Redstone Government Consulting Blog | Redstone Team (17)

Congratulations! You have won your first prime federal contract – now what do you do?! Unfortunately, regardless of how many contracts a company has won, the focus seems to be on “the win” and NOT how a company is going to manage and administer the contract. Larger companies’ that have been around for years have figured out through the “school of hard knocks” (i.e. Government audits, ACO cure notices, contract terminations, debarments, system inadequacies, etc…), how to comply with all the federal laws and regulations that are inevitably part of the Federal government contract you were just awarded.

As we approach year-end, many of our clients are in the midst of preparing to close the year, of which tax planning is always an important consideration.  Historically, government contractors have maintained “2 sets of books.”  The first on a GAAP accrual basis, which is required as a component of an adequate accounting system per the SF1408 PreAward Accounting System Survey for all contractors working with flexibly-priced contracts, and the second set of books maintained on a tax basis.  There are a variety of factors that create differences between the two sets of books, such as the IRS 50% rule for business meals vs. FAR 31 allowability/allocability considerations for the same category of expense.  Further, DCAA is not tasked with assessing tax compliance, and as an agency income tax treatment has no impact to the audits performed by the agency. This year, however, a new IRS regulation concerning the capitalization of assets is creating confusion for some government contractors and could impact cost accounting for government contracts. 

Many of us who have retired from DCAA as well as contractors like to discuss the “good old days” before DCAA audits became marathons and helping contractors was not forbidden.  As DCAA became more demanding and intrusive, the preferred alternative for a contractor was to be subjected to the less-intrusive review by DCMA.  Now it appears that contractors may soon be longing for the “good old days” of DCMA as well.

On November 12, 2014, the U.S. Government Accountability Office (GAO) issued its report on the results of its review of DCAA actions to comply with section 832 of the National Defense Authorization Act (NDAA) for Fiscal Year 2013, regarding requests for company internal audit reports.   The purpose of the GAO review was to assess the extent DCAA’s revised guidance “(1) complied with the act, and whether selected requests for company internal audit reports were documented in accordance with requirements, and (2) contains safeguards to help ensure that companies’ internal audit reports are used only for authorized purposes.”

Although the details are yet to be determined, there is no question that Republican control of both the Senate and the House could significantly impact government contracting.

The new DFARS business system rule requires audits by CPA’s, with DCAA approving the risk assessment and the audit program and reviewing the working papers afterwards.      

The obvious reason for this proposal is that DCAA is unable to perform the audits themselves.  At least not on a timely basis.  When DCAA was performing the audits, it was taking over 2 years to perform 1 system audit.  This rule requires it to be done within 6 months after the close of the contractor’s fiscal year.  In contrast, DCAA was not completing the risk assessment in that length of time.

So now let’s take CPA firms that are used to performing financial statement reviews in a timely manner and handcuff them to DCAA, an Agency that is notorious for missing due dates.

And THEN let that same Agency, in essence, audit the audit.  And furthermore, there are no provisions to limit DCAA to a reasonable time frame for approval of the risk assessment and audit program. 

I recently delivered a presentation at the National Contract Management Association (NCMA) World Congress on the July 15, 2014 DoD proposed changes to DFARS business system Rules (DFARS Case 2012-042) for contractor accounting systems, estimating systems, and material management and accounting systems (MMAS).  A public hearing on the proposed changes is scheduled for August 18, 2014 and comments are to be submitted on or before September 15, 2014.  As noted in previous blogs, the new rules do not apply to small businesses or to other DFARS defined business systems (purchasing, EVMS, Government property).

Not only do you get to pay for the audit, you get pay for the CPA to support an audit of the audit!

On April 21, 2014, the DAR editor submitted a proposed new DFARS rule (DFARS Case 2012-042) for Business Systems Compliance to OMB’s Office of Information and Regulatory Affairs (OIRA).  Generally, this is the last step prior to the publication of the new rules.  The full body of the proposed rule has not been published; however, OIRA has published the following abstract on May 23, 2014 as part of its semiannual compilation of all pending federal regulations: