Government Contracting & The DCAA Regulatory Environment

GOVERNMENT CONTRACTING
& THE DCAA REGULATORY
ENVIRONMENT
Helping Great Organizations Thrive
www.raffa.com P: 202.822.5000 F: 202.822.0669
APRIL 13, 2016
Seth Zarny, Raffa Partner
Glenn Anstead, Raffa Manager
Larry Mocniak, LGM Consulting
Mark Machi, LGM Consulting

TODAY’S AGENDA
 INTRODUCTIONS & OVERVIEW
 PART 1: UNDERSTANDING GOVCON ACCOUNTING SYSTEM REQUIREMENTS
 PART 2: SYSTEM REQUIREMENTS FROM AN ERP PERSPECTIVE
 PART 3: 10 KEYS FOR A SUCCESSFUL ACCOUNTING SYSTEM AUDIT
 PART 4: RECENT GOVCON DEVELOPMENTS
 QUESTIONS & ANSWERS
 HANDOUTS & SUPPLEMENTAL INFORMATION

RAFFA OVERVIEW
 LARGE ACCOUNTING, CONSULTING &
TECHNOLOGY CONSULTING FIRM
• Serve hundreds of clients in DC/MD/VA
• 240+ specialists on staff at all levels
• Support over 230 Financial System Clients
• Certified System Consultants, Certified Project
Management Professionals, Business Process
Consultants
 32+ YEARS IN BUSINESS
 17 PARTNERS, INCLUDING 11 WOMEN PARTNERS
 WOMEN-OWNED FIRM
 MULTI-CULTURAL WITH DIVERSITY AT ALL LEVELS
 PRIMEGLOBAL ALLIANCE MEMBER
Raffa is nationally recognized with access to all the resources of
the largest international firms. We contribute to our clients’
abilities to achieve their missions and deliver promises to the
world.
 WIDE RANGE OF SERVICES
• Technology Solutions
• ERP & Accounting Systems
• Software Development
• Managed IT Services
• Audit and Tax
• Managed Accounting
• HR Consulting
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• Employee Benefit Plans
• Search and Transition Services
 NATIONALLY RECOGNIZED
• Top 100 Largest Accounting Firms
• Top 100 ERP VAR (Bob Scott & Accounting Today)
• Top 100 and Fastest Growing Value Added Reseller

UNDERSTANDING GOVCON ACCOUNTING
SYSTEM REQUIREMENTS
Part 1: Understanding GovCon
Accounting System Requirements

SYSTEM REQUIREMENTS
 THE IMPORTANCE OF JOB COST ACCOUNTING SYSTEMS – WHAT IS
JOB COST ACCOUNTING?
• The process of identifying all the costs of the business to the specific “jobs” being performed.
• A job cost accounting system enables the contractor to identify, or allocate, all costs to its “jobs.”
• May be specific contracts, subcontracts, or contract line item numbers (CLINs) or other.
 WHY IS JOB COSTING SO IMPORTANT?
• Helps determine what jobs are profitable.
• Must have in place an adequate system to be awarded federal cost reimbursement contracts.
• Also required for certain time and materials contracts.
• May be necessary to respond to RFP or other solicitation.
• Must maintain such an adequate system to get paid for cost reimbursement contracts.
• Must also be able to identify any unallowable costs to exclude them from the costs billed.
• Although job cost accounting systems are most relevant to cost reimbursable contracts, even for
fixed priced contracts, important for understanding profit/loss ratios on the contract.

SYSTEM REQUIREMENTS
 PRINCIPAL SOURCES FOR RULES & GUIDANCE
• FAR (Part 15.4, 16.3)
• DFARS (252.242)
• GAAP
• CAS
• DCAA Contract Audit Manual (the “CAM”)
• DCAA Manual No. 7641.90 (the “DCAAM”)
• DCAA Audit Guidance Memos (“MRDS”)
• Defense Contract Management Agency Instructions (“DCMA-INST”)

SYSTEM REQUIREMENTS
 BASIC PROCESS FOR APPROVAL OF GOVCON ACCOUNTING SYSTEM
• To gain approval under FAR 16.3, an audit is required by DCAA
• Contractor cannot request audit—must be sponsored by a government agency
• Contracting officers request audit when there is a government need.
• Normally associated with an open RFP or contract.

