DFARS Accounting System Reviews -...

Watkins Meegan, A Division of CohnReznick

D FA R S A c c o u n t i n g S y s t e m R e v i e w s

A G E N D AAssessment Confusion SF1408’s Pre-Award Survey’s Post-Award Survey’s Accounting System Review / Approved Accounting System / Adequate Accounting

System / Super Awesome System

DFARS Accounting Systems – A deeper dive Why do I need an accounting system in compliance with DFARS criteria? What are withholding requirements? Who has responsibility for review? What is an “Accounting System”? What are the DFARS Criteria? Common Deficiencies

The future of Accounting Systems Proposed rulings

January 21, 2015 1

A s s e s s m e n t C o n f u s i o n

W A Y S Y O U A R E A S S E S S E D

Pre-award Survey of Prospective Accounting SystemUsed when a company is new to government contracting or new to cost reimbursement contracts. Contractor fills out Determines the readiness of a contractor for an SF1408 Provides no assurance, no pass or fail, no procedures are performed. It

CANNOT be relied upon to determine adequacy. Involves the evaluation of the design effectiveness not the operating

effectiveness of the accounting system. (no tests of transactions)

January 21, 2015 3

W A Y S Y O U A R E A S S E S S E D

Pre-award Survey of Prospective Accounting System

January 21, 2015 4

W A Y S Y O U A R E A S S E S S E D

17741 Post-award Accounting System Audit at Nonmajor ContractorsUsed on Nonmajor contractors not normally subject to DFARS. Provides assurance on the adequacy and suitability of a nonmajor

contractor’s accounting systems for accumulating and billing costs under Government Contracts.

The workprogram was revised to align more with the DFARS criteria however it does not test nor opine on compliance with the criteria.

January 21, 2015 5

W A Y S Y O U A R E A S S E S S E D

17741 Post-award Accounting System Audit at Nonmajor Contractors

January 21, 2015 6

W A Y S Y O U A R E A S S E S S E D

11070 Accounting System AuditUsed when a company is subject to DFARS criteria. Opines on compliance with criteria as prescribed in the DFARS Denotes significant deficiencies CO determines adequacy of the system

January 21, 2015 7

W A Y S Y O U A R E A S S E S S E D

11070 Accounting System Audit

January 21, 2015 8

W h y I s A n A d e q u a t e S y s t e m I m p o r t a n t ?

Y O U ’ D L I K E A S H O T A T T H A T S O L I C I T A T I O N

• PCO’s have jumped on the bandwagon and are increasingly more comfortable with the business systems concept

• Solicitation provisions often demand evidence of “acceptability,” “adequacy,” or “approval” as a condition of award– Most often for accounting systems– More frequently for purchasing systems

• Not permitted by FAR for EVM systems• Prime contractors may also request as part of their subcontract

monitoring

January 21, 2015 10

S O L I C I T A T I O N R E Q U I R E M E N T S C O N S E Q U E N C E S

• Reducing the pool of competitors by requiring systems adequacy is seen as a benefit by the acquisition community

• Unaudited or unassessed contractors are at a significant disadvantage

• Provisions not consistent on authority• Many agencies are adopting the DFARS criteria as a sound model

for an acceptable system• Most agencies will accept a CPA firm opinion on accounting system

adequacy• Strategy for purchasing systems – CPSR readiness engagements

are valuable

January 21, 2015 11

S O L I C I T A T I O N R E Q U I R E M E N T P R O T E S T S

• There have been multiple protests alleging that a requirement to show evidence of an adequate system is burdensome or inappropriate – none have been successful.

• GAO consistently refuses to disturb the contracting officers judgment with respect to the agency’s requirements – regarding goods, services OR status of systems.

January 21, 2015 12

R F P E X A M P L E 1

The Contracting Officer will make a contract award only to an otherwise successful offeror who has an adequate cost accounting system. In this context, “adequate” is defined as “the Contracting Officer’s determination that the offeror’s cost accounting system is at a risk level sufficient for the Government to enter into a contract.” In making the adequacy determination, the Contracting Officer may consider the following factors: audit reports from Government agencies (e.g., Defense Contract Audit Agency); testimony from the offeror’s cognizant Defense Contract Audit Agency office; audit reports from a qualified external independent accounting firm; and the adequacy, compliance, and status of the offeror’s corrective action plan, if applicable.

