Pentagon to start using U.S. GAAP instead of cost accounting

The Defense Department plans to shift from its traditional use of cost accounting to the more widely prevalent U.S. GAAP to make it easier to do business with companies.

Deputy Secretary of War Steve Feinberg signed a memorandum Tuesday directing the Department of War, the name used by the Trump administration for the Department of Defense, to remove the accounting, audit and compliance barriers that have separated military contractors from the rest of the U.S. economy. The memo sets 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. The Pentagon has long sought to receive the equivalent of a clean audit opinion from the Government Accountability Office, but the idiosyncratic cost accounting standards are among the obstacles standing in the way.

The new approach will now direct the department to audit only what matters, only when a risk exists, and never twice. The department will now rely first on the independent audits that companies already pay for, while reserving government-unique oversight for high-risk work where the department has no alternative.

The actions included in an appendix to the memo include a proposal to the Cost Accounting Standards Board to make exemption the default and confine coverage to cost-based development contracts awarded without adequate competition immediate use of the higher cost-accounting thresholds enacted in the National Defense Authorization Act for fiscal year 2026. It also requires:

• Senior-level approval before any acquisition strategy brings a new business unit under full coverage;
• Commercial product and service determinations within 15 business days;
• Simplified, commercial-aligned business-system criteria with acceptance of independent public accounting firm certification in place of separate government review;
• Risk-based audit rules;
• Expanded use of other transactions and advance market commitments; and
• Profit policy under which negotiated margins reflect value delivered, risk carried, and private capital invested — not merely cost incurred.

No new organization or compliance framework will be created, and implementing guidance may not add requirements beyond the memorandum and applicable law.

"Selling to the Department of War should be a line of business, not a corporate identity," Feinberg said in a statement. "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. 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."