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Mysteries of a Compliant Accounting System
Susan Moser, CPA
Partner, Cherry, Bekaert & Holland, L.L.P.
September 23, 2010
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Objectives
Requirement for adequate systems
General data requested
Preparing for audit
Real world stories
Proposed rule
Closing remarks
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The Myth
“Approved” Accounting Systems
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The Truth
“Adequate” Accounting Systems
o Based on contract type and requirements
o FAR 16.301-3 – adequate to determine costs applicable to cost reimbursement contracts (no FAR requirement for T&M or FFP contracts)
o FAR 9.103 – KO must determine responsibility IAW FAR 9.104-1
May request a pre-award survey (FAR 9.106)
No longer adequate in part – either adequate or inadequate
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When are Audits Conducted?
Prior to award of cost or T&M type contract
After award of contract to verify system functioning properly
If accounting software changes
Mergers and Acquisitions
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Why We Should Care
Contracting Officers use audit report to help determine contractor responsibility
Negative report may result in not winning cost type or T&M work
Both Government and Prime contractors are asking contractors to certify whether or not system(s) are adequate
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Accounting System Defined
Software
People
Processes
Policies
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Basic Requirements
Segregation of Duties
Written policies and procedures
Method to consistently allocate costs
Identify costs by project
Software is a tool to accomplish this
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Size Matters
Compliant system varies by company size
1 man shop requires little controls or written policies
1000 person company needs segregation of duties, employee training, written policies
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Requested Data
Chart of Accounts
Trial Balance – in accrual; ties to all subsidiary reports
o May also request G/L
Financial Statements
Project Report(s)
Organization Chart
List of government contracts
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Requested Data, contd.
Policies and Procedures
o Timekeeping
o Billing
o Indirect Rates
o Budgeting
o Segregating costs (emphasis on unallowable)
Survey of Contractor’s Organization
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Preparing for Audit
Always be audit ready
o Expected to provide info quickly (see MRD from 12/19/08)
Request audit number & name
Review audit program to understand scope
o Pre-award Survey of Prospective Contractor Accounting System – Activity Code 17740
o Standard Form 1408
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Preparing for Audit, contd.
Written description of basic account structure
o System used (Deltek, QuickBooks)
o Identify pools and bases for indirect rates and how to identify within the chart of accounts
o Define company’s allocation methods and indirect cost pools
o Overview only – may only be a few pages
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Preparing for Audit, contd.
Reconcile all reports and correct variances or have a thorough explanation available prior to audit
Select a variety of timesheets
o self-audit that timekeeping procedure was followed and time properly recorded in accounting system
Identify contracts with special accounting/billing requirements and verify contract terms followed (75% notice)
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Surprises
Post Award Accounting System Audits
Pre-award Survey – conducted again?
o But everything was fine in the last audit
Proposed change to DFARS
o Potential for withholding if systems are inadequate
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Post Award Accounting System Audit
Scope: adequate system to segregate and bill costs IAW contract requirements
Not designed for overall accounting system review
Not testing internal controls
May be requested by Contracting Officer or follow-up to pre-award
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Real World Examples
Was adequate, now it’s inadequate
Special requests
Written policies
Timekeeping
Fully utilizing accounting system
New business
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Adequate to Inadequate
Accounting System: Deltek FMS
Revenue > $20 million
Original pre-award audit deemed system adequate
Several years later, updating with a post award audit
o System deemed inadequate
Significant issues:
o Lack of billing policies and procedures
o Lack of training on proper billing procedures
o Billings not based on current accounting information
o Not reconciling booked to billed costs
o Not excluding unallowable costs (travel)
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Adequate to Inadequate, contd.
Contractor Response:
o Develop policies and procedures to exceed DCAA’s recommendations
o Hire additional accounting staff
o Develop training plan
o Revise method to calculate invoices
o Revise expense reimbursement policy
o Hired consultant to assist with project reconciliations and P&P development
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Adequate to Inadequate, contd.
Results
o Regular visits with DCAA to track progress
o Meetings with customers to assure of contractor’s capabilities/responsibility
o High cost in labor and time to correct
o Follow-up audit conducted
o Received notice of adequate system 1 year after initial audit began
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Prime & KO Request
Accounting System: Peachtree
Revenue > $10 million
Prime contractor questioned propriety of subcontractor cost allocations
IG investigated subcontractor and found no improprieties
Subcontractor awarded large prime contract - cost reimbursable
o KO read article on IG investigation and asked DCAA to perform accounting system survey
o System found inadequate
o Different KO received report and stated no renewal of cost contract
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Prime & KO Request, contd.
Negotiated with KO to receive FFP contract
Significant issues
o Inconsistent treatment of fringe benefits as direct or indirect cost
Mistake in presentation on the ICS
o Non-segregation of costs by contract type within a contract
Accounting system is capable of this
Setup corrected
o Indirect costs not billed using provisional billing rates
Misunderstanding on ability to revise provisional rates
o Indirect rates not adjusted to actual year end rates
Creating policy to make interim billing adjustments
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Prime & KO Request, contd.
Results
o Incurred cost submissions amended and accepted by DCAA
o Negotiations with customers to award FFP contracts or extend current contracts
o Large expense in time and money to resolve
o DCAA returned to review accounting system
KO requested specific invoices be reviewed
Debate on accuracy of invoices
Adequacy of accounting system withheld pending result of billing system
Not resolved after 15 months
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Policies & Procedures
Accounting System: Solomon
Pre-award survey conducted
Contractor activities were adequate
Lacked written policies & procedures – inadequate system
Contractor put everything in writing within weeks
o DCAA not to return for 6 months to have sufficient data to test
Contractor lost two contracts as a result of report
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Policies and Procedures, contd.
DCAA returned and found directly associated unallowable costs that were not segregated
Maintained system was inadequate
As of March 2010, system still inadequate (9 months after initial report)
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Timekeeping
Accounting System: Deltek Costpoint
System found inadequate for not recording time in and out
No requirement to record this information
Until contractor can overturn this decision, remains on record and can affect future awards
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Accounting System Features Accounting System: Deltek Costpoint Significant Issues
o Not segregating unallowable G&A travel
o Not maintaining adequate contract briefs Contractor Response
o Hired a consultant to review segregation of unallowable travel after adjusting system
o Prepared contract briefs in Word format following Schedule S
o Hired a consultant to review briefs against contracts
o Consultant wrote report on procedures and results
Letter provided to KO
o DCAA returned and deemed system adequate (took 6-8 months)
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New Business
Accounting System: QuickBooks
Pre-award survey prior to award of SBIR contract
Revenue size < $1 million
Redesigned chart of accounts prior to audit
Improved policies to be more clear on timekeeping and payroll
Improved company handbook
Developed a policy on segregating unallowable costs
Provided DCAA with organized package of info requested
o Explained why some items were not applicable
Adequate system and promise that there will be a follow-up audit to ensure system working
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DFARS Case 2009-D038
Acceptable business system rule
Mandatory - Withhold payments – up to 50%
o Interim payments
Cost reimbursement
Incentive type
T&M
Labor Hour
o Progress payments
o Performance-based payments
o No exception for commercial contracts
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DFARS Case 2009-D038, contd.
Systems involved
o Accounting
o Estimating
o Material Management & Accounting
o Purchasing
o Earned Value Management
o Property Management
Public Comments closed; committee report due July 28
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Final Remarks
Don’t assume system is adequate
Continuous improvement
Consider expert advice
o Before audit
o During audit
o Upon receipt of draft report
Mock audit(s)
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QUESTIONS?