January 21, 2015 13

R F P E X A M P L E 2

All Offerors are required to have an adequate accounting system as defined in DFARS Clause 252.242-7006 ‘Accounting System Administration’ to be eligible for an award. All prime Contractors must have an approved purchasing system as prescribed in FAR 44.201. The Offeror shall provide evidence of its accounting system being adequate in accordance with FAR 16.301-3, 16.304, 16.306, 16.601 and in compliance with FAR Part 31 Contract Cost Principles and Procedures. Evidence in the form of (a) Third party audited financial statements to include audit of accounting system and methods, (b) Current Defense Contract Audit Agency (DCAA) cost accounting system audit report shall be accepted. Self certification or unsubstantiated statements of possessing an adequate accounting system are insufficient and may render the Offeror’s proposal non-responsive.

January 21, 2015 14

R F P E X A M P L E 3

Section C – Offerors shall indicate if they have a Government-determined adequate billing system. If the Offeror has such a system, it shall submit evidence to support the adequacy determination (e.g., Defense Contract Audit Agency audit report).

January 21, 2015 15

R E C A P

• SF1408 – Recommendation “Prospective contractor’s accounting system is acceptable for award of prospective contract”

• Post-award Accounting System Audit – Opinion “In our opinion, the Contractors accounting system is adequate for accumulating and billing costs under Government contracts.”

• Accounting System Audit – Opinion “In our opinion, the Contractor complied in all material respects, with the system criteria in DFARS Part 252.242-7006 (c)1-18…”

January 21, 2015 16

E X P I R A T I O N D A T E

• Generally every 3 years (per workprogram and many RFP’s)• Change in risk to include

• New System• New Rate Structure• M&A activity• Etc.

January 21, 2015 17

A U D I T P R O C E S S

Accounting System Audits are audits and generally require the following steps:

1. Planning and Risk Assessment2. Test work3. Notification of deficiencies4. Corrective action5. Test work of corrective action6. Partner and Quality Control review7. Issuance of Report

January 21, 2015 18

C O M P E T I T I V E = P R O A C T I V E

• Audits take time, especially if you don’t want deficiencies noted in your report

• Competitive pools are narrowed down through business system requirements

• Be proactive on all of the systems for which you are at risk on future awards and…

LINE UP YOUR ASSESSMENTS

Your competitors are….

January 21, 2015 19

B U S I N E S S S Y S T E M C L A U S E F U N C T I O N

• Any CAS-covered contract of any value may contain the DFARS Business Systems Rule clause

• Requires ACO to withhold a percentage of payments when any single system is determined to have a “significant deficiency”– Percentage set at 5% per deficient Business System once determination

made– Total withholding is capped at 10% including other withholds– Contractor required to correct or submit plan (45 day clock)– ACO required to reduce withhold once an acceptable plan is submitted (90

day clock) DFAR 242.7000 indicates CO should reduce withhold by at least ½

DFAR 242.242-7005 indicates that CO should reduce withhold to 2%

January 21, 2015 20

W H A T I F I ’ M N O T C A S C O V E R E D ?

Then you aren’t subject to withhold penalties but could be considered nonresponsive to solicitations if not in compliance.

January 21, 2015 21

W H O I S R E S P O N S I B L E ( O R A R E T H E Y ? , M O R E L A T E R … )

January 21, 2015 22

T I M E L I N E O F A S S E S S M E N T

January 21, 2015 23

W h a t i s a D F A R S A c c e p t a b l e A c c o u n t i n g S y s t e m ?

A C C E P T A B L E A C C O U N T I N G S Y S T E M

DFAR 252.242-7006 An “acceptable accounting systems “ as a system that complies with all 18 system criteria and provides reasonable assurance that---- Applicable laws and regulations are complied with; The 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 Business Rule Applicability Cost, T&M; labor-hour; incentive; or FP w/ cost-based progress

payments

January 21, 2015 25

D F A R S 2 5 2 . 2 4 2 - 7 0 0 6 ( A ) ( 2 )

Defines accounting systems as: “The contractor’s system or systems for accounting methods, procedures,

and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting in compliance with applicable laws, regulations, and management decisions.”

May include subsystems for specific areas such as:– indirect and other direct costs, – compensation, – billing, – labor, and – general information technology.