SYSTEM REQUIREMENTS
 THE DEFENSE CONTRACT AUDIT AGENCY (DCAA)
• The Defense Contract Audit Agency (DCAA) provides audit and financial advisory
services to Department of Defense and other federal entities responsible for
acquisition and contract administration.
• DCAA operates under the authority, direction, and control of the Under Secretary of
Defense (Comptroller)/Chief Financial Officer.
 TYPES OF DCAA AUDITS
• Pre-Award Survey Audits
• Incurred Cost Audits
• Proposal Audits
• Other Audits
• Field Audits

SYSTEM REQUIREMENTS
 THE PRE-AWARD SURVEY AUDIT/ACCOUNTING SYSTEM REQUIREMENTS
• CAM Chapter 5
• Overall Accounting System (5-300)
• General IT System (5-400)
• Budget and Planning System (5-500)
• Purchasing System (5-600)
• Material System (5-700)
• Compensation System (5-800)
• Labor System (5-900)
• Indirect and ODC System (5-1000)
• Billing System (5-1100)
• Estimating System (5-1200)

SYSTEM REQUIREMENTS
 THE PRE-AWARD SURVEY AUDIT/ACCOUNTING SYSTEM AUDIT
• Purpose is to develop an understanding of the contractor’s accounting system and
determine whether design of the system is acceptable for the award of federal
government contract
• DCAA evaluates design of Accounting System to determine if it is acceptable for
prospective contract
• DCAA or Buying Command will request contractor complete Accounting System
Checklist
• Contractor should be prepared to demonstrate how accounting system satisfies SF
1408 criteria at initial meeting

SYSTEM REQUIREMENTS
 WHAT WILL THE DCAA REQUIRE FOR THE PRE-AWARD SURVEY /
AUDIT?
• ICQ (Internal Controls Questionnaire)
• Will review accounting system to determine:
• GAAP compliance
• Proper segregation of direct and indirect costs and job costs
• Accumulation of costs under General Ledger Control
• Timekeeping System/Labor Distribution
• Interim determination of costs/monitoring of rates
• Exclusion of unallowable costs
• Costs by CLIN
• Procedures to ensure accurate billing
• Whether the accounting system is accurate and reliable
• Whether the accounting system is in operation

SYSTEM REQUIREMENTS
 STANDARD FORM 1048: THE 12 CRITICAL ELEMENTS FOR APPROVAL
• Designed to discover if you have a job cost accounting system.
• Accounting system to be in accordance with generally accepted accounting principles and
provide for:
• Proper segregation of direct costs from indirect costs;
• Identification and accumulation of direct costs by contract;
• A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives;
• Accumulation of costs under general ledger control;
• A timekeeping system that identifies employees' labor by intermediate or final cost objectives;
• A labor distribution system that charges direct and indirect labor to the appropriate cost objectives;
• Interim (at least monthly) determination of costs charged to a contract through routine posting of books of
account;
• Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of
FAR 31, Contract Cost Principles and Procedures, or other contract provisions;
• Identification of costs by contract line item and by units (as if each unit or line item were a separate
contract) if required by the proposed contract;
• Segregation of preproduction costs from production costs;
• Financial information required by contract clauses concerning limitation of cost (FAR 52.232-20) or
limitation on payments (FAR 52.216-16); and required to support request for progress payments; and
• Adequate, reliable data for use in pricing follow-on acquisitions.

SYSTEM REQUIREMENTS
 DCAA’S FINDINGS
• Verify that the accounting system and related policies and procedures are in place and ensure
compliance with 15 key items contained in the DCAA Pre-award Survey Audit Program
• DCAA will prepare a draft audit report
• Contractor responds to draft audit report
• DCAA incorporates contractor’s comments into a final report
• An “Adequate” or “Inadequate” opinion is made by DCAA
• Contractor either passes or fails (08-PAS-043 (2008))
• All findings are either adequate or not adequate
• DCAA does not make recommendations for correction or improvement
• When any part of the internal control system is found deficient, the entire system will be
deemed inadequate for use
• When determined inadequate, the auditor is required to recommend that the system be
disapproved and payments be suspended.
Although DCAA makes a recommendation, contracting officer makes the decision on the outcome of
an audit as far as award.

SYSTEM REQUIREMENTS
 PRIOR TO CONTRACT AWARD
• Contracting Office or DCMA conducts Pre-award Survey to consider responsibility of prospective
contractor
• Design of the Accounting System is part of the Pre-award Survey (SF 1408 Criteria)
• DCAA requested to evaluate design of Accounting System
 AFTER CONTRACT AWARD
• DFARS 252.242-7006 (a) (1) Defines an Acceptable Accounting System as: “a system that complies
with the system criteria in paragraph (c) of this clause to provide reasonable assurance that:
• (i) Applicable laws and regulations are complied with;
• (ii) The accounting system and cost data are reliable;
• (iii) Risk of misallocations and mischarges are minimized; and
• (iv) Contract allocations and charges are consistent with billing procedures.”
From March 29, 2016: DCAA, Accounting System Requirements: www.dcaa.mil/small_business/Accounting_System

