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Deltek Insight 2011: New DFARS Business Systems Rule & Your Accounting System
 

Deltek Insight 2011: New DFARS Business Systems Rule & Your Accounting System

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    Deltek Insight 2011: New DFARS Business Systems Rule & Your Accounting System Deltek Insight 2011: New DFARS Business Systems Rule & Your Accounting System Presentation Transcript

    • ECT-202New DFARSBusiness SystemsRule & YourAccounting SystemMay 17, 2011Presented byMichael Steen, CPA
    • Enabling Success Project Human Financial Project Manufacturing Resources Management Management Do More Market Teaming CRM and Capture Win More Intelligence Solutions Management Know More Business Performance Management Winning More Increasing Project Improving Cash Reducing the Cost Business Visibility Flow of Compliance2 5/22/2012 © 2010 Deltek, Inc. - The specifications, functionality and schedules described reflect Deltek’s current estimates, may change without notice, and do not constitute obligations of Deltek.
    • Do More Project Human Project Financial Manufacturing Resources Management Management Do More Market Teaming CRM and Capture Win More Intelligence Solutions Management Know More Business Performance Management Project Execution Project & Corp Time, Expense, Reporting, GRC & & Management Accounting Labor, Payroll Compliance3 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System:Presentation TopicsOverview of the proposed ruleStatus of the rule (still a proposed rule as of March 2011)  Why DOD believes it needs a rule  Details of the proposed rule including: • The six systems defined within the rule • The criteria for government evaluations of compliance • The process for government evaluations of compliance • The government leverage to motivate one to comply4 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System:Presentation Topics The unanswered questions  What are the implications to those not directly covered by the rule?  How will contract audit oversight adapt to the new requirement?  How will this impact me if I am only a subcontractor on government contracts?5 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System: Overviewof the Proposed Rule DFARS Case 2009-D038 (www.regulations.gov) Posted in the Federal Register December 3, 2010 (a significant rewrite of the January 2010 proposed rule) Public Comments through January 10, 2011 (all favorable—well not exactly) Target date for issuing a final rule---there isn’t one Background (as stated within the proposed rule) • DOD is defining six business systems which must be adequate • DOD is proposing a compliance enforcement mechanism (to withhold payments on contracts with the clause)6 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System: Status ofthe Proposed Rule Public comment cutoff was January 10, 2010 Heralded (by DCAA Director) as one of three key factors for achieving more cost effective government contracts DFARS Council (which published the rule) does not publish expected or target dates for a final rule Rule will not be effective until: • It is published as a final rule (included in a DFARS contract clause) and • A company is awarded a contract with the clause7 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System: Why DODNeeds the Rule Originated from Commission on Wartime Contracting (CWC) Hearings DCAA (Defense Contract Audit Agency) assertions that billions at risk (anecdotal evidence and a few “attention grabber” examples) DCMA (Defense Contract Administration Agency) assertions that it had no “enforcement” or “compliance mechanism” CWC conclusion that DCAA-DCMA working relationship was dysfunctional CWC assertion that business systems internal controls are the first line of defense against fraud, waste and abuse Congressional Hearings in addition to CWC Hearings8 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System: SixSystems Defined Accounting (auditor) Estimating (auditor) Purchasing (auditor or purchasing system analyst) Earned Value Management/EVMS (auditor or functional specialist) Material Management & Accounting/MMAS (auditor and functional specialist) Government Property Management (property administrator) NOTE: The rule will be incorporated into a DFARS contract clause 252-242- 7XXX which will be required in contracts greater than $50 million (assume contract value is the maximum including all options)9 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System:Evaluation Criteria Criteria established for each applicable system Defines a system deficiency as “a failure to maintain one or more system criteria of an acceptable business system” System deficiencies will be reported in sufficient detail to allow the contracting officer to “potential adverse impact to the Government” Establishes a process for initial review, adequacy determination, follow-up and monitoring corrective action plans/actions, decreasing or increasing withholds Mandates withholds for a system deficiency • 5% (or 2% for small business) for one inadequate system • 20% maximum withholds (large business) for multiple deficient systems • Withholds applied to all forms of payments on contracts with the DFARS clause and in addition to any other withholds under other contract provisions • Withholds are amounts sufficient to protect the government’s risk10 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System:Evaluation Criteria--ExamplesEstimating System DFARS 215.407-5-70 & 252.215-7002 Revised proposed rule eliminated ambiguities such as “as applicable” Criteria previously exists in -7002; examples: • Maintained, reliable and consistently applied • Produces verifiable, supportable and documented cost estimates that are adequate for negotiation • Integrated with the contractor’s related management systems • Subject to applicable financial control systems • NEW: Contractor compare projected results to actual results and analyze any differences Estimating system “disclosure” required if cumulative DOD awards > $50mil (which includes timely notification of significant changes to cost estimating system) Contracting Officer determination (acceptable/approved or unacceptable/disapproved based upon the auditor’s documented findings)11 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System:Evaluation Criteria--ExamplesAccounting System DFARS 242.7501 & 252.242-7YYY Applicable to cost-type, incentive-type, time & materials or labor hour contracts or contracts with progress payments, percentage or stage of completion or certain construction contracts Includes systems and subsystems for accounting methods, procedures and controls to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data 18 System Criteria • Sound internal control environment, logical and consistent method