January 21, 2015 26

D F A R S - C O M P L I A N C E W I T H 1 8 C R I T E R I A

18 Criteria which can be segregated into 4 categories: Accumulating and Segregating Costs Billing Compliance Controls

January 21, 2015 27

A C C U M U L A T I N G A N D S E G R E G A T I N G C O S T S C R I T E R I A

Criteria 2 - Proper segregation of direct costs from indirect cost Criteria 3 - Identification and accumulation of direct costs by contract Criteria 4 - A logical and consistent method for the accumulation and

allocation of indirect costs to intermediate and final cost objectives Criteria 14 - Segregation of preproduction costs from production

costs

January 21, 2015 28

A C C U M U L A T I N G A N D S E G R E G A T I N G C O S T S C R I T E R I A

Criteria 9 - A timekeeping system that identifies employee’s labor by intermediate or final cost objectives

Criteria 10 - A labor distribution system that charges direct and indirect labor to the appropriate cost objectives

January 21, 2015 29

A C C U M U L A T I N G A N D S E G R E G A T I N G C O S T S C R I T E R I A

Criteria 5 - Accumulation of costs under general ledger control Criteria 11 - Interim (at least monthly) determination of costs charged

to a contract through routine posting of books of account Criteria 13 - Identification of costs by contract line item and by units if

required by the contract

January 21, 2015 30

C O M P L I A N C E C R I T E R I A

Criteria 8 - Management review or internal audits of the system to ensure compliance with the Contractor’s established policies, procedures, and accounting practices

Criteria 12 - Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of FAR part 31 and other contract provisions

Criteria 17 - Adequate, reliable data for use in pricing follow-on acquisitions

Criteria 18 - Accounting practices in accordance with standards promulgated by the CAS Board and GAAP

January 21, 2015 31

C A S S T A N D A R D S I N C O R P O R A T E D I N T O F A R

January 21, 2015 32

C O N T R O L S C R I T E R I A

Criteria 1 - A sound internal control environment, accounting framework, and organizational structure

Criteria 6 - Reconciliation of subsidiary ledgers and cost objectives to general ledger

Criteria 7 - Approval and documentation of adjusting entries

January 21, 2015 33

B I L L I N G C R I T E R I A

Criteria 15 - Cost accounting information as required for:– Limitation of Cost (52.232-20), Limitation of Funds (52.232-22) and

Allowable Cost and Payments (52.216-7), – Readily recalculate indirect rates from books of account

Criteria 16 - Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms

January 21, 2015 34

D F A R S A C C O U N T I N G S Y S T E M A U D I T

January 21, 2015 35

Subsystems of

Accounting

B I L L I N G P R O C E D U R E S

Criteria 15 - Does the contractor’s accounting system provide cost accounting data required by contract clauses concerning limitation of cost (FAR 52.232-20), limitation of funds (FAR 52.232-22), or allowable cost and payment (FAR 52.216-7) (DFAR 252.242-7006(c)(15i))– Is the system able to provide current period total costs, cumulative to date total costs and total

funded amount? Criteria 16 – Does the contractor’s accounting system provide for billings that can be

reconciled to cost accounts for both current and cumulative amounts claimed and comply with the terms of the contract (DFAR 252.242-7006(c)(16))– Is the system able to provided data for actual costs incurred by cost element and labor

categories? – Do costs billed, both current and cumulative, agree to job cost ledgers, including various labor

categories? (booked to billed reconciliations)

January 21, 2015 36

E X T E N D E D B I L L I N G P R O C E D U R E S

• Were the rates adjusted to reflect the most current available year-end rates; i.e., the most current of the following: year-end actuals, rates per the incurred submission, or final negotiated rates?

• Were the billed costs incurred within the contract period of performance?

January 21, 2015 37

B I L L I N G P R O C E D U R E S -S U B C O N T R A C T O R S

As required by FAR 42.202(e)(2), the prime contractor is responsible for managing its subcontracts. A critical part of subcontract management is the payment of subcontractor billings, which the prime contractor includes in billings to the Government.

Determine if the prime contractor:– performed procedures to determine if the subcontractor’s accounting and

billing systems were adequate.– monitored the adequacy of the subcontractor’s accounting and billing

systems during the subcontract performance. – performed an adequate review of the subcontractor billings prior to making

payment. Verify that subcontractor and vendor costs are only included in billings if

payment to the subcontractor or vendor will be made in accordance with the terms and conditions of the subcontract or invoice and ordinarily within 30 days of the contractor’s payment request to the Government.