SYSTEM REQUIREMENTS
 ACCOUNTING SYSTEM DEFINED
• DFARS 252.242-7006 (a) (2) defines a “Contractor’s system or systems for accounting methods,
procedures, and controls established to gather, record, classify, analyze, summarize, interpret,
and present accurate and timely financial data for reporting in compliance with applicable laws,
regulations, and management decisions”
• May include subsystems for specific areas such as:
• Billing
• Labor
 TOTAL CONTRACT COSTS
• DFARS 252.242-7006 (c)(2) requires
• Proper segregation of direct costs from indirect costs.
• The total cost of a contract is the sum of the direct and indirect costs allocable to the
contract.
• While the total cost of a contract includes all costs properly allocable to the contract, the
allowable costs to the government are limited to those allocable costs which are allowable
pursuant to Part 31 and applicable agency supplements.

SYSTEM REQUIREMENTS
 DIRECT COSTS
• DFARS 252.242-7006 (c)(3) requires Identification and accumulation of direct costs by contract;
• FAR 2.101 Defines Direct Cost as “any cost that is identified specifically with a particular final cost
objective.”
• Direct costs are not limited to items that are incorporated in the end product as material or labor.
• No final cost objective shall have allocated to it as a direct cost any cost that has been included in an
indirect cost pool.
• Direct costs of the contract shall be charged directly to the contract.
 INDIRECT COSTS
• Indirect cost means any cost not directly identified with a single, final cost objective, but identified with two or more
final cost objectives or an intermediate cost objective.
• An indirect cost is not to be allocated to a final cost objective if other costs incurred for the same purpose in like
circumstances have been included as a direct cost of any other final cost objective.
• DFARS 252.242-7006 (c)(4) requires “A logical and consistent method for the accumulation and allocation of
indirect costs to intermediate and final cost objectives”
• The term indirect cost covers a wide variety of cost categories and the costs involved are not all incurred for the
same reasons
• The number of indirect cost accounts in a single company can range from one to hundreds.
• The indirect structure needs to be tailored to your company and how it operates.
• In general, indirect cost accounts fall into two broad categories:
• Overhead
• General and Administrative

SYSTEM REQUIREMENTS
 GENERAL & ADMINISTRATIVE
• These are management, financial, and other expenses related to the general management and
administration of the business unit as a whole. To be considered a G&A Expense of a business
unit, the expenditure must be incurred by, or allocated to, the general business unit.
• Examples of G&A expenses include:
• Salary and other costs of the executive staff of the corporate or home office
• Salary and other costs of such staff services as legal, accounting, public relations, and
financial offices
• Selling and marketing expenses

SYSTEM REQUIREMENTS
 ALLOCATION BASE
• Indirect costs should be allocated based on benefits accrued to intermediate and final cost
objectives.
• Allocation base must be reasonable.
• There must be a relationship between the selected allocation base and the pool costs.
• For example, training costs in the overhead pool are not necessarily caused by a particular cost
objective, but the cost objectives might benefit from the training of employees. In that case,
training would be related and benefit the labor dollars incurred on contracts/final cost objective.
• In general, typical allocation bases for Overhead and G&A are:
• Overhead
• Direct Labor Dollars
• Direct Labor Hours
• Direct Material Dollars
• G&A
• Total Cost Input (Total direct and indirect costs minus G&A)
• Value Added (TCI less subcontracts, and direct materials)
• Single Cost Element (e.g. Direct labor dollars)

SYSTEM REQUIREMENTS
 ALLOWABILITY (FAR 31.201-2)
A cost is allowable only when the cost complies with all of the following requirements:
• Reasonableness
• Allocability
• Terms of the contract
• Applicable Cost Accounting Standards (CAS)
• Any Limitations Set forth in the entire Subpart 31.201
 REASONABLENESS (FAR 31.201-3)
The FAR considers a cost to be reasonable if:
• In its nature and amount, it does not exceed that which would be incurred by a prudent person in
the conduct of competitive business.
• It is the contractor's responsibility to establish that each cost is reasonable.
 ALLOCATABILITY (FAR 31.201-4)
The FAR considers a cost to be reasonable if:
• Is incurred specifically for the contract;
• Benefits both the contract and other work, and can be distributed to them in reasonable
proportion to the benefits received; or
• Is necessary to the overall operation of the business, although a direct relationship to any
particular cost objective cannot be shown.

