Audit firms are only days away from facing a U.S. Department of Defense requirement to provide information on disciplinary proceedings as a condition of winning audit contracts.

The Defense Department has not yet issued guidance on how it is interpreting language tucked into an appropriations bill that requires any accounting firm providing audit or audit remediation services to the DOD to disclose disciplinary proceedings against the firm or its auditors. With little specificity, the requirement is contained in a single paragraph of the National Defense Authorization Act for fiscal 2019, which was signed into law last August.

The Act does not fund the military, but it authorizes the policies by which funding will be set by appropriations committees. Section 1006, titled “Transparency of Accounting Firms Used to Support Department of Defense Audit,” says the provision takes effect 180 days after the law is enacted, which is about Feb. 13, 2019.

The statute says any accounting firm providing financial statement auditing or audit remediation services to the DOD is required to provide “a statement setting forth the details of any disciplinary proceedings with respect to the accounting firm or its associated persons before any entity with the authority to enforce compliance with rules or laws applying to audit services offered by accounting firms.”

The American Institute of Certified Public Accountants sent a letter to DOD in September listing numerous concerns about the requirement and asking for implementation guidance. The language of the requirement is not only ambiguous, the AICPA says, but it is applied unfairly to accounting firms, putting them at a competitive disadvantage with other firms that might also bid for audit or audit remediation services.

Perhaps most significant, the AICPA is asking the DOD to address confidentiality. “Certain proceedings that are initiated against accounting firms and accountants by federal and state agencies are required to be kept confidential as a matter of law,” says the AICPA letter, signed by Barry Melancon, president and CEO of the AICPA.

Under Sarbanes-Oxley, enforcement actions brought by the audit profession’s regulator, the Public Company Accounting Oversight Board, are private until settled, including the appeals process. That gives audit firms years to litigate matters in secrecy before they are ever revealed to the public, and even representatives of the PCAOB have called for more transparency. The DOD requirement doesn't specifiy whether firms are required to disclose pending actions or those that have been settled.

Advocates for greater transparency have lobbied Congress to alter the statute, and members of Congress have tried, most notably with legislative efforts led by Sen. Jack Reed (D-R.I.) and Sen. Chuck Grassley (R-Iowa). Those bills have not gained the traction necessary to overturn privacy of enforcement assured under Sarbanes-Oxley.

The AICPA is imploring DOD to assure that confidentially is protected under its appropriations process. “It is therefore critical that the rulemaking to implement Section 1006 accord strong confidentiality protections to the statements submitted under that provision,” Melancon wrote.

The Government Accountability Office has called on the DOD, among other federal agencies, to improve its financial management and internal controls, and Defense is preparing for more audit rigor. The DOD’s fiscal 2019 budget overview calls for improved accountability to taxpayers. “Transparency, accountability, and business process reform are some of the benefits the Department will receive from the financial statement audit even before achieving a positive opinion,” the DOD says.

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