Redstone Government Consulting Blog | DCAA Audit Support (21)

Estimating System Deficiencies

In its recent report (DODIG 2015-139), the DOD-IG (Inspector General) found that DCMA Contracting Officers failed to comply with DFARS timing requirements related to contractor business systems (DFARS 215,407-5-70 and DFARS 252.242-7005. In this case, the IG evaluated actions (or more accurately inactions) on 18 DCAA audit reports related to contractor estimating systems which are subject to the criteria in DFARS 252.215-7002. The DFARS Business Systems rule includes no time frames concerning government audits of contractor systems; however, once a government audit report is (finally) issued, DFARS has the following time-requirements (“requirements” used loosely because due dates applicable to the government are routinely ignored as evidenced in the IG report):

In its report dated March 25, 2015, DCAA issued its fourth Annual Report to Congress including a number of self-accolades for numerous accomplishments in spite of a huge disconnect between DCAA’s audits and its statutorily required audits.  DCAA provides an overview wherein it reports that its “cost-effective” approach examined $182.6 billion, issued 5,688 audit reports, identified $4.5 billion in savings with a 6.9 to 1 return on investment (ROI).   DCAA now represents that its ROI is based upon a “conservative approach” because the savings only include realized savings and not future potential savings if DCAA recommendations are implemented.   However, DCAA fails to mention that future potential savings will be reported when realized; hence, if in any given year DCAA did report future savings as well as realized savings, DCAA would be duplicating reported net savings (coincidentally an issue reported in a 2014 DOD-IG report because two different DCAA audit offices reporting the same net savings for the same audit exceptions).

On April 30, 2015, a US District Court Judge in Delaware granted a United States motion to dismiss an FTCA claim (Federal Torts Claim Act) filed by KBRS (Kellogg Brown and Root Services).   The government’s motion to dismiss was premised upon jurisdictional issues; in particular discretionary functions on the part of a government official are exemptions to the FTCA.   The litigation involved a two count complaint by KBRS; i) damages arising from a negligent DCAA audit and ii) damages caused by the negligent DCAA audit resulting in a Department of Justice investigation under the False Claims Act.   Although the litigation involved a number of other issues (in addition to the allegedly negligent DCAA audit report), none of those issues were debated once the District Court determined that it did not have jurisdiction over actions exempt from the FTCA.

Most contractors (those with calendar year ends) have incurred cost proposals (ICP) due to the government on June 30 and we know that preparing the incurred cost proposal can be stressful and time consuming.  We have prepared 10 helpful tips for contractors to consider when preparing their ICP this year to help alleviate stress, reduce the amount of time spent preparing the ICP and most importantly to result in ICP adequacy.

It’s that time of year, books are closed, tax data has (maybe) been sent to the CPAs and you are ready to start a new year. However, as a government contractor with cost-reimbursable contracts, for the next 180 days a cloud called the incurred cost submission (due on June 30, 2015) is looming over head. Will this cloud looming become a thunder storm or beautiful clear skies? Well, my friend, that is up to you. Here are the top 5 things to know about the incurred cost submission that will make this year a success in submitting a timely and adequate incurred cost submission.

Government contractors have been undergoing accounting system reviews by DCAA for years, but more recently, the adequacy of a contractors accounting system does not necessarily have to be determined by DCAA.  Some Government agencies are relying on outside accounting and consulting firms to offer confidence that a government contractor has an adequate accounting system as a prerequisite for awarding a cost reimbursable contract. 

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.”

Prior to retiring from DCAA, I was involved in developing the 2012 DCAA Requirements Plan for the Huntsville Branch Office. Since one of my Huntsville contractors was a major, I was required to coordinate my plan with the DCAA Contract Audit Coordinator (CAC) in Chicago. The CAC was estimating the Business Systems staffing requirement for ONE major contractor. The estimate was prepared to consider auditing the Accounting and Billing business system requirements using the draft DCAA audit program for the respective systems. The CAC advised me that its estimate of the hours required to complete TWO business system audits across all segments of the ONE major contractor would be 235,000 over a two-year period. This estimate was communicated to DCAA management at the All Managers Meeting in the fall of 2011.