1Copyright 2011 Beason & Nalley, Inc.

DCAA Audits: Current Trends and Issues

Presented to: National Contract Management AssociationOctober 13, 2011

Wayne Murdock, CPA/CISASr. Managing ConsultantBeason & Nalley, Inc.

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Objectives

• Background events affecting DCAA audit priorities and approach

• Impact of events on audits• What audits come first• What audits come later• Primary audit issues:

• Cost proposals• Accounting systems• Incurred costs

• Predictions going into FY 2012

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Events that Changed DCAA Landscape

• GAO (2008 and 2009 reports)• Independence• Inadequate internal controls audits• Insufficient transaction testing• Audit supervisors overriding auditor findings• Lack of auditor training• Too much emphasis on metrics

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Events that Changed DCAA Landscape

• GAO recommendations• More audit work to substantiate conclusions• Emphasis on quality vs metrics• Risk based audit approach• More authority should be given to DCAA in access

to records

Events that Changed DCAA Landscape

Commission on Wartime Contracting

• First interim report: lack of sufficient numbers of competent government acquisition officials

• August 2009 Hearing pitted DCMA against DCAA• 2010 Hearings ramped up government challenges to

prime contractor management of subcontractors

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Initial Impact on DCAA

• Increased DCAA independence• Increase substantive testing• More aggressive access to records policy• Less focus on materiality & increase in audit findings• All internal controls deficiencies significant• Increase in audit staffing• DCAA appealing decisions not consistent with audit

findings• Lack of resources

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DCAA Audits - Highest Priority

• Cost proposals• Any other demand requests from DoD• REAs, terminations, & change order proposals• Follow-up audits• Defective pricing audits• DCMA and DCAA Joint Cost Recovery Initiative

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DCAA Audits - Secondary Priority

• Incurred Cost• Internal Controls• Accounting System audit • Civilian Agency audits

Expect stop and go audits

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Understanding Audit Process &Working Relationships with

Auditors

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Understanding General Audit Process

• Auditor Planning– Gain understanding of relevant internal controls– Preliminary evaluation of data– Perform risk assessment– Determine scope– Discuss with supervisor– Audit program

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Understanding General Audit Process

• Executing Audit Plan– Review policies/procedures if necessary– Obtain sufficient evidential data– Document basis of findings with adequate working

papers– Discuss with supervisor

Understanding General Audit Process

• Audit Report– Include appropriate opinion or statement of issues– Include adequate explanation of questioned costs or

deficient practices– Obtain Contractor Comments– DCAA Internal Review process (Technical and/or

Management)

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Contractor Preparations for Audit

• When notified of audit, discuss with auditor– Defined purpose of audit and likely procedures– Personnel most likely required to support audit– Preliminary data required - ask to put in writing– Dates/duration of audit– Names of auditors performing audit (if “new auditor”

will they have a senior auditor helping them)

• Request entrance conference (face to face), if not offered by auditor

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Contractor Preparations for Audit

• Preparations for entrance conference– Gather data requested & have available– Read applicable DCAA information/guidance– If follow-up audit, have corrective plan ready

• During entrance conference– Ask questions & take notes– Designate principal point of contact– Identify methods for delivery of data– Discuss time frame of audit

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Coordination During Audit

• During audit– Maintain close contact with auditor– Address problems immediately– Provide access to data promptly - know what data auditor

has been provided & compliance implications– Request periodic status of audit

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Coordination During Audit

• During exit meeting– Understand all problems or issues raised– Ask for additional time to resolve problems or provide

added data before final report is released– Ask for report draft, not just “findings”– Request added audit calculations/workpapers if

necessary to clarify auditor’s position– If General FAR Reference, ask for more specific FAR

reference (e.g. FAR 31.205-43 vs. FAR 31.205)

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General Guidelines - Audit Exceptions

Audit findings to which contractors must respond• Questioned costs—examples:

Incurred cost proposals Forward pricing proposals Indirect billing rates

• Business Systems (internal control) deficiencies: Systems issues—”risk” of overcharging gov’t Examples—accounting, billing, estimating, etc. Recommendations may include added oversight &

withholds of billed costs

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Summary of the General Audit Process

• Contractor’s obligation– Provide all relevant evidential data requested– Adequately support company position/policy– Respond to audit exceptions with sufficient &

documented explanation

• Auditor’s obligation– Provide well-supported conclusions based on

adequate evaluation of company data– Support & disclose those conclusions in report/memo

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Responding to the Draft Audit Report

• Address each exception as there is a valid basis • Response should be respectful• Identify corrections implemented or provide a corrective

action plan• Ensure written response identifies all relevant regulations

in their full context• Do not include “case law” • Revisit DCAA’s audit process for compliance with internal

DCAA policies and interpretation of regulations

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Issues on DCAA’s Hot Spot List

• Cost proposals– Overall adequacy issues FAR 15.408, Table 15-2– Forward pricing rates out years and inadequate

budgetary information– Insufficient cost support for subcontractor proposals

Issues on DCAA’s Hot Spot List

• Accounting systems - if requested or for follow-up– Attribute statistical sampling of transactions– Accounting for unallowable costs– Insufficient documentation– Lack of written policies & procedures– Almost all deficiencies regardless of apparent

insignificance will be deemed significant– Unpredictable time frame for corrective action follow-up

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Issues on DCAA’s Hot Spot List

• Incurred cost proposals (if initiated)• Extensive testing (transaction analysis) - variable

sampling• Costs questioned if documentation not sufficient -

higher use of “reasonableness test”• Focus on sensitive

accounts—entertainment/recreation, advertising, exec. compensation, prof. fees, travel, and organization costs

• Recommendations of penalties application (expressly unallowable indirect costs)

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Predictions

• Turnaround time not likely to improve• Internal controls & Incurred Cost audits lengthy• Auditors will report internal controls deficiencies• More pressure on contractors to provide access to

records• Improvement in auditor communication• Continued extensive testing

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Comments or

Questions

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Beason & Nalley, Inc.

101 Monroe Street

Huntsville, Alabama 35801

256-533-1720

Wayne Murdock, CPA/CISA

Government Compliance Sr. Managing Consultant

wmurdock@beasonnalley.com