RGCI - DCAA Trying to Stretch FAR Yet Again

At the end of each of the DCAA audit programs for contractor business systems, DCAA discusses what it refers to as “Less Severe Significant Deficiencies.” These are clearly deficiencies which do not meet the DFARS definition of a “Significant deficiency.”[1] As a result, the withhold requirement provided for in DFARS 252.242-7005 cannot be applied.

As an example, the DCAA 11070 Compliance with DFARS 252.242-7006 Accounting System Administration Requirements Audit Program instructs auditors that the less severe deficiencies should be included in the audit report in an exhibit titled DFARS Less Severe Significant Deficiencies and to discuss the withhold provisions under FAR 32.503-6 with the responsible contracting officer.

FAR 32.503-6[2] relates to the contracting officer’s administration of progress payment under fixed price contracts and provides no such withhold provisions. FAR 32.503-6(b) allows the contracting officer to suspend all or a portion of progress payments associated with the unacceptable portion of the contractor’s accounting system, but in no way implement withholds similar to those required by DFARS 252.242-7005.

As we understand it from numerous DCMA presentations, the intent of the DFARS business system clauses is to improve overall compliance and not punish contractors. It does not appear DCAA sees it that way – as DCAA is taking the FAR out of context to attempt to apply withholds to contractor’s that simply need to make improvements to their current systems in order to provide a DoD official with data that is materially reliable.

DFARS Case 2021-D006 Definition of Material Weakness

This case was initiated based on Congressional direction in the 2021 NDAA to align the DFARS business system rules definition of a significant deficiency with the definition of a material weakness[3]. As of December 2021, the case status shows a draft proposed rule is in the works. We hope to see this case provide for an alignment of DCAA requirement under GAGAS to report significant deficiencies and material weaknesses and DCMA Corrective Action Requests (CAR) Levels.

While we are still troubled by DCAA’s apparent focus on withholds and troubling lack of materiality when it comes to many recent findings for which we have helped our clients navigate. We hope for a brighter more collaborative future that builds on the intent to improve contractor business systems. It is important that all parties (yes – including the independent DCAA auditor) understand that internal controls do not come without a cost – thus the levels of deficiencies from minor to significant to material in most auditing standards. For example, a service contractor that proposes material costs in its proposal of less than 5% of total proposal value should not be expected to have robust preventive controls over the estimating of these immaterial costs – management review (a detective and corrective control) should be more than adequate..

Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractor from contract award to contract closeout. We would be happy to be part of your team.

[1] “Significant deficiency” means a shortcoming in the system that materially affects the ability of officials of the Department of Defense to rely upon data and information produced by the system that is needed for management purposes.

[2] FAR 32.503-6 Suspension or reduction of payments

[3] The term ‘material weakness’ means a deficiency or combination of deficiencies in the internal control over information in contractor business systems, such that there is a reasonable possibility that a material misstatement of such information will not be prevented, or detected and corrected, on a timely basis. For purposes of this paragraph, a reasonable possibility exists when the likelihood of an event occurring— (A) is probable; or (B) is more than remote but less than likely.

Whitepaper: DFARS Business Systems Download Now

Written by John C. Shire, CPA

John C. Shire, CPA John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama 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, Contracts Administration, Defense Contractors, DFARS Business Systems, Cost-Type Contracts, DCAA Audit Support, Contractor Purchasing System Review (CPSR), Government Regulations, Federal Acquisition Regulation (FAR)