RCGI-The Audit to End All Audits – Government Contractors Beware

Unless you have undergone a DCAA Accounting System audit under the criteria in DFARS 252.242-7006 (a.k.a. DFARS Accounting System Audit), you do not know what a comprehensive audit is.  To start with there are eighteen criteria, some of which are as broad as “Accounting practices in accordance with standard promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles.”  This leaves the door open to pretty much endless questions.  But don’t worry, DCAA has narrowed it down to only 27 questions. 

The Questions- Broken Down

For each of the 27 questions, you should provide a summary narrative, a description of the ERP and organizational structure, key process flows, key controls, key policies and procedures and key personnel.  By the time the instructions are included and the format laid out, the questions cover 16 pages, broken down into the following five parts:

  1. Control Environment
  2. Labor Timekeeping, Distribution and Compensation
  3. Direct Contract Cost: Materials/Subcontracts/ODC
  4. Indirect Cost and Rates
  5. Billing System

Many of the questions (especially in parts 2 – 4) are repetitive.  For example, each part wants to know how your company accounts for unallowable costs – specifically for labor, direct-non-labor costs and indirect-non-labor costs.  Are these processes in your company really so different that you need to answer the question three times?  Nevertheless, if you answer each question without referring to other parts of the document, you are going to end up with 75 to 100 pages of narrative.  And by the way, please provide the written policies to support your narrative.

Timeline for DCAA Audit Responses

Our experience was that DCAA wanted all this information put together and system demonstrations be prepared within 3 months and then projected 9 months after that before audit completion.  However, in the interim, DCAA was sending specific requests related to the control environment section that had turnarounds of about a week.

Audits-The Good News

There are 3 pieces of good news related to these types of audits:

  1. Only companies with CAS-covered Defense contracts are subject to these types of audits, so small companies need not worry.
  2. Because these audits are so massive, not very many of them are currently being accomplished. However, as DCAA starts having IPA’s perform incurred cost audits, it will free up more resources for these types of audits.
  3. Most medium and all large companies have all this information already documented. Just putting it together in the format DCAA requested is time consuming and frustrating.

How to Be Prepared for a DCAA Accounting System Audit

If your ACO or DCAA auditor starts talking about performing an accounting system audit to test compliance with the DFARS criteria, be prepared to dedicate the resource needed to this project because the consequences of not adequately supporting the audit could be disapproval of your accounting system and up to a 5 percent withholding on all contracts.

Redstone GCI Can Guide You Through the Audit Process

Redstone Government Contracting, Inc. is helping navigate through these audits by assisting in the preparation, documentation and responses to DCAA.  From resources to training, Redstone provides multiple options for helping your team through the process. If we can help you through this beast of an audit, please let us know, as it’s a full-time job, in and of itself. Let our experts guide you with years of experience and insight!

 

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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: Compliant Accounting Infrastructure, DCAA Audit Support