If your company has an accounting system audit in the near future, now is the time to get prepared, before DCAA starts knocking at your door. So, what are the common deficiencies? We are going to address the typical post award accounting system audit and deficiencies that DCAA frequently identifies during an audit.
So, What Type of Deficiencies Does DCAA Find During an Accounting System Audit?
- Policies and procedures do not comply with DFARS criteria or employees are not following policies and procedures. (Note: DFARS criteria can be found in DFARS 252.242.7006)
- Lack of documented approval authority for accounting entries, journal entries, invoices, etc.
- Inconsistent charging of direct costs. A common example is where a program manager position is charged direct on one contract and indirect on another contract.
- Failure to exclude unallowable costs from indirect pools such as unallowable executive compensation. Another common finding is the use of a percentage applied to the actual travel account to determine unallowable travel versus specifically identifying unallowables.
- Employees not completing timesheets daily, not signing timesheets or completing timesheets in advance.
- All employee hours worked not included on timesheet. DCAA will site contractors for not using total time reporting including those hours in excess of 40.
- Supervisors making corrections to employee timesheets without employee knowledge or approval.
- Failure to perform reconciliations of subsidiary ledgers to the general ledger.
- Failure to perform internal audits or management reviews.
- Failure to follow-up and correct findings from internal management reviews.
(Need assistance with training your team, learn more about our Course on “Timekeeping for Government Contractors”)
The billing system is an integral part of the accounting system. The financial data in the accounting system should generate accurate billings, but there is contractor oversight required. Some of the DCAA findings associated with billings are:
- Invoice includes costs in excess of contract ceiling.
- Fee withholding not applied per contract terms.
- Invoice included costs in excess of funding.
- Invoice costs not reconciled to job cost/general ledger.
- Approved provisional billing indirect rates were not used.
- Adjustment invoices not submitted when provisional billing rates revised during the year or final indirect rates established.
- Delinquent in paying subcontract costs (e.g., within 30 days).
DCAA will also cite a contractor for not preparing contract briefs on cost reimbursable or T&M contracts, especially when adherence to contract terms were not met.
Can Contractors Prepare for an Accounting System Audit?
Yes, and in fact, it would be in poor judgement of a contractor to not be prepared for this highly important audit. We recommend, as a best practice, that contractors prepare a presentation documenting their accounting system infrastructure and controls, in advance of the entrance conference. This can be accomplished using a matrix with the DFARS criteria and a short slide presentation to walkthrough with DCAA and the ACO at the entrance conference. Include a crosswalk between the DFARS criteria and your accounting system and provide copies of documents– policies and procedures, work instructions, chart of accounts, organization chart, approval authority, work instructions, and screenshots, including timesheets, labor distribution reports, etc. to support the process. As you present the background of your accounting system, it is a good idea to ask DCAA to confirm their understanding of what was presented or ask if they have questions. DCAA may request additional documents that you can provide prior to the start of the review. Having a walkthrough presentation and providing the documents, upfront, can significantly reduce the number of requests for documents, your staff’s involvement with DCAA, and the timeframe of the audit, which is a win-win situation for the contractor. Try and keep the audit moving, if DCAA doesn’t respond over several weeks, reach out to them. We have seen DCAA cancel an accounting system audit because the transaction testing became old. Unfortunately, the contractor had invested significant time and resources in supporting an audit and a report was not going to be issued.
Do I Get a Chance to Respond to the Report?
DCAA will hold an exit conference and provide the draft statement of conditions and recommendations for discussion. It is important to get a clear understanding of the deficiencies identified in the draft report. There may have been a miscommunication or you have other documentation that resolves an issue. If an error is identified, contractors should provide the additional information to DCAA timely so they can review and correct the report prior to issuance. Contractors should request additional time, if necessary. DCAA is required to provide contractors a reasonable amount of time to respond to a draft audit report but if their due date is looming, DCAA will reduce the number of days for the contractor response to meet their due date.
Should Contractors Wait for the ACO’s Letter to Implement Corrective Action?
Absolutely not. Contractors should be proactive and begin implementing corrective action after receiving the draft DCAA report (even during the audit if possible) and prior to receiving the ACO’s initial determination if the ACO concurs with the findings. Sometimes it is easier to acquiesce to a minimal change in policy or other recommendation by DCAA than to fight it. Some of the DCAA deficiencies can be easily corrected, such as updating or developing a policy and procedure, issuing a notification to the staff of an updated practice in advance of training, and scheduled training. For example, DCAA cites a significant deficiency because adjustment vouchers were not submitted within 60 days after final rates were established per FAR 52.216-7. A contractor can quickly fix this by submitting the adjustment vouchers, updating a policy and procedure, and notifying the employees of the requirement. Getting a head start on correcting deficiencies is a best practice to implement.
What are the Next Steps?
DCAA will issue their report to the Administrative Contracting Officer (ACO). The ACO will issue an initial determination identifying the significant deficiencies and request a contractor response within 30 days. After the contractor responds to the ACO’s initial determination, the ACO will issue a final determination concerning any remaining deficiencies, the adequacy of proposed or completed corrective actions and system disapproval. The contractor will have 45 days to correct the deficiencies or submit a corrective action plan with milestones of when the deficiencies will be corrected.
Get Your House in Order
If DCAA has notified you of an upcoming accounting system audit, now is the time to get your house in order.
- Ensure you have written policies and procedures that address general accounting, approval authority, timekeeping and billing. If not, it is a good idea to draft these policies now, even if they are in draft form when the auditor begins the audit. Sometimes contractors have good procedures, but they aren’t documented in a written policy.
- Ensure your timekeeping practices are in order – employees should be completing timesheets daily, reporting all hours, making timesheet corrections and management is approving timesheets and corrections. Perform your own in-house floorchecks. (Need assistance with training your team, learn more about our Course on “Timekeeping for Government Contractors”)
- Check your billing practices – do your invoices include costs with approved provisional indirect billing rates, are invoiced costs reconciled to the accounting records, or are you briefing contracts to ensure you adhere to the contract limitations, ceilings, limitation of cost/funds clauses, etc.
- Finally, put together a walkthrough with the documents to support the DFARS criteria. A walkthrough will provide DCAA with a better understanding of your accounting system and audit risk and should reduce the audit fieldwork considerably. It is less time consuming for you to put the documents together in advance of the audit, then to have DCAA issue multiple requests during the audit and consumes the accounting staff’s time.
Redstone GCI is available to assist contractor’s in developing accounting policies and procedures, performing mock audits and assessing DCAA audit findings and aiding in audit rebuttals. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations in applying the DFARS 252.242.7006 Accounting System Administration Criteria.