for accumulation and allocation of indirect costs • Accumulation of costs under a general ledger control and reconciliation of subsidiary ledgers with the GL • Monthly determination of costs charged to a contract12 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System:Evaluation Criteria--ExamplesAccounting System DFARS 242.7501 & 252.242-7YYY 18 System Criteria (continued) • Exclusion from costs charged to government contracts FAR Part 31 unallowble costs and other contract provisions • Identification of costs by contract line item (if applicable) • Cost accounting information to comply with Limitation of Fund & Limitation of Costs, allowable cost and payment clause, calculation of indirect rates, and billings which can be reconciled with the cost accounts for both current and accumulative amounts • Adequate, reliable data for pricing follow-on acquisitions • Accounting consistent with CAS (Cost Accounting Standards) if applicable Contracting Officer determination (acceptable/approved or unacceptable/disapproved based upon the auditor’s documented findings)13 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System:Evaluation CriteriaEVMS, MMAS, CPSR, Government Property EVMS (252.234-7002) must comply with ANSI/EIA-748 (34 criteria) MMAS (252.242-7004) which includes “desirable” goals of: • 98% Bill of Material accuracy • 95% Master Production Schedule accuracy • 95% Inventory accuracy Government Property (252.245-7XXX) must be in accordance with FAR 52.245-1(f) CPSR (252-244-7XXX) 23 Criteria (essentially unchanged from previous criteria)14 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System:Evaluation ProcessGovernment review initiated by the Contracting Officer (CO) Functional specialist and/or auditor perform the review or audit and document findings and recommendations in a report to the CO CO if no findings>promptly notifies the contractor and approves the system CO if findings: • Initial determination on any system deficiency • Notify contractor in sufficient detail to allow the contractor to understand the deficiency and the potential harm to the government • Request contractor response within 30 days • Evaluate the contractor response in consultation with the auditor and make a final determination15 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System:Evaluation ProcessGovernment review initiated by the Contracting Officer (CO) CO if findings and final determination of deficiencies (continuation): • Request within 45 days either correction of deficiencies or corrective action plan • Disapprove the system • Withhold in accordance with 252.242-7XXX CO shall promptly approve a previously approved system when the CO determines that the contractor has substantially corrected all system deficiencies removing the potential risk of harm to the Government16 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System:Evaluation ProcessRandom Observations Contracting Officers (DCMA) are openly stating that they must conform to the audit report (findings and recommendations) Audits are not timely (initial business system audits or follow-up audits of corrective actions) Follow-up audits will assert that a reasonable amount of time has lapsed in order to evaluate the corrective actions vis-à-vis actual transactions Follow-up audits will not be limited to an evaluation of the corrective actions Government leverage is obviously the withholds and the unpredictable timing of follow-up reviews, results and release of withholds (note withholds will apply even after a CPFF contract is physically complete)17 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System: TheUnanswered Questions Business Systems Rule only applies to future DOD contracts > $50mil FAR Part 9.104-1 Contractor Responsibilities-General standards and 9-104-4 Subcontractor Responsibilities Accounting system requires DCAA audit utilizing a SF1408 (Standard Form) which includes 13 of the 18 criteria (from the business systems rule) Accounting system is generally considered a prerequisite (must have been audited and deemed adequate before a cost-type contract is awarded) System inadequacy and procedures/timeline for corrective actions, audit follow- up, etc. are ill-defined and unpredictable FAR Part 9.104-1 deficiency implicates “hold” on future contract (or subcontract) awards18 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System: TheUnanswered Questions Business Systems Rule and Contract Audit Oversight DCAA is pilot testing its business systems audits (displacing “ICAPS”) Pilot testing involves a “cast of thousands” with very few predictable results • System audits will involve a large number of transactions for substantive testing • System audits will most likely involve statistical sampling (DCAA issued two policies concerning statistical sampling) • System audits/statistical sampling will involve DCAA requests for filtered or purified sampling universe, contractor demonstration that sampling universe is complete • Audit will report deficiencies or lack thereof, but adequate or inadequate opinion will defer to the Contracting Officer19 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System: TheUnanswered QuestionsBusiness Systems Rule and Subcontractors Rule will flow down if subcontract value > $50 mil or prime contractor insists on flowing it down (regardless of subcontract value) Prime contractor will incorporate “indemnification” clause wherein government withholds partially flow down to subcontractor(s) Additional pressures on prime contractor for expanded access to subcontractor business systems (accounting, estimating, purchasing, etc.) if government has not already reviewed/audited the subcontractor (as a prime on a government contract)20 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • DFARS Business Systems Rule &Your Accounting System: TheUnanswered QuestionsBusiness Systems Rule and Non-DOD Agencies Rule will not apply to civilian agencies; however FAR 9.104 does apply DCAA untimely audits (all) implicates civilian agencies will not necessarily involve DCAA in any audits and will have no incentive to embrace the DFARS Business Systems Rule (notwithstanding the fact that DCAA’s Director has stated that this rule is one of three “silver bullets” for government cost reductions)21 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • Although the revised rule maybe an improvement over the initial proposed rule, as the saying goes……….22 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • In terms of predicting if, how and when the new rule will be implemented, your best tool is………………..23 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved
    • www.twitter.com/deltek www.facebook.com/deltekinc www.linkedin.com/company/163414 www.youtube.com/user/deltekinc24 5/22/2012 ©2011 Deltek, Inc. All Rights Reserved