RGCI- Section 809 Panel—The Government Moves Slowly

Slowly is the word that always describes Government change, and acquisition process change is no exception.  Some of you will remember that the 2017 NDAA required DCAA to reduce the backlog of DoD incurred cost submissions and suspend work for other Departments.  But how many of you remember that it also created an Advisory Panel on Streamlining and Codifying Acquisition Regulations, better known as the Section 809 Panel?  Its Final Report was published January 2019.  The Section 809 Panel was tasked with identifying ways to streamline and improve the defense acquisition system.  In total, they have made 98 recommendations.  Obviously, we are not going to address all of them in this blog, but we selected one example that may (someday) affect your accounting system and how it is audited.

Recommendation 72: 

Replace 18 system criteria from DFARS 252.242-7006, Accounting System Administration, with an internal control audit to assess the adequacy of the contractors’ accounting systems based on seven system criteria.

Now before you get too excited at this prospect, remember, these are only recommendations! 

Let’s look at the seven remaining criteria:

  1. Direct costs and indirect costs are classified in accordance with contract terms, FAR, CAS and other regulations, as applicable.
  2. Direct costs are identified and accumulated by contract in accordance with contract terms, FAR, CAS and other regulations, as applicable.
  3. Methods are established to accumulate and allocate indirect costs to contracts in accordance with contract terms, FAR, CAS and other regulations, as applicable.
  4. General ledger control accounts accurately reflect all transactions recorded in subsidiary ledgers and/or other information systems that either integrate or interface with the general ledger, including, but not limited to, timekeeping, labor cost distribution, fixed assets, accounts payable, project costs and inventory.
  5. Adjustments to the general ledger, subsidiary ledgers or other information systems, bearing upon the determination of contract costs (e.g. adjusting journal entries, reclassification journal entries, cost transfers, etc.), are done for reasons that do not violate contract terms, FAR, CAS and other regulations, as applicable.
  6. Identification and treatment of unallowable costs are accomplished in accordance with contract terms, FAR, CAS and other regulations, as applicable.
  7. Billings are prepared in accordance with contract terms, FAR, CAS and other regulations, as applicable.

Section 809 Panel Eliminations 

Still sounds pretty comprehensive, doesn’t it?  In fact, it has eliminated some of the more nebulous requirements of DFARS 252.242-7006, such as a sound internal control structure and accounting practices in accordance with CAS/GAAP.   Either of these are based so much on judgement that an auditor could “find” a noncompliance in virtually all accounting systems.

It also eliminates some requirements which don’t really relate to the adequacy of the accounting system, but which make it easier for the auditor.  One such requirement is the requirement for cumulative allowable cost worksheets and to readily calculate indirect cost rates from the book of accounts. 

Another elimination is the requirement to produce adequate, reliable data to use in pricing follow-on acquisitions.  Isn’t this an estimating system function?

Where the Section 809 Plan May Leave Gaps

There are many more extremely good ideas in the Section 809 Panel Report, but also some gaping holes and/or contradictions.  For example, the first Report recommended development of a Professional Practice Guide for DoD’s oversight of contract costs and business systems, to be complete by January 2019.  It is now well into 2019, but no such Guide has shown up on the Section 809 Panel’s website.  One more example of a meaningless recommendation is their audit planning materiality threshold calculation.  Their formula is: Materiality Threshold = $5,000 x [(Total ADV/$100,000)^.75], which would mean that a $100M ADV contractor would have a materiality threshold of $889,140.  This sounds wonderful until you read the exception.  The exception says that “a different and significantly lower planning materiality would be used for expressly unallowable costs and sensitive audit areas.”

While the wheels of acquisition process change grind slowly along, remember, Redstone GCI can help you navigate the current requirements as well as being committed to keeping you up-to-date on any changes. With a variety of training options and consulting packages available, we can guide your team in establishing and maintaining a good accounting system.

 

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Written by Cheryl Anderson

Cheryl Anderson Cheryl Anderson is a Director with Redstone Government Consulting, Inc. She provides Government Contract Consulting services to our government contractors primarily related to equitable adjustment claims, terminations, and DCAA audit expectations. Prior to joining Redstone Government Consulting, Cheryl served in a number of capacities with DCAA for over thirty-five years. Upon her retirement, Cheryl was a regional audit manager with DCAA. Cheryl began her DCAA career in 1977 as an auditor-trainee with the Ingalls Resident Office in Pascagoula, Mississippi. After instructing at the Defense Contract Audit Institute for four years, she returned to the Eastern Region in 1990, holding various audit positions before ultimately becoming a Regional Audit Manager in August 2005. She had overall management responsibility for audits performed by approximately 200 employees. During Cheryl’s tenure with DCAA, she was involved in conducting or managing a variety of compliance audits, to include cost proposals incurred cost submissions, systems, Cost Accounting Standards, claims, defective pricing, financial capability and agreed-upon procedures. She directly supported the government litigation team on a contract dispute and has prepared and presented various lectures and seminars to DCAA staff. In addition, she has served as an instructor for the Government Audit Training Institute for over 20 years. She currently specializes in preparing clients for more complex DCAA audits, providing advice on FAR cost principles and contracts regulatory provisions, and assisting clients in anticipating and addressing audit. Education Cheryl has a BS Degree in Accounting from Auburn University at Montgomery and a Masters of Business Administration from Wichita State University. Cheryl also completed courses at OPM’s management and executive development centers and at the Federal Executive Institute and is a Georgia Certified Public Accountant.

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: Contracts Administration, Defense Contractors