SYSTEM REQUIREMENTS
 ACCOUNTING FOR CONTRACT COSTS
The accounting system must be able to accumulate and report the costs for each final cost objective; i.e.
government contract.
• Direct costs of the contract, plus
• Allocation of applicable indirect costs, less
• Unallowable Costs
 LABOR SYSTEM DFARS 252.242-7006 (C)
• Requires a timekeeping system that identifies employees’ labor by intermediate or final cost
objectives
• A labor distribution system that charges direct and indirect labor to the appropriate cost objectives
 TIME KEEPING
• Labor should be charged to intermediate and final cost objectives based on a timekeeping
document (paper or electronic timecards) completed and certified by the employees and approved
by the employees’ supervisors.
• Employees should fill out timesheet on a daily basis and include all hours worked including
uncompensated overtime.
• Labor cost distribution records should reconcilable to payroll records and labor distribution
records should trace to and from the job cost ledger and general ledger accounts.

SYSTEM REQUIREMENTS
 UNALLOWABLE COSTS DFARS 252.242-7006 (C)
• Requires “Exclusion from costs charged to Government contracts of amounts which are not
allowable in terms of Federal Acquisition Regulation (FAR) part 31, Contract Cost Principles and
Procedures, and other contract provisions;”
• You need written policies and procedures to identify and exclude unallowable costs.
• Unallowable costs need to be identified and excluded from any billings, claims, and proposals
applicable to a Government contract.
 COSTS BY CONTRACT LINE ITEM DFARS 252.242-7006 (C)(13)
• Requires “Identification of costs by contract line item and by units (as if each unit or line item
were a separate contract), if required by the contract”
• Accounting system needs be able to expand beyond a project number.
• Each job needs to be expanded to the requisite level of detail as determined by contract terms.
• Make sure the contract is adequately reviewed to determine what this level might be.

SYSTEM REQUIREMENTS
 BILLINGS
• Contractors should only bill cost which comply with FAR 52.216-7
• Recorded costs that have been paid by cash, check, or other form of actual payment for items or
services purchased directly for the contract
• When the Contractor is not delinquent in paying costs of contract performance in the ordinary
course of business, costs incurred, but not necessarily paid, for supplies and services purchased
directly for the contract and associated financing payments to subcontractors, provided payments
determined due will be made:
• In accordance with the terms and conditions of a subcontract or invoice; and
• Ordinarily within 30 days of the submission of the Contractor’s payment request to the
Government
• Billings must be based on current contract provisions.
• The total amount billed should not exceed any contract, work order, funding limitation, or any other
contract ceiling amount.
• Important to review contract to identify billing provisions, including but not limited to:
• Restriction of billing frequency
• Special withholding provisions
• Contractual unallowable costs
• Must reconcile booked costs to billed costs.

SYSTEM REQUIREMENTS
 COST ACCOUNTING INFORMATION DFARS 252.242-7006 (C)
• Requires Cost accounting information, as required:
• (i) By contract clauses concerning limitation of cost (FAR 52.232-20), limitation of funds (FAR
52.232-22), or allowable cost and payment (FAR 52.216-7); and
• (ii) To readily calculate indirect cost rates from the books of accounts; • Interim rates should
be routinely monitored.
• At least monthly, an employee needs to be responsible for monitoring total contract expenditure
against contract limitations on price or cost.
• Adequate, reliable data for use in pricing follow on acquisitions; and
• Accounting practices in accordance with standards promulgated by the Cost Accounting Standards
Board (CASB), If applicable, otherwise, Generally Accepted Accounting Principles (GAAP).
 OTHER
• Be up to date on its submission of adequate incurred cost proposals in accordance with contract
terms, if applicable.
• Submit final vouchers within 120 days after settlement of applicable final indirect costs rates for all
years as required by FAR 52.216-7(d)(5)

SYSTEM REQUIREMENTS FROM AN ERP
PERSPECTIVE
Part 2: System Requirements
From an ERP Perspective

PERSPECTIVE
 THERE IS NO “SILVER BULLET.”
• There is no solution certified by any agency or organization that will guarantee compliance with
DCAA, FAR and regulatory audits.
• Contractors must invest in the proper processes, financial systems, and reporting tools to help
achieve and maintain compliance
WILL ANY ERP SYSTEM SUPPORT
GOVERNMENT CONTRACTORS?
Yes and No…
For these reasons, government contractors are increasingly turning away from
basic accounting software applications, and instead require broader and
more fully integrated Enterprise Resource Planning (ERP ) systems.

