Deltek Insight 2010: Surviving a Defense Contract Audit Agency Audit


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Deltek Insight 2010: Surviving a Defense Contract Audit Agency Audit

  1. 1. XT-215: Surviving a DefenseContract Audit Agency AuditPresented By:Bill Keating, Baker Tilly/Beers + CutlerNoah Leiden, Baker Tilly/Beers + Cutler 1
  2. 2. Agenda• Understanding the DCAA• Typical DCAA Audits• DCAA Current Initiatives and Focus Areas• Preparing and Conducting the Audit• Resolving Audit Disputes• Special Issues Related to Disallowed Costs• Best Practices – Key TakeawaysCopyright © 2010 Deltek, Inc. 2
  3. 3. Understanding the DCAA 3
  4. 4. Understanding the DCAA• The Defense Contract Audit Agency (DCAA) is a Procurement Advisory Agency which Audits Both Defense and Non-Defense Contractors• It Plays a Critical Role in Helping Officials Formulate Government Policy by Providing Insights on the Impact that Government Decisions Will Have on Contractors• DCAAs Audit Practices Will Ultimately Have a Significant Impact on the Day-to-day Operations and Profitability of Your Company• It is Critical to Understand the DCAA Audit Objectives and Actively Manage Your Relationship with the Cognizant Audit OfficeCopyright © 2010 Deltek, Inc. 4
  5. 5. Understanding the DCAA• Purpose (Mission) – Perform all necessary contract audits for Department of Defense (DOD) and provide accounting and financial advisory services – Provide contract audit services to other Government agencies as appropriate• Key Data Points – DCAA consists of approximately 4,000 people – Headquarters in Fort Belvoir, VA – 300 Field Audit Offices located throughout the United States, Europe and the Pacific• Internal Changes/New Leadership – Issues in 2008 and 2009, including Government Accountability Office (GAO) investigation and Inspector General (IG) report – Patrick Fitzgerald replaced April Stephenson as the new DCAA directorCopyright © 2010 Deltek, Inc. 5
  6. 6. Understanding the DCAACopyright © 2010 Deltek, Inc. 6
  8. 8. Typical DCAA Audits 8
  9. 9. Typical DCAA Audits• Preaward Contract Audit Services – Price Proposals – Preaward Surveys – Forward Pricing Labor and Overhead Rates• Post Award Contract Audit Services – Incurred Costs/Annual Overhead Rates – Truth in Negotiation Act (TINA) Compliance – Cost Accounting Standards (CAS) Compliance and Adequacy – Claims – Financial CapabilityCopyright © 2010 Deltek, Inc. 9
  10. 10. Typical DCAA Audits• Internal Control Audit Planning Summary (ICAPS) – Accounting – Estimating – Electronic Data Processing (EDP) – Compensation – Billing – Budgeting – Material Management – Labor – Purchasing – Indirect and Other Direct Cost• Negotiation Assistance – Fact-finding and analysis of contractor information after audit – Procurement liaison assistanceCopyright © 2010 Deltek, Inc. 10
  11. 11. DCAA Current Initiatives andFocus Areas
  12. 12. DCAA Initiatives and Focus AreasToday’s Internal Control Environment July 2008: GAO 2007: Report - Allegations Dec. 2008:Requirement for that Certain Audits at DCAA PolicyEthics Program Three Locations Did Revisions March 2009: and System of Not Meet Professional ICS Audit DCAA Policy Internal Standards were Opinions/ Denial Revisions Controls Substantiated of Access IG Referral March 2008: Dec 2008: “Close the DCAA Revises DCAA Re-Defines Fraud Loophole” ICAPS Materiality Final Ethics, Approach Compliance, Internal Controls and Disclosure RuleCopyright © 2010 Deltek, Inc. 12
  13. 13. DCAA Initiatives and Focus Areas• Audit Guidance on the Status of Contractor Systems of Internal Controls as Documented in the Contractor Organization and Systems and Scope of Audit Sections of Audit Reports (MRD 09-PAS-021(R))• Audit Guidance on Federal Acquisition Regulation (FAR) Revisions Related to Contractor Code of Business Ethics Conduct (MRD 09-PAS- 014(R))• Audit Guidance on Performing Audits of Subcontract Forward Pricing Proposals (MRD 09-PSP-011(R))• Audit Guidance on Approving and Rescinding Contractor’s Authorization to Participate in the Direct Bill Program for Major Contractors (MRD 09- PPD-006(R))• DoD Policy Instructs Contracting Officers (COs) on Resolving Disagreements with DCAA Prior to Negotiations (Federal Contracts Report, 12-08-09)Copyright © 2010 Deltek, Inc. 13
  14. 14. Preparing and Conductingthe Audit
  15. 15. Preparing and Conducting the Audit• Audit Approach/Preparation – Audit Planning – Audit Request (Written Request) – Entrance Conference • Review audit objectives • Respond to initial data request • Contractor’s first opportunity to influence audit• Audit Process – Performance of Field Work – Condition of Statement • Auditor will establish assessment of Condition, based on Findings • “Significant” and “Insignificant” Conditions • “Satisfactory” and “Unsatisfactory” ConditionsCopyright © 2010 Deltek, Inc. 15
  16. 16. Preparing and Conducting the Audit• Audit Process (continued) – Interim Conference(s) • Discussions between auditor and contractor regarding the Condition(s) • This is the Contractor’s primary opportunity to influence the audit – Exit Conference • Discussion of all Findings and Conditions • There should be no surprises – Contractor’s Response/Rebuttal – Auditor’s Response – Report Issued; Workpapers Sent to Permanent Files – CO (or Requestor) Action – The best time to challenge audit findings/conditions is before they are put into writing!Copyright © 2010 Deltek, Inc. 16
  17. 17. Preparing and Conducting the Audit• Audit Rights – Virtually every Government contract over $100,000 in value, except for acquisitions of “commercial items” and utility services, contains a contract clause granting audit access rights to the Government. – The “Access to Records” clause is located at FAR 52.215.2 – What Can Be Examined? • Books, Accounting Procedures/Practices, Contractor’s Records, etc.Copyright © 2010 Deltek, Inc. 17
  18. 18. Preparing and Conducting the Audit• How to Deal with Government Auditors – What Should You Do During a Routine Audit ... • Strive to establish a rapport • Keep relationship non-adversarial and professional • Seek to have data requests and interrogatories put into writing • Provide access in an organized and systemic manner • Document all meetings and telephone conversations • Maintain structured environment • Obtain copies of audit reports • Obtain copies of internal planning documentsCopyright © 2010 Deltek, Inc. 18
  19. 19. Preparing and Conducting the Audit• How to Deal with Government Auditors (continued) – What NOT to Do During a Routine Audit ... • Refuse to provide access to any requested record with relevance to the audit scope • Create unreasonable delays in scheduling the entrance conference • Create unreasonable delays in providing access to needed data and/or personnel • Restrict reproduction of necessary evidential matter • Establish a pattern of failure to comply with agreed-to dates for furnishing dataCopyright © 2010 Deltek, Inc. 19
  20. 20. Resolving Audit Disputes
  21. 21. Resolving Audit Disputes• Understand the Auditor’s Point of View• Ensure that All Relevant Facts/Circumstances are Understood• Build your Argument• If DCAA is Correct, Withdraw the Cost and Concur with the Finding Condition• If DCAA is Incorrect, Prepare a Rebuttal with DocumentationCopyright © 2010 Deltek, Inc. 21
  22. 22. Resolving Audit Disputes• Hierarchy of Resolution (DCAA) – During field work at interim conferences – Branch Manager – Contracting Officer post-audit – DCAA Regional Manager or Regional Specialist – DCAA Regional Director – DCAA Headquarters – File a claim with Board of Contract Appeals or Court of Federal Claims• Third-party Professional Support• Government Official SupportCopyright © 2010 Deltek, Inc. 22
  23. 23. Special Issues Related toDisallowed Costs
  24. 24. Special Issues Related to Disallowed Costs• Normally DCAA “Questions” Costs; Only the Contracting Officer is empowered to “disallow” them, using the FAR Part 42.8 procedures• Either DCAA or a Contracting Officer May Take Issue with Costs Included in Invoices, During Routine Invoice Reviews• With Contracting Officer Approval, DCAA May Utilize a “Form 1” to “Suspend” or “Disapprove” Costs• The Contractor has the Right to Respond to the Form 1, but May have to Utilize the Disputes Clause to Overturn the DecisionCopyright © 2010 Deltek, Inc. 24
  25. 25. Best Practices – Key Takeaways
  26. 26. Best Practices – Key Takeaways• Perform Self-Assessments• Review DCAA Website (• Conduct Mock Audits• Know the Rules• Pick Your Battles• Train Your Employees• Build Relationships With Your Auditor• Understand Audit Notice Requirements (except for floor-checks)• Know your Limitations• Get Resources to Assist in Supporting YouCopyright © 2010 Deltek, Inc. 26
  27. 27. Q&ACopyright © 2010 Deltek, Inc. 27
  28. 28. Call to Action• For More Information, Please Visit Our Booth in the Solutions Pavilion – Bill Keating,, 703.923.8227 – Noah Leiden,, 703.923.8321Copyright © 2010 Deltek, Inc. 28