The Defense Department will soon force accounting firms it hires to disclose investigations they face, a requirement that chips away at federal protections that have long helped keep flawed audits of public companies under wraps. The directive was slipped without notice into last August's $716 billion defense bill by Rhode Island Senator Jack Reed. It could have a significant impact on the many accounting firms that bid for auditing and consulting work at the Pentagon.
None of the Big 4—PwC, Ernst & Young, KPMG, and Deloitte—was aware of the measure when it became law, according to lobbyists and congressional staff, and now these firms are belatedly trying to scale it back. One major concern: The rule is slated to take effect in mid-February, and the Defense Department hasn't provided details on how it intends to implement the requirement.
Accountants' main trade association, the American Institute of Certified Public Accountants (AICPA), is taking the lead on the lobbying effort, arguing that the provision is vague and puts audit firms at a competitive disadvantage relative to other Pentagon consultants. The group also points out that the law doesn't say whether the disclosures, which will likely contain sensitive details on employees and audit clients, should be non-public. There's a worry that short-sellers will learn of probes and use the information to go after public companies.
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