PERSPECTIVE
 BUSINESS PROCESS IMPROVEMENTS
 INDIRECT RATES
• Monitor Trends via standard reports
• More Accurate Cost Information for Bidding
• More Accurate Historical Procurement Costs
 TRACEABILITY OF SOURCE DOCUMENTS
• Management Reporting Drill Down
• On line Inquiry Screens
• Transaction Level Detail
• Imaging/Document Management
WHAT WILL YOU GET FROM AN INTEGRATED
MICROSOFT SOLUTION?
 ORGANIZED FLOW OF INFORMATION
• Project Management
• Resource Allocation
• Financial Reporting
 SEAMLESS INTEGRATION OF INFORMATION
 ONE VIEW OF THE DATA
 SOFTWARE TOOLS YOUR TEAM IS FAMILIAR
WITH…

PERSPECTIVE
 JOB COST SYSTEM
 SEGREGATION OF DIRECT, INDIRECT & UNALLOWABLE COSTS
 ABILITY TO TRACK AND REPORT ON INDIRECT COSTS
 TRACEABILITY OF COSTS
WHAT ARE THE KEY COMPONENTS OF A
ERP SYSTEM FOR GOVCON’S?

PERSPECTIVE
JOB COST ACCOUNTING SYSTEMS
 USED TO DETERMINE COST OF A PRODUCT OR SERVICE
 CAN BE USED TO DETERMINE PRICES – GOVERNMENT CONTRACT PRICES ARE
OFTEN BASED ON COSTS CHARGED TO A JOB
 USED TO RECORD COST OF AN INDIVIDUAL TRANSACTION
 MAY BE USED TO DISTRIBUTE INDIRECT COSTS TO COST OBJECTIVES
 GOVERNMENT DOES NOT REQUIRE “ON BOOK” DISTRIBUTIONS
 “MEMO RECORDS” ARE ACCEPTABLE

PERSPECTIVE
 FACILITATES INTEGRATION OF PRODUCTION DATA INTO ACCOUNTING RECORDS
 COSTS MUST BE ACCUMULATED UNDER GENERAL LEDGER CONTROL
• Job costs must be reconcilable and posted to general ledger control accounts
• Costs must be posted at least monthly to books of account
 COSTS MUST BE SEGREGATED BETWEEN DIRECT AND INDIRECT TYPES
• Controls must exist to preclude direct charging of indirect expenses
 DIRECT COSTS MUST BE ACCUMULATED BY CONTRACT
• Must either have a subsidiary job cost ledger or accounts receivable ledger
• Must be able to “drill down” to at least Contract Line Item Number (“CLIN”) level
 INDIRECT COSTS MUST BE ALLOCATED TO JOBS
• Accumulated in logical cost groupings and allocated based on causal or beneficial relationships
JOB COST ACCOUNTING SYSTEMS – CONT.

PERSPECTIVE
MEASURABLE BENEFITS OF EFFECTIVE
JOB COST SYSTEMS
 BETTER PRIORITIZATION OF PROJECTS AND SERVICES
• It is shocking how many “projects” operate below the radar screen with no plans, controls or
accountability
 SHORTEN BILLING CYCLES
• Better allocation of resource T&E to project schedules and invoicing, and faster billing
disputes
 MINIMIZE REVENUE LEAKAGE
• Eliminate errors from manual entry or redundant systems used to invoice client services
 IMPROVED SERVICE AGILITY
• Quicker response to sudden or unexpected changes in business priorities, competitive
pressures, new technology, and economic downturns

PERSPECTIVE
ALLOCATION OF EXPENSES
 WHEN A COMPANY INCURS AN EXPENSE, IT IS EITHER A DIRECT EXPENSE THAT IS
CHARGED TO A SPECIFIC PROJECT OR IT IS AN INDIRECT EXPENSE THAT BENEFITS
VARIOUS PROJECTS AND THE COMPANY AS A WHOLE, OR ITS UNALLOWABLE.

PERSPECTIVE
WHAT IS A DIRECT COST?
 IF A COST IS EASILY IDENTIFIED WITH A SINGLE PROJECT, IT IS GENERALLY
CONSIDERED A DIRECT COST.
To help make this determination, ask…
“If we did not have this contract, would we still incur
this cost?”
A “no” answer to this question indicates that it is
probably a direct cost.

