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Keeping Your Accounting System Compliant: Hot Issues & Requirements Not to Overlook

October 11, 2011

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• First in a series that will discuss selective topics relating to each business system

• Topics selected fall within – Hot issues for DCAA– Overlooked requirements that often create

deficiencies• MLA is preparing a comprehensive business

systems compliance guide

Introduction

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• Interim Business Systems Rule(76 Fed. Reg. 28,856-01, May 18, 2011) – Adopts “existing” evaluation criteria for various

systems– Revised DFARS Subpart 242.75 and § 252.242-7006

• Govern accounting systems for contractors performing flexibly-priced or progress payment eligible work

• Define “acceptable accounting system”• Establish 18 evaluation criteria

Accounting System Overview

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• “Accounting system” is the methods, procedures and controls established to gather, record, classify, analyze, summarize, interpret and present accurate and timely financial data, including subsystems for:– Indirect costs– Compensation– Billing– Labor– Information technology

Accounting System Overview (cont.)

• “Acceptable accounting system” means a system that provides “reasonable assurance” that –– Applicable laws and regulations are complied with– The cost accounting system and data are reliable– Risk of misallocations and mischarges are minimized;

and– Contract allocations and charges are consistent with

billing procedures

Accounting System Overview (cont.)

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• “Significant deficiency” means a shortcoming in the system that materially affects the ability of DoD officials to rely upon information produced

• Must establish and maintain an “acceptable accounting system”– Contracting officer disapproval and/or contract

withholdings – “in consultation with auditor or functional specialist”

Accounting System Overview (cont.)

– CO retains ability in connection with field pricing audits to require contractor correction of perceived deficiencies, adjust contract type, segregate certain costs, reduce fee or profit objective and/or insert contract reopener clause to mitigate government risk

– FAR § 16.301-3(a)(1) precludes cost-type contract unless contractor’s accounting system is “adequate for determining costs applicable to the contract”

• CO “shall promptly approve a previously disapproved accounting system . . . when . . . there are no remaining significant deficiencies”

Accounting System Overview (cont.)

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• Compliance with – CAS– FAR/DFARS/Agency Supplements– Contract requirements

• Cost accounting system and data reliability• Internal controls• Billings

Accounting System Priorities

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• CAS-compliance of contract element cost allocations (among CLINs, Sub-CLINS or Units, etc.)

• Indirect cost allocations– Consistent practices – Reflective of beneficial/causal relationship

• Cost allowability, including costs of subcontracts, bid and proposal, professional and legal services, insurance, etc.

Compliance - Hot Topics

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• Flexibly-priced contracts subject to modified coverage (CAS 401, 402, 405 and 406) also must comply with– CAS 412 and 413 (pensions) (FAR § 31.205-6(j))– CAS 415 (deferred compensation) (FAR § 31.205-6(k))– CAS 414 and 417 (cost of money) (FAR § 31.205-10))– CAS 420 (IR&D and B&P) (FAR § 31.205-18)– CAS 416 (insurance) (FAR § 31.205-19)

Compliance – Do Not Overlook

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• Proper allocation of business generation costs– Selling– IR&D– B&P

• Proper allocations generally – Overhead pools– Service centers

Compliance – Do Not Overlook (cont.)

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• Impact of business decisions– Organizational changes, creating accounting practice

changes – Pricing decisions for an individual contract, creating

CAS 401 issues– Training for personnel outside of accounting functions– Acceptance of contract terms for reporting and billing

that are more detailed than CAS Disclosure Statement

Compliance – Do Not Overlook (cont.)

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• Support for adjusting entries to accounts under general ledger control

• Systems– Are not integrated– Cannot be (immediately) reconciled

• Must have job order accounting – Not correct– But must establish ability to develop contract costs

using process costing or standard costs

System/Data Reliability – Hot Topics

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• Compensation/labor recording system– Consistent uncompensated overtime practice– Consistent compensatory time practice– Disciplined timekeeping compliance – Error corrections/management review

• Unallowable cost screening – Disciplined compliance at point of entry– Disciplined compliance at home offices

System/Data Reliability – Do Not Overlook

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• Ability to produce– Source documentation– Audit trail

System/Data Reliability – Do Not Overlook (cont.)

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• Automated and integrated systems with built-in segregation of employee responsibilities

• Internal audit activity– Functionally and organizationally independent– Maintain requisite specialized knowledge to

review government contract compliance– Periodically performed

Internal Controls – Hot Topics

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• Error correction– Timely – Accurate

• Ethics practices– timely investigation of issues– documented resolution and corrective action– appropriate disclosures and follow-up

Internal Controls – Do Not Overlook

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• Adequate contract “briefings” • Periodic reconciliation of billings to incurred costs• Invoices and supporting information conform to

contract billing requirements• Job order accounting by CLIN, Sub-CLIN, Unit and/or

lower-level cost element, if contract requires • Timely adjustments, including resolution of items in

suspense

Billing Systems – Hot Topics

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• Subcontractor billing compliance and supporting documentation

• Periodic estimates to complete for “Limitation of Costs” and/or “Limitation of Funds” provisions

• Progress payment limitation and/or liquidation requirements

• FPI “Quarterly Limitation of Payment” requirements

Billing Systems – Do Not Overlook

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• Investments in integrated and automated systems• Conduct periodic accounting system evaluations,

review results, implement corrective actions • Continuous employee training on key compliance

areas– Timekeeping– Cost allowability

Best Practices

• Thomas A. Lemmer303-634-4350tlemmer@mckennalong.com

• Steven M. Masiello303-634-4355smasiello@mckennalong.com

Presenters

21DN 32216384