January 21, 2015 38

C O M M O N D E F I C I E N C I E $

Policies and Procedures – Lack of evidence of approval of review of vendor invoices– Lack of evidence of approval and documentation of adjusting entries– Lack of evidence of management’s reviews of compliance with established policies,

procedures and accounting practices Allocation issues (treating like costs unalike) Improper inclusion of unallowable expenses (training/new costs) Improper timesheet reporting

– Not completing a timesheet daily– Not properly processing timesheet corrections– Lack of proper supervisory signature

Lack of subcontract management Improper reporting of rate ceilings (on ICE, on billings, on both) Management of LCAT requirements With QuickBooks – harder to determine routine posting of accounts (Criteria 11),

identification by CLIN, SLIN and ACRN (Criteria 13), readily recalculate indirect rates (Criteria 15)

January 21, 2015 39

P r o p o s e d C h a n g e s t o t h e D F A R S R u l e

P R O P O S E D C H A N G E S T O D F A R S R U L I N G - D A R S - 2 0 1 4 - 0 0 4 7 ( 0 7 / 1 4 ) All contractors subject to CAS must:

– Establish, maintain and comply with an acceptable accounting system– Provide the Government with results of self-assessments ensuring

compliance with the system criteria and established accounting system policies and procedures within six months of the end of the first fiscal year, and then annually.

– Qualify and engage a CPA firm to audit the accounting system in accordance with GAGAS

– The CPA audited report is required in year one and then every three years thereafter

– Contractor must be prepared to provide an out of cycle CPA report, if requested

January 21, 2015 41

P R O P O S E D C H A N G E S T O D F A R S R U L I N G - D A R S - 2 0 1 4 - 0 0 4 7 ( 0 7 / 1 4 ) All contractors required to report on their accounting system must:

– Maintain and make available to the Government upon request: Documentation providing support of the self-assessment

Information considered in the selection of the CPA firm

– Arrange for Government access to: CPA working papers

Documentation supporting the CPA’s independence and qualifications

January 21, 2015 42

P R O P O S E D C H A N G E S T O D F A R S R U L I N G - D A R S - 2 0 1 4 - 0 0 4 7 ( 0 7 / 1 4 ) All contractors subject to CAS and with more than $100 million in costs on cost

reimbursable, time and materials and labor-hour contracts must:– Provide the CPA firm’s audit strategy, risk assessment and audit programs to the ACO and

government auditor– DCAA will review these documents and report any issues to the ACO– The ACO will notify the contractor ONLY if any issues in audit strategy or risk assessment have

been noted– The contractors should note that they are not required to wait to hear from the ACO. However,

should there be issues with the audit strategy or risk assessment, costs incurred for audits commencing prior to notice of issues will be considered unallowable

January 21, 2015 43

P R O P O S E D C H A N G E S T O D F A R S R U L I N G - D A R S - 2 0 1 4 - 0 0 4 7 Interesting items to think about as it relates to these proposed changes:

– How does this affect non-CAS covered contractors?– There is concern over the timeline as mentioned on the previous slide– There is concern over the CPA firm qualification process– There is no money in the DCAA’s fiscal ‘15 budget allocated to performing

accounting system adequacy reviews. We assume it is because of contractor’s ability to perform self-

assessments

We will keep you posted on any further updates to the ruling

January 21, 2015 44

N E W D O D C O N T R A C T I N G F O R A U D I T S E R V I C E S P O L I C Y

The following comments are extracted from new DoD policy on obtaining audit services:• The DoD Components will contract for audit services when applicable expertise is

unavailable within the DoD audit organization, augmentation of the DoD audit organization’s audit staff is necessary to execute the annual audit plan, or temporary audit assistance is required to meet audit reporting requirements mandated by law or a DoD issuance.

• The IG will review all statements of work for procuring audit services from outside sources. The review must be performed before the release of solicitations to prospective bidders to ensure the appropriate use of non-federal auditors and compliance with applicable auditing standards. The exception to that policy is audit of non-appropriated funds. Non-federal auditors who perform work for the DoD Components are subject to GAGAS. Substandard work by a non-federal auditor may warrant referral for sanctions by the appropriate State licensing authorities or suspension and debarment by the contracting authority.

January 21, 2015 45

Kristen Soles, CPAPartner, Government Contracting PracticeKristen.Soles@CohnReznick.com(703) 847-4411

Justin Reid, CPASenior Manager, Government Contracting PracticeJustin.Reid@CohnReznick.com(703) 847-4425

C O N T A C T I N F O R M A T I O N