PERSPECTIVE
WHAT IS AN INDIRECT COST?
 AN INDIRECT COST IS A COST INCURRED THAT:
• Benefits more than one contract
• Incurred for the common good of the company
• Impractical to split
• Immaterial direct cost

PERSPECTIVE
WHY IS IT IMPORTANT TO MONITOR
INDIRECT RATES?
 UNDER-RUNNING RATES: BILLING RATES ARE SIMPLY ESTIMATED RATES THAT
MUST BE ADJUSTED TO ACTUALS AT YEAR END. A COMPANY THAT HAS
PREDOMINANTLY COST-REIMBURSEMENT CONTRACTS AND THEY ARE
SIGNIFICANTLY UNDER-RUNNING THEIR ESTIMATED RATES, WHICH MEANS THEIR
ACTUAL RATES ARE LOWER THAN THE APPROVED BILLING RATES, THEY WILL BE
EXPECTED TO REIMBURSE THE GOVERNMENT ANY EXCESS CASH COLLECTED.
 OVER-RUNNING RATES: IF ACTUAL INDIRECT RATES ARE RUNNING HIGHER THAN
THE BILLING RATES, THE COMPANY NEEDS TO EITHER SLOW DOWN THE
OPERATING EXPENSES BEING INCURRED OR THEY WILL BE FORCED TO SUPPORT
THE NEGATIVE CASH FLOW THROUGH OTHER MEANS, SUCH AS LINE-OF-CREDIT
BORROWING.

PERSPECTIVE
MONITOR INDIRECT RATES WITH
PRE-DEFINED REPORTS
 FRINGE RATES

PERSPECTIVE
 OVERHEAD RATES

PERSPECTIVE
 G&A RATES

PERSPECTIVE
REPORTING IS KEY…
REPORTING VS. DASHBOARDS
 MANY PEOPLE USE THE TERMS INTERCHANGEABLY
 WHAT IS THE PURPOSE OF A REPORT IN GOVCON ORGANIZATION?
• Compliance
• Company Directed
 WHAT IS THE PURPOSE OF A DASHBOARD?
• Drive user towards decision
 HOW DO YOU KNOW WHAT THE DASHBOARDS SHOULD BE?
• Key Performance Issues of Company
 WHAT ARE KPI’S?
• Key Performance Indicators

PERSPECTIVE
PROJECT DASHBOARD

PERSPECTIVE
JOB COST SUMMARY REPORT

PERSPECTIVE
WEB APPS – PROJECT ANALYST

PERSPECTIVE
PROJECT NET PROFIT

PERSPECTIVE
DRILLDOWN TO TRANSACTION DETAILS

PERSPECTIVE
WEB APPS – ACCESS TO ALL REPORTS

PERSPECTIVE
ADDITIONAL FUNCTIONALITY THROUGH
THE WEB…
 ELECTRONIC TIMECARD ENTRY

PERSPECTIVE
 APPROVALS

PERSPECTIVE
 RESOURCE PLANNING

10 KEYS FOR A SUCCESSFUL DCAA
ACCOUNTING SYSTEM AUDIT
Part 3: 10 Keys for a Successful
DCAA Accounting System Audit

1. CONDUCT PRELIMINARY MANAGEMENT REVIEWS/INTERNAL AUDITS
• Undertake management reviews or internal audits of the system to ensure compliance with the
Contractor’s established policies, procedures, and accounting practices. DFARS 252.242-
7006(c)(8)
• Utilize SF Form 1408 and DCAA Pre-award Accounting System Adequacy Checklist as
guides
• Management should review company key policies e.g., timekeeping
• Internal audit team review DCAA Contract Audit Manual
2. ENSURE PROPER RECORDS RETENTION
• FAR Subpart 4.7 generally describes records retention requirements. Specific retention periods
for the differing types of records are addressed as well as how to calculate the retention periods.
• Requires contractors to make available records, which includes books, documents,
accounting procedures and practices, and other data, regardless of type and regardless of
whether such items are in written form, in the form of computer data
• Necessary to satisfy contract negotiation, administration, and audit requirements of the
contracting agencies and the Comptroller General

3. ESTABLISH INTERNAL AUDIT TEAM AND APPOINT INTERNAL LIAISON
• Management team to review policies and ensure corporate compliance
• Internal liaison to act as intermediary between DCAA and management team
• Internal audit team should have senior representative from finance/accounting, payroll/human
resources, operations, legal and business development departments as well as a senior executive
• Internal liaison should have solid understanding of company operations and products/services,
finance background and, ideally, experience with past DCAA audits
• Ensure that internal liaison is present at interviews of personnel
4. REQUIRE AN ENTRANCE CONFERENCE (CAM 4-302.1)
• Clarify the specific scope/parameters of the audit
• Ask auditor to identify approach to the audit
• Ask auditor to identify personnel he/she intends to interview
• Ask auditor to define length of intended field work

