Deltek Insight 2011: Government Contract Audits: A Strategic Approach for a Successful Outcome

ECT-208Government Contract Audits: A Strategic Approach for a Successful Outcome

May - 2011

Presented byBrent Calhoon

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Introduction

Backroundit Process Prerequisites for Success Impediments to Success Strategy Points Dispute Resolution Avenues


Government Auditors

Defense Contract Audit Agency Civilian Agency Auditors Independent Accounting Firms Government Accountability Office Prime Contractors Others


Definition of “Successful Outcome”

Requestor/Customer (Contracting Officer) Unbiased audit opinion(s) with sound basis in regulatory requirements,

facts, and circumstances Timely Places risk in perspective

Auditor (DCAA) Compliance with professional auditing standards Useful to customer

Auditee (Contractor) Fair and objective analysis of facts and circumstances with reasonable

interpretation of contractual/regulatory requirements given the business environment

Audit findings presented with context/perspective


Audit Guidance – Generally Accepted Government Auditing Standards (GAGAS)

Competence – all personnel assigned to the audit collectively have the technical knowledge, skills, and experience to perform the audit

Integrity – conduct of audit work with attitude that is objective, fact-based, nonpartisan, and non ideological

Independence – free from personal and external impairments to ensure their opinions, conclusions, judgments, and recommendations are impartial.


Audit Guidance – Generally Accepted Government Auditing Standards (GAGAS)

Professional Judgment – exercising reasonable care and professional skepticism

Quality Control and Assurance – reasonable assurance that the organization and its personnel comply with professional standards and applicable legal and regulatory requirements; external peer review at least once every three years

Suitable Criteria – evaluation against criteria that are suitable and available (e.g., FAR, CAS, DFARS)

- Objective - Complete- Relevant - Measurable


DCAA Audit Manual

Audit Process:- Risk Evaluation

- Audit Procedures

- Audit Techniques

- Reporting Procedures

Professional Standards

Generally Accepted Government Audit Standards (GAGAS):- Most misunderstood element of DCAAM

- Applies to all audit and attest engagements

Technical Standards:- Specific Contract Requirements

- Federal Acquisition Regulation (FAR)

- Cost Accounting Standards (CAS)

- Agency Supplements (e.g., DFARS)

Relationships with Other Parties:- Contracting Officer

- Contractors

- Office of the Inspector General

- Other Auditors

- Technical Experts

- etc.

Defense Contract Audit Agency

Contract Audit Manual (DCAAM)


Audit Sequence

Pre-Audit Audit request Audit Planning Entrance Conference

Field Work Audit Testing Formation of preliminary conclusions and draft report

Exit Conference & Post Audit Contractor response to audit findings Audit follow up Final audit report

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Audit Sequence – Key Participants

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SalesPre-Audit

Contracting OfficerAuditorContractor

Entrance Con-ference

AuditorContractor

Field Work

AuditorContractor

Exit Confer-ence & Post-Audit

Contracting OfficerAuditorContractor

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Strategic Prerequisites to Success


SalesContracting Officer

AuditorContractor

Successful Audit

Outcome

Open communication between all parties


Strategic Prerequisites to Success

Show professional respect (no back-channeling or jumping ranks)

Check emotions and pride at the door

Pick battles carefully – minimize conflict

Ask “so what?”; be prepared to answer “so what?”

Form opinions based on facts and reasoned, objective analysis rather than assumptions (i.e., resist judging a book by its cover)

Document discussions

Review FAR Guiding Principles (FAR 1.102)


Impediments to Success

Checks and balances out of balance

- DCAA circling the wagons – reaction to recent congress/GAO scrutiny and criticism

- Thinly-veiled threat to COs [(MRD) 09-PAS-004(R)] Agree with us or we’ll report you to OIG Tempered somewhat by new guidance on resolving contract audit

recommendations [(MRD) 10-PAS-015(R)] - “Materiality” generally interpreted as anything greater than zero

No cost/benefit considerations At odds with Gates/Carter efficiency initiative

DCAA opinions are pass/fail – no flexibility for COs or Contractors [(MRD) 08-PAS-043(R)]


Impediments to Success (cont’d)

Contractors generally viewed negatively within the DC beltway (political pariah)

Increasing regulatory burden and new compliance requirements Political intolerance for noncompliance (i.e., anything less than perfection

given current view of materiality) DCAA: fear of favorable audit opinions COs: growing reputational/professional risk


Strategy Points for Contracting Officers

Do –

Know what you need and why

Discuss communication expectations (e.g., frequency, content, etc.)

Set expectations regarding quality and usefulness of audit report

Arbitrate grievances raised by either contractor or auditor

Understand the gravity of incorrect conclusions

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Strategy Points for Contracting Officers (cont’d)


Don’t – Cede regulatory authority to auditors

Presume the auditor is always right

Be reluctant to hold both auditors and contractors accountable to you

Impair auditor independence

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Strategy Points for Auditors


Do – Understand the contractor’s business and competitive environment

Perform audit according to auditing standards - Independent- Objective- Sufficient evidence

Assess materiality/impact; frame findings in fair context

Understand contractor’s audit policies


Strategy Points for Auditors (cont’d)

Don’t – Undermine the contractor/CO relationship

Be a crusader in the name of the taxpayer

Become invested in outcomes – focus on the process

Let personal opinion cloud professional judgment

Stop pursuing the facts because they’re hard to find

Leap to conclusions before asking questions


Strategy Points for Contractors

Do – Be prepared for potential audits

- Perform self-assessments- Findings/issues should not be surprises

Assign a qualified and dedicated audit liaison Establish policy for audit process

- Require audit requests in writing

- Define “reasonable” response times for info requests

- Set policy for conduct of employee interviews

- Define communication schedule Establish database to track/monitor requests


Strategy Points for Contractors (cont’d)

Do – Help inexperienced auditors learn

Ask questions rather than make statements – chance to learn what auditor needs to reach reasonable conclusion

Encourage senior-level finance/accounting managers to build rapport with auditors

Showcase internal control procedures and evidence of continuous improvement


Strategy Points for Contractors (cont’d)

Don’t – Be a victim

Make excuses; instead, provide reasons or mea culpas

Break commitments/your own audit policy

Provide information without verifying accuracy

Make the audit process inefficient


Contractor/DCAA Dispute Resolution

Resolve with DCAA auditor and contracting officer

Resolve with DCAA regional manager

Resolve with DCAA regional director

Resolve with DCAA headquarters

Go to Board of ContractAppeals or Claims Court(long, involved, difficultand expensive process)


CO/DCAA Dispute Resolution

DCAA Director/Director

Defense Procurement and Acquisition Policy

Auditor/ Contracting Officer

• “Significant disagreement” when CO sustains less than 75% of DCAA findings

• DCAA has 3 days to elevate

• Any issue can be elevated by DCAA Director


Questions, Comments, Banter?

Baker TillyGovernment Contractor

Advisory Services

Vienna, VA


Presenter Contact Information

Brent Calhoon, Partner, Baker Tilly• 703.923.8311• [email protected]

Katrina Karaan, Manager, Baker Tilly• 703.923.8441• [email protected]


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Education

Deltek Insight 2011: Government Contract Audits: A Strategic Approach for a Successful Outcome