To the uninformed, there may be little or no distinction between the three adjectives which could apply to a contractor (or potential contractor) accounting system. To those dealing with the terminology in government solicitations, there may appear to be no significant distinction because the words seem to be used interchangeably. For example, an Air Force solicitation may have a prerequisite for an adequate accounting system, in contrast to Navy solicitation which substitutes the words acceptable accounting system. Then a third alternative could be a solicitation which gives competing bidders points for approved systems; i.e. 500 points for having an approved accounting system. In most cases, the solicitation links the accounting system status (adequate, acceptable or approved) to an action (written opinion or written determination) by a federal government agency or, less frequently, an opinion by an independent third party such as a CPA or consultant. There is a fourth alternative, an accounting system which has never been reviewed by any independent party (government or otherwise). In this case, a contractor (or a potential contractor) may have an accounting system awaiting its first test, so to speak.
The somewhat obvious question is this: Is(are) there a regulation(s) which answer the mail in terms of defining what terminology applies to what circumstance; and does it matter if a contractor interprets or translates one term into another? For example, if a contractor accounting system has been deemed adequate based upon a DCAA audit, can that contractor self-certify that it has an approved accounting system, especially when the contractor is currently bidding on that solicitation (which adds 500 points for an approved system); hence, an advantage towards a favorable source selection? In most cases the answer is “no”.
Status of Accounting Systems
Here is a brief discussion of that status of accounting systems, using the analogy of Olympic medals.
Bronze Medal = Adequate Accounting System
In most cases, an adequate contractor accounting system is considered in the context of a DCAA pre-award accounting system (limited) review. The purpose is to satisfy FAR 16.301-3(a)(3) Limitations on cost-reimbursement contracts for which the contractor’s accounting system is deemed adequate for determining costs applicable to the contract or order” (emphasis added). Assuming the contractor passes a DCAA pre-award accounting system review, that contractor now has an adequate system and should be able to use that reference in bidding on subsequent cost-type contracts. In rare cases, a DCAA pre-award results in a contracting officer letter “approving” the accounting system. This is unintended, but if it happens, take it and run with it.
Silver Medal = Acceptable Accounting System
The regulatory basis for an acceptable accounting system (or other business system) is DFARS 252.242-7005 and -7006, which require a contractor to have acceptable business systems. If a government audit or review (post-award) determines that a contractor system is free of any significant deficiencies, DFARS defines that as an acceptable system. This test involves far more compliance testing (than a pre-award), and subsequently, a higher medal for success. However, the more substantive testing also equates to far greater risk for system deficiencies; in which case, DFARS administration requires system disapproval. One other reality is that contractors don’t control the opportunity to be reviewed for the silver (or gold) medal; the government decides on who gets these opportunities, and it logically applies to the larger defense contractors (i.e. typically those subject to DFARS).
Gold Medal = Approved Accounting System
As with silver, the gold medal implicates DFARS 252.242-7005/6; however, the regulation is silent with respect to system approval. As with too many regulations, it only addresses the negative: the explicit requirement for a contractor officer to disapprove a system which has been determined to have one or more significant deficiencies. Although system approval is unstated in the regulation, DCMA comes to the rescue in Instruction 131, which describes the process for approving or disapproving a contractor business system. DCMA fills the void by stating that its contracting officers shall issue a letter notifying the contractor that the system is approved (if/when an audit or review reports that there are no significant deficiencies). Of passing interest for purposes of populating a DCMA data base related to contractor business systems, CBS Instruction 131 states that CBS status shall be “approved” for legacy findings (prior to the May 18, 2011 business systems rule) for approved, adequate, acceptable or no-non-compliances found”.
But for the May 18, 2011 business systems rule, adequate, acceptable or approved were all equivalent within DCMA’s internal recording of system approval. Unfortunately, that was then and there are hundreds of contractors with adequate accounting systems, but very few with an approved accounting system