5. IDENTIFY AND COMMUNICATE WITH KEY EMPLOYEES
• Advise key managers and employees how to properly respond to audit requests and remind them
to cooperate timely
• To the extent possible, have internal liaison schedule interviews during mutually convenient times
with employees to mitigate disruption
• Inform key employees and managers of scope of audit and caution them to keep responses within
scope
• Inform key employees and managers of internal liaison and that questions should be directed to
internal liaison
6. BE RESPONSIVE
DCAA Access to Your Employees (MRD PPS 730.4.A.9(July 2013))
• DCAA considers access to contractor employees a routine and established audit procedure that is
necessary to satisfy the Generally Accepted Government Auditing Standards (GAGAS).
• “If during the course of any audit, the auditor considers access to employee observations or
interviews to be essential to completing their audit, and the contractor fails to permit the auditor to
interview those employees or observe them during the performance of their current duties, the
auditor should follow the guidance in CAM Section 1-504.5, Resolution of Contractor Denials. If
those efforts prove unsuccessful, the field audit office should continue to elevate the matter as an
access to records issue, in accordance with DCAA Instruction 7640.17.”
• May Report recalcitrance to contracting officer. MRDS 10-PAS-024(R) (DCAA “Rules of
Engagement”)

7. MAINTAIN COMMUNICATIONS LOG
• Maintain a log of documents provided to DCAA and date provided
• Never provide originals
• Important for assessing what auditor relied upon to make findings and what auditor may have
neglected to consider
8. KEEP AUDIT IN SCOPE
• Prevent audit creep and sure auditor stays within scope of audit agreed upon during preliminary
conference
• If auditor refuses to stay in scope, request conference with supervisor
• Do not develop reports or analysis not otherwise maintained by company in ordinary course of
business even if auditor demands

9. REQUEST THAT AUDITOR DISCUSS PRELIMINARY FINDINGS (CAM 4-303.1)
• The auditor should discuss preliminary audit findings (e.g., potential system deficiencies, potential
FAR/CAS non-compliances, etc.) with the contractor to ensure conclusions are based on a
complete understanding of all pertinent facts. MRDS 10-PAS-024(R) (DCAA “Rules of
Engagement”)
• Contractor may make revisions after the auditor has discussed preliminary issues with the
contractor.
• In those cases, the audit report MAY reflect the results of the audit of the original submission
and include all questioned cost and/or deficiencies identified during the audit. The
requestor/contracting officer should be notified that the audit report will reflect the FAO’s audit
of the original submission, and the auditor will consider the contractor’s management
approved revised submission the contractor’s concurrence with DCAA’s audit position.
MRDS 10-PAS-024(R) (DCAA “Rules of Engagement”)
10. REQUIRE AN EXIT AND DRAFT REPORT (CAM 4-303.1)
• “Upon completion of the field work, the auditor should hold the exit conference to discuss the audit
results and obtain the contractor’s views concerning the findings and conclusions.” MRDS 10-
PAS-024(R) (DCAA “Rules of Engagement”)
• “For other than audits involving forecasted costs subject to negotiations, the auditor should provide
the contractor a copy of the draft report, or at a minimum, the results of audit section of the draft
report (including the opinion and any exhibits and notes, or statement of conditions and
recommendations).” MRDS 10-PAS-024(R) (DCAA “Rules of Engagement”)

Part 4: Recent GovCon
Developments
RECENT GOVCON DEVELOPMENTS

 JUDICIAL: UNIVERSAL HEALTH V. UNITED STATES
 LEGISLATIVE: 2016 NATIONAL DEFENSE AUTHORIZATION ACT
 REGULATORY: PRIME CONTRACTOR’S AUDITING OF SUBCONTRACTORS

 UNIVERSAL HEALTH VS. UNITED STATES
• December 4, 2015, the Supreme Court granted certiorari to address the “implied certification”
theory of “legal falsity” required for False Claims Act liability.
• Question: Can factually accurate claims submitted to the government for payment nevertheless
be “false or fraudulent,” pursuant to an implied certification theory, under the False Claims Act
(FCA) because of an underlying violation of law?
• Federal Circuits are currently split on this issue: the First, Second, Third, Fourth, Sixth, Ninth,
Tenth, Eleventh, and D.C. circuits have found that implied certification is a valid FCA theory, but
the Fifth and Seventh circuits have found that it is not.
• Two Types of False Claims: Factually and Legally False
• Factually false: e.g., services are billed for, but never provided.
• Legally false: Invoice or claim fails to satisfy an underlying legal requirement because of a violation
of a statute, regulation, or contract.
• Two Types of Certification: Implied and Express
• Express certification: Contractor submitting the claim affirmatively certified compliance with a law.
• Implied certification: Contractor had an ongoing obligation to comply with a law irrespective of
whether it made a direct certification of compliance when submitting the claim.
• The longstanding question under the FCA is whether a government contractor impliedly certifies
that it has complied with all applicable statutory, regulatory, and contractual requirements when it
submits a claim for payment to the government and, if it has not actually complied with those
requirements, has it violated the FCA.
• Oral argument was heard on April 9, 2016.

