How can a defense contractor break a cost-accounting rule without changing anything?

A single asset is depreciated three ways at once, for the financial statements, the tax return, and the cost of government contracts, and the contract-cost figure often lives in spreadsheets kept outside the accounting system. It can drift, through an inherited file or a formula dragged a row too far, with no one deciding to change a method. On covered government work, an unannounced shift away from the disclosed method is itself a change to a cost accounting practice, even though no one chose it. The rule is broken by silence, not by a decision.

Why is depreciation read differently for taxes than for government contracts?

Depreciation is recorded once but read in three places. The tax return uses the accelerated methods Congress created to reward equipment purchases; the financial statements use a method that shows lenders and investors a fair picture; and government contract cost is governed by the Cost Accounting Standards, which require the contractor to hold to the depreciation method it disclosed. The tax figure and the contract-cost figure answer to different readers, so a change made for tax reasons can move the figure the government reimburses.

Does the rescission of CAS 409 remove this depreciation exposure?

No. The Cost Accounting Standards Board issued a final rule on July 8, 2026, effective August 7, 2026, rescinding CAS 409 and other measurement standards in favor of generally accepted accounting principles, and the exposure never depended on CAS 409 surviving. The durable obligation is consistency with disclosed practice, the core of CAS 401, which remains in force. A contractor whose contract-cost depreciation drifts away from what it disclosed can still face a change to a cost accounting practice and potential cost recovery, whether or not CAS 409 itself survives.

When is a contract-cost depreciation discrepancy usually discovered?

Most often in an incurred-cost audit. The Defense Contract Audit Agency reviews contractor cost submissions after the fact, and a contract-cost depreciation figure that no longer matches the disclosed method is the kind of inconsistency that surfaces there, sometimes years after the drift began and after it has compounded across several years of contracts. The discovery belongs to the auditor rather than the contractor, which is the disadvantage.

Contract Depreciation Drift: A Hidden CAS and DCAA Risk

Here is something that should not be possible, let alone common. A defense contractor can break a federal cost-accounting rule without anyone in the company making a decision, an error, or anything they would label a change. Ask the controller when the company last altered how it depreciates its equipment, and the honest answer is never. Ask the tax group: the same. Still, the company is out of compliance.

A single asset is depreciated three ways at once: one figure for the financial statements, one for the tax return, one for the cost of the government contracts. Different people own each, and at most companies the records do not all live in the accounting system; some live in spreadsheets beside it, handed down as staff come and go. A formula gets dragged a row too far, or a successor keeps a file running without knowing why a method was chosen, and the contract-cost figure drifts. Nothing is recorded where a rule would notice. No one compares the three. Then an audit does, and that is usually how the drift is found.

For nearly every company in the country, that is the whole story: the number moves, the tax return absorbs it, and no one is hurt. For a company that builds for the government, the same figure is read again, by a reader who was never told it moved. To that reader, the failure was never the number. It was the silence.

The figure the government also reads

Start with why one asset needs three numbers at all. The financial statements depreciate it one way, to show investors and lenders a fair picture of the business. The tax return depreciates it another way, faster, because Congress wants to reward companies that buy equipment. These two have never matched and were never meant to. The gap between book and tax is ordinary, reconciled every year, and nobody is penalized for it.

The third figure is the one almost no one watches. When a company performs work for the government on a cost basis, the depreciation it charges to those contracts is governed by its own body of rules, the Cost Accounting Standards. For fifty years the detailed rule was the one numbered 409, which fixed how the cost of a long-lived asset is spread over time; as of a July 2026 final rule it is being retired in favor of ordinary commercial accounting, along with several of its neighbors, with only a few provisions kept and moved elsewhere. What is not being retired is the obligation underneath it, and that is the one that costs money: the contractor must hold to the method it disclosed. That figure does not follow the tax return. It follows the company’s books, and it answers to a reader the tax return never meets: the government, paying for a share of that depreciation and entitled to check that the method has not quietly moved.

So the drift that is harmless everywhere else has somewhere to land. A shift in the contract-cost figure, even one nobody made on purpose, is a shift in how the company measures cost on work the government is funding. The company does not have to be wrong for this to matter. It only has to be inconsistent.

What’s at stake

For a commercial manufacturer, that figure has one outside reader, the tax authority, and whatever it gets wrong stays inside the company’s own return. A government contractor has a second reader. The same number is read again on the cost of federal contracts, by a party that can act on what it finds. The cost charged to those contracts no longer matches the method the company disclosed, and that difference is not treated as a harmless variance. It is treated as money the government may have overpaid, recoverable across the contracts the company still holds, sometimes years after the figure first slipped. A silent error on the commercial side becomes an expensive one the moment the same number is read by someone who keeps the receipts.

How it works

The drift stays silent because the comparison that would catch it almost never happens on its own. Three sets of records kept by different hands are not reconciled to one another in the normal course of business. They are reconciled when an outside party forces it, and for a government contractor that party is the Defense Contract Audit Agency, which audits the costs charged to federal contracts.

How seldom that audit comes is itself the danger. The agency works from risk, not suspicion. Of the incurred-cost submissions it finished reviewing in fiscal year 2024, it ran full audits on 530 and cleared more than three thousand others with low-risk memos. Roughly one in seven drew a real audit. The rest moved through on sampling. A drifted figure can sit, uncaught, charging the government a slightly wrong number, for years.

And the prospect of that reading alone moves money. In the same year, contractors voluntarily pulled $4.2 billion in costs out of their own submissions rather than defend them under audit, a figure the agency itself cites as evidence that the prospect of a second look changes what a contractor is willing to claim. That is what the silence is worth, the moment someone is finally expected to read the number twice.

Where the registers stand now

There is a reason this is sharper in 2026 than it was a few years ago. The tax law that governs the fast, return-side figure was rewritten, and asset registers across the contracting world are being reopened and reworked to capture the new treatment. Every one of those edits touches the same records the contract-cost figure depends on. A register that had not moved in years is moving now, handled by people focused on the tax result, on the single view that has an outside reader watching it. The conditions that produce drift are not rare this year. They are everywhere, and many of them are being created on purpose, for reasons that have nothing to do with the contract the company forgot it was affecting.

What to do now

The defense is not complicated to describe, only easy to skip. Someone has to read the contract-cost figure before the auditor does. A sound register holds all three views, and its contract-cost view still matches the method the company committed to. The exposure is the gap between the two: what the contractor charges its contracts now against what it once disclosed. A contractor that knows whether that gap exists has nothing to fear from the comparison and can close what it finds on its own schedule, not the agency’s. A contractor that has never looked is trusting that the figure stayed put on its own, in a spreadsheet, kept by people who have since left. The silence is comfortable right up until it breaks, and the company that broke it is always the last to know.

FactorTax reads a single, engineered asset register through all three views at once, financial, tax, and federal contract cost, so a contractor learns what its contract-cost depreciation actually says before a government auditor does. To have the third figure read by your side first, schedule a discovery call.

The Number No One Watches