The Pentagon's War Department has asked the defense industrial base to help write a second round of contract-accounting reforms, building on a Cost Accounting Standards Board final rule that already erased more than 10,000 words of federal compliance text tied to how contractors capitalize, depreciate and report costs on government work.
Under Secretary of War for Acquisition and Sustainment Michael Duffey and Acting Under Secretary and Comptroller Michael Powers co-signed a letter to industry, dated July 31 and posted to media.defense.gov, seeking feedback on further changes to contract-accounting rules. Comments are due August 15, 2026.
Background
The Cost Accounting Standards Board, housed inside the Office of Management and Budget's Office of Federal Procurement Policy, published a final rule in the Federal Register on July 8, 2026, that took effect August 7. The rule conforms four of the government's oldest cost-accounting standards — CAS 404, 408, 409 and 411 — to Generally Accepted Accounting Principles, the framework commercial companies already use for financial reporting.
The rule fully rescinds CAS 408, which governed compensated personal absence costs such as vacation and sick leave, and CAS 411, which covered material acquisition costs. It also rescinds CAS 404, which addresses capitalization of tangible assets, and strips most of the substance out of CAS 409, which governs depreciation, while relocating a handful of surviving requirements from each. Combined, the changes eliminate 68 of 72 individual requirements across the four standards, removing regulatory language that in some cases had gone unchanged for more than 50 years, with the original standards taking shape in the 1970s.
Not every provision was cut. The CASB preserved a handful of safeguards that GAAP does not address on its own, including a rule that blocks contractors from claiming a stepped-up asset value — and the duplicative depreciation that would follow — after a merger, and provisions covering gains or losses when a contractor disposes of an asset within a year of an intercompany transfer. Those surviving requirements were relocated into a new paragraph within CAS 405 rather than left inside the standards the rule otherwise gutted. The rulemaking carries docket number OFPP_FRDOC_0001 and document number 2026-13764.
The scale of the rewrite is unusual for federal cost-accounting policy, which tends to move in incremental amendments rather than wholesale rescissions. CAS 408 and CAS 411 had governed compensated-absence and material-cost accounting for defense contractors since the Cost Accounting Standards Board's original standards took shape in the 1970s, and portions of the capitalization and depreciation rules in CAS 404 and CAS 409 carried language that had not been substantively revised in the five decades since. By eliminating 68 of the 72 individual requirements spread across the four standards, the CASB rule represents one of the largest single reductions in CAS regulatory text in the program's history.
Key Details
The War Department's July 31 letter frames its new request as a direct follow-on to the CASB rule, not a separate initiative. Duffey and Powers are asking industry specifically how contract-accounting rules can be aligned with GAAP and with Section 404(b) of the Sarbanes-Oxley Act, the internal-controls standard that publicly traded companies already have to satisfy for their commercial financial statements.
The letter frames the goal as reducing compliance costs for commercial suppliers and incentivizing their participation in defense contracting. A framework that let companies lean on GAAP- and Sarbanes-Oxley-aligned commercial accounting systems, rather than standing up a separate government-only cost-accounting regime, would plausibly lower one of the costs of entering the defense market for firms that do not already sell primarily to the government — though the letter itself is framed around compliance costs generally rather than a specific technical mechanism.
The department is treating this as part of the "Revolutionary FAR Overhaul," the Acquisition Transformation Strategy that Pentagon leadership launched in May 2025 to rewrite large sections of the Federal Acquisition Regulation and the Defense Federal Acquisition Regulation Supplement. That effort has been aimed at maximizing acquisition flexibility by reducing unnecessary regulations, and it has continued to develop since launch, with a second phase of feedback solicited in February 2026. The accounting-standards push extends that same logic from acquisition procedure into financial compliance.
Feedback is due August 15, 2026, a roughly two-week window from the letter's July 31 date. The department has not yet published a proposed rule implementing the Sarbanes-Oxley alignment; the current step is a call for industry input that will inform what, if anything, gets drafted next.
What It Means for Contractors
Traditional defense contractors that already operate CAS-compliant cost-accounting systems will see the immediate effect of the CASB rule in reduced administrative burden: fewer disclosure-statement line items, less time spent reconciling GAAP-based financial statements against CAS-specific rules for depreciation, capitalization, material costs and compensated absences, and less exposure to findings tied to regulatory text that predates most current compliance staff.
For commercial suppliers that have avoided defense work specifically because of CAS overhead — a group the letter says DOW wants to incentivize — the more consequential move is the one still in progress. If the Sarbanes-Oxley alignment effort produces a rule that lets commercial accounting systems satisfy more government requirements, it would weaken one of the standing justifications companies give for staying out of the defense market: the cost of building and maintaining a second accounting system that exists only to serve one customer.
Contractors that want influence over how that alignment gets written have a narrow window to weigh in before the August 15 deadline. Companies with existing CAS-covered contracts should also confirm with their contracts and accounting teams that internal disclosure statements and cost-accounting practices have been updated to reflect the CASB rule's August 7 effective date.
The relocation of surviving safeguards into CAS 405 means contractors should not assume the rule was purely deregulatory. The anti-abuse provisions around merger-related asset valuation and short-window disposition accounting remain enforceable; they simply moved to a different section of the standard. Compliance teams updating internal policy manuals need to track the provisions to their new location rather than treating CAS 404, 408, 409 and 411 as fully retired.
Contracting officers and program offices should also expect questions from industry partners during the comment window and in the months that follow, as accounting and legal teams work through what the CASB rule changes for open contracts, pending proposals and disclosure statements already on file. Because the department tied its Sarbanes-Oxley request directly to the Revolutionary FAR Overhaul, contractors tracking that broader effort should treat the letter as a signal of where FAR and DFARS revisions go next, not a standalone notice.
