Redstone - Is My Accounting System Adequate, Acceptable or Approved...Does it Matter_.jpg

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  

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Written by Michael Steen

Mike Steen is a Senior Advisor with Redstone Government Consulting, Inc. and a specialist in complex compliance issues to include major contractor cost accounting & business system regulations, financial compliance, resolution of DCAA audit issues, Cost Accounting Standards application, litigation support, and claims preparation. Prior to joining Redstone Government Consulting, Mike served in a number of capacities with DCAA for over thirty years, and upon his retirement, he was one of the top seven senior executives with DCAA. Mike Served as a Regional Director for two DCAA regions, and during that time was responsible for audits of approximately $25B and 800 employees. In October 2001, he was selected for the Senior Executive Service and in 2006 he received the Presidential Rank Award. During Mike’s tenure with DCAA, he was involved in conducting or managing a variety of compliance audits, to include cost proposals, billing systems, Cost Accounting Standards, claims, defective pricing, and then-evolving programs such as restructuring, financial capability and agreed-upon procedures. He directly supported the government litigation team on significant contract disputes and has prepared and presented various lectures and seminars to DCAA staff and business community leaders. Since joining Redstone Government Consulting in June 2007, Mike has developed and presented training and seminars on Government Contracts Compliance to NCMA, Federal Publications Seminars and various clients. Mike also is a prolific contributor of written articles to government contracting publications, as well as to our own Government Insights Newsletter. Mike also serves as the director of our training service offerings, with responsibilities for preparing and developing course content as well as instructing our seminars to clients and general audiences throughout the U.S. Mike also serves as a faculty instructor for the Federal Publications Seminars organization. Education Mike has a BS Degree in Business Administration from Wichita State University. He is also a graduate of the DCAA Director’s Fellowship Program in Management, and has a Masters Degree in Administration from Central Michigan University. Mr. Steen also completed a number of OPM’s management and executive development courses.

About Redstone GCI

Redstone Government Consultants are a team of the most senior industry veterans and the brightest new talent in the industry. Many have held senior government positions including leadership roles in the DCAA. Our new talents bring significant accounting and software experience along with fresh perspectives, inspiration and energy to our team. Through our leadership and combined experience, we provide a unique perspective, bringing both government and contractor proficiencies to bear and ensuring rock-solid government compliance for our clients.

Topics: Compliant Accounting Infrastructure, Cost and Pricing and Budgeting, Small Business Compliance, Contracts Administration, Government Compliance Training