Redstone Government Consulting Blog | DFARS Business Systems (14)

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.

In March 2013, we blogged about “a new Sheriff in town”. That blog commented on DFARS 252.244-7001 Contractor Purchasing System Administration which sets forth 24 criteria to be used in the determination of an adequate contractor purchasing system. It also reflected on DCMA-INST 109 Contractor Purchasing System Reviews issued November 2012 which has since been revised in January 2014. At the time it was unclear as to just what DCMA would be including in its reviews.  Specifically what criteria would it use when evaluating a contractor’s purchasing system. Late last year we began seeing a bad trend from DCMA reviewers. 

President Obama signed another executive order July 31 2014 which will mandate contractors to disclose prior violations of federal labor laws, the superficial purpose of which is to enable federal procurement process to protect contractor workers and improve integrity of selection of contractors for future awards.  

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. 

Contractors who have analyzed the proposed rule released July 15, 2014, which places the responsibility on contractors to support the adequacy of certain business systems via utilization of Independent Public Accounting (IPA) CPA organization audits, have mixed reactions to the rules requirements: reactions ranging from total agony due to added and redundant audit oversight plus administrative strife in dealing with those redundancies, to a real opportunity to achieve some control over obtaining a reasonable and objective analysis of their systems the outcomes of which just might be completed timely. 

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).

As published in the Federal Register on May 6, 2014 the Department of Defense has issued a final rule amending the DFARS to require certain qualifying contractors to adequately address the detection and avoidance of counterfeit electronic parts.  This was done to implement those sections of the NDAA for fiscal years 2012 and 2013 respectively dealing with the same subject and is effective May 6, 2014.

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:

Non-U.S. contractors have many misconceptions as to what rules and regulations they must comply with under U.S. Government contracts. The two most common misunderstandings non-U.S. entities have are (1) their country laws trump U.S. laws and regulations, and (2) Federal Acquisition Regulations (FAR) rules on cost collection and allocations are less strenuous for non-U.S. contractors. These two misconceptions could not be further from the truth.