issues associated with how a contractor estimates, accumulates, and reports contract costs have not changed.

In reviewing the Federal Register notice for this open meeting, we were struck by the fact that one of the items specified is changes to CAS in light of "acquisition reform." This is very unfortunate. Although we might debate both the good and bad aspects of "acquisition reform" as it is being practiced, it is clear that attempts to steer CAS in the direction of "acquisition reform" initiatives are nothing more than an opportunistic method of confusing the underlying issues. CAS is about cost- based pricing. Nothing more. Use of phrases such as "commercial items," "commercial buying," and "commercial practices" make for nice sound bites, but they have nothing to do with cost-based pricing.

It now appears that some in the acquisition world wish to label various forms of cost-based pricing as something other than what they really are in order to weaken or change the safeguards that the CAS system provides. If "acquisition reform" means no more cost-based pricing -- fine. But, from where we sit, "acquisition reform" appears to be, in part, a new name for the same old practices. Cost data is cost data. Attempts to make it appear that it is something it is not with the use of new terms such as "information other than cost or pricing data" (i.e., uncertified cost data) are at best, disingenuous; at worst, dishonest.

CAS Board Staffing

Recent press reports indicate that the Board is considering abolishing the CAS Board Branch as a part of the Office of Federal Procurement Policy (OFPP); "rotating" the existing staff to other functions within OFPP; and, using outside government/industry "task forces" to perform most, if not all, of the basic staff research. The explanations given for these potential moves is unclear. However, one thing is certain, such a move would send exactly the wrong kind of signal to contractors. It would mean that any attempt at standards-setting objectivity would be completely jettisoned in favor of the contractor interests that seek so ardently to influence the outcome of the Board's deliberations. POGO strongly opposes any such wholesale attempts to curry favor with special interests over those of taxpayers' interests. It is our hope that these press reports are inaccurate, and that such a precipitous and ill-advised move never takes place.

As POGO told the CAS Board Review Panel, the independence of the CAS Board needs to be strengthened, not decimated. The establishment of cost accounting standards should be done in an environment that fosters objectivity and neutrality, sound principles and theory, logic, and creativity - not in one dominated by politics, or a concern for specific outcomes. POGO hopes that the CAS Board Members takes these words to heart so as to enhance the Board's independence, not to make it subservient to special interests at the expense of taxpayers and the public interest.

I would now like to address some of the specific areas that were identified in the Board's "open meeting" notice.

Continuing Urgency of CAS Board Work

The Federal Register notice identified several ongoing or potential projects currently under consideration by the Board, indicating the continuing need for establishment, review, and improvement of cost accounting standards. To cite one example, I want to especially focus on the importance of the work of the Board in developing consistency requirements in relation to the ongoing "Cost Accounting Practice Changes" project.

The genesis for the original CAS Board's creation was Admiral Hyman Rickover's testimony that contractors were overcharging defense contracts by more than $2 billion a year due to the absence of uniform cost accounting standards. In 1970, GAO issued its now famous "Report on the Feasibility of Applying Uniform Cost-Accounting Standards to Negotiated Defense Contracts." The GAO report, concluded, in part, that cost accounting standards could provide a common framework for the estimating of prospective costs or for the determination of actual costs of a contract, for both cost-type and fixed price contracts. Chapter 3 of the report was entitled "Major Cost Accounting Problem Areas." Here GAO reported that "... Contractors sometimes present cost data in pricing proposals differently from the way they record their cost of performance. This makes several administrative responsibilities quite difficult ..." Another area listed as a major problem was that some contractors charged Government contracts directly for costs of a nature which were normally handled as indirect costs but did not adjust their indirect cost pools to eliminate similar costs (applicable to other work) which were, consequently, also charged indirectly to the same Government contracts (i.e., "double counting" occurred).

As you know, the original Board promulgated its first two standards in 1972. CAS 401, "Consistency in Estimating, Accumulating and Reporting Costs," requires contractors to consistently apply the same cost accounting practices when estimating, accumulating and reporting contract costs. CAS 402, "Consistency in Allocating Costs Incurred for the Same Purpose," provides that each type of cost may only be allocated once and only on one basis to any contract, i.e., no "double counting."

At the time of issuance of the two Standards, the Board also established a CAS contract clause which required the consistent application of a contractor's cost accounting practices when accumulating and reporting the costs of contract performance and specified enforcement provisions which provided for contract price or cost adjustment if the contractor made a change to its established cost accounting practices. This entire scenario was dependent upon what was considered to be a cost accounting practice. To that end, the terms "cost accounting practice" and "change to a cost accounting practice" were defined in the Board's rules. The administrative aspects of implementation were essentially left to the various Federal agencies that placed negotiated national defense contracts.

When the original CAS Board's funding expired, Congress had concluded that this basic "consistency" objective was in place, and that the Board had completed its work. However, in POGO's view, that work was apparently not done. The language defining what constitutes a change to a cost accounting practice has been interpreted and continues to be interpreted differently by the contracting parties. Some have even conjectured that the CAS Board's "Cost Accounting Practice Changes" project is one of the fundamental industry concerns that led to the formation of the hostile CAS Board Review Panel. The current CAS Board, albeit consisting of some different individual Members over time, has issued four notices in the Federal Register to address this issue. Thus, some current and prior Board Members must have concluded that some sort of regulatory change is needed.

I find it almost inconceivable that one of the fundamental concepts that led to the formation of the original CAS Board is in such a state of disarray. After more than 25 years, there apparently is still no common agreement on what constitutes the consistent application of a contractor's cost accounting practice. What I find even more distressing is the fact that no comprehensive guidance has been promulgated on the administrative process to be followed when a cost accounting practice change occurs. This observation is based on the current Board's efforts to set forth the administrative process for adjusting contract prices and costs if a contractor changes its cost accounting practices or submits a cost proposal where proposed contract costs were predicated upon the application of a noncompliant cost accounting practice. Without such authoritative guidance, how can the contracting parties determine the cost impact of a change made to a cost accounting practice? Or, the cost impact of an estimating noncompliance? Absent specific regulatory guidance, there is no assurance that the Board's rules are being implemented uniformly on a Federal-wide basis. Rather, the contracting parties must research and reinvent a cost impact methodology of their own making, on a case-by-case basis.

POGO can only urge you, the current CAS Board Members, to expeditiously complete your deliberations and promulgate a final rule that clearly sets forth, in unambiguous language, what you believe constitutes a change to a cost accounting practice for negotiated cost-based contracts, and what administrative processes should be followed. In a cost-based pricing environment, such specificity and guidance is sorely needed to ensure that the taxpayers' interests are protected, that covered contractors have a clear understanding of what the rules are, and that an efficient, but flexible, administrative enforcement process is put in place.

This is just one case that demonstrates the continuing need for an effective and independent CAS Board. Efforts to abolish it, downgrade it, gut its independence, or weaken the small staff just because the defense industry wants to, will demonstrate an unacceptable level of acquiescence to private defense industry interests over the interests of the taxpaying public.

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