 2016 NATIONAL DEFENSE AUTHORIZATION ACT
• Signed by President Obama in November, the 2016 National Defense Authorization Act (NDAA)
includes a number of sections related to acquisition management.
• Requirement for improved auditing by DCAA addressing incurred cost audit backlog (contractor
indirect cost rate proposals (ICPs), submitted annually as required by FAR 52.216-7(d)).
• Section 893 prohibits DCAA from performing any audits for non-defense agencies (e.g. NASA) unless
DOD certifies that DCAA is current on the ICP backlog.
• “Current” is defined as 18 months of incurred cost inventory, further defined as “the level of
contractor incurred cost proposals in inventory from prior years that are currently being audited
by DCAA”. As a point of clarification, the inventory should include ICPs currently being audited
or those in the queue awaiting audit.
• DCAA will publicize its ICP inventory (as of 9/30/2015) when it releases its 2015 Annual Report
to Congress in April-May 2016;
• Several commentators suggest that DCAA must have no more than 11,250 ICPs in inventory to
avoid the Section 893 restriction on performing non-defense audits.
• If DCAA has not achieved the 18-month inventory as of the date of the 2016 NDAA, any
reimbursements received by DCAA for performing non-defense audits will be a reduction to DCAA’s
DOD funding.

 2016 NATIONAL DEFENSE AUTHORIZATION ACT - CONTINUED
• Section 893 imposes an additional requirement on DCAA “to enhance the productivity of oversight and
program and contract auditing to avoid duplicative audits and to streamline oversight reviews”.
• This requirement will be included in a report (due within one year) which will also address:
• Comparisons to commercial industry accounting practices to cost accounting standards (CAS) to
determine if commercial industry accounting practices can satisfy CAS requirements;
• A description of materiality standards used by the DCAA and DOD-IG;
• Estimate of the average delay in contract awards due to the time for DCAA to complete pre-
award audits; and
• Total costs sustained or recovered costs as a percentage of questioned costs.

 PRIME AUDITING OF SUBCONTRACTORS
• DCMA instruction 135
• 3.2.3.2. Subcontract Costs. The prime contractor is responsible for auditing subcontractors and
generally closes subcontracts using procedures similar to the Government.
• The functional specialist shall ensure that the prime has settled subcontractor costs before closing
a contract/order.
• DCAA may issue a qualified indirect cost audit report indicating that audit of certain subcontract
costs has not been completed. When the subcontract costs (direct or indirect) are considered to be
immaterial, the functional specialist may proceed with contract closeout.
• CAM 9-104.1
• Primary responsibility for evaluation of subcontractor proposals rests with prime contractors and
upper-tier subcontractors.
• FAR 15.404-3(b) require contractors and higher-tier subcontractors to conduct appropriate
cost or price analyses to establish the reasonableness of proposed subcontract prices.
• FAR 15.408, Table 15-2 requires contractors and higher-tier subcontractors to conduct price
analysis of all subcontractor proposals and a cost analysis of each subcontract proposal
when certified cost or pricing data are required by FAR 15.403-4(a)(1) regarding
noncompetitive methods and to provide the results of such evaluations prior to negotiations.
• FAR 42.202(e)(2)
• “The prime contractor is responsible for managing its subcontracts. The CAO’s review of
subcontracts is normally limited to evaluating the prime contractor’s management of the
subcontracts (see Part 44).”
DCAA’S Position: The prime contractor (or higher tier subcontractor) is responsible managing and
monitoring all aspects of the subcontract effort, including pricing and performance.

 SUBCONTRACTOR MANAGEMENT
• Procedures to ensure that subcontractor and vendor costs are only included in billings if
payment to subcontractor or vendor will be made in accordance with terms and conditions of
the subcontract or invoice and ordinarily within 30 days of the contractor’s payment request
to the Government.
• Regularly audit and management of subcontractor performance and invoicing

Questions
&
Answers
Remember to complete your evaluation survey…

HANDOUTS
 PRESENTER BIOGRAPHIES
 SF FORM 1408
 DCAA PRE-AWARD ACCOUNTING SYSTEM ADEQUACY CHECKLIST
 DCAA AUDIT GUIDANCE ON AUDITING CONTRACTOR BUSINESS SYSTEMS
 DCAA RULES OF ENGAGEMENT

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