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Incurred Cost AuditsThe Process, What to Expect, & How to Survive

Presented by Norman J. Lorch, CPA

Norman J, Lorch, Chartered© Copyright Norman J. Lorch, Chartered

Copyright Notice

• The materials presented in this handbook and all of the slides are subject to the Copyright Laws of the United States of America.

• Reproduction of any of these materials or their use in any presentation without the prior express written permission of the author and Norman J. Lorch, Chartered is prohibited.

© Copyright Norman J. Lorch, Chartered

Course Layout & Presentation

• The Requirement for Submission of Indirect Rates

• The Indirect Cost Rate Proposal• Allowable & Unallowable Costs• The Audit Process

– From The Entrance Conference/Walkthrough to

– The Audit

• Sensitive Accounts• Document Requests• The entire Audit of an

Incurred Cost Submission

• Resolution of Audit Exceptions– Contracting Officer– Courts

• Adjustment Billings


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The Requirement for The Proposal/Incurred Cost Submissions

• Objectives– Understand The Requirement– Know to Whom & Where to Send the Proposal– Know When to Make the Submission– Determine Which Contracts Require the Submission– The Relationship of the Submission to the Coming

Audit


The Requirement

• Required Under Cost Reimbursable Contracts – CPFF, CPIF By– Allowable Cost and Payment Clause FAR

52.216-7 (which is required by FAR 16.216-7)

• Under Time & Material/Labor Hour Contracts– Payment Clause FAR 52.232-7 (B)(2)


The Requirement (Continued)

• When – Must be Submitted– Within 6 Months after the End of the

Contractor’s Accounting Year

• Where– To the ACO – Administrative Contracting

Officer or The Contracting Officer– Copy to the Cognizant Auditor


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• Extensions– In Exceptional Circumstances ONLY

• Penalties– None Required by Existing Regulations – Except

Under the DoD Business Systems Rule– Could

• Discontinue Processing Vouchers• Comment Adversely on Contractor’s Performance• Disallow all Overhead/G&A Costs• Will Disallow 20% of all Direct and Indirect Costs• Determine the Accounting System to Be Inadequate under

the DoD Business Systems Rule & Withhold up to 10% of all Payments



• Required to Submit Final Vouchers Within– 120 Days After the Settlement of The Final

Indirect Cost Rates

• Incentives to File Timely– Allows the Reduction of Fee Withholding by

75% to 90%– Begins the Audit Process and Gets the Audit

Agency to Program the Audit



– Relieves Internal Pressures and Prodding by DCAA and the Contracting Office

– Allows for Collection of All Fee Withheld for Contract Completed During the Year – Once the Audit Is Completed

– Allows Contractors to Bill for Differences Between Provisional Rates and Final Proposed Rates

– Eliminates the Threat of A Determination that the Accounting System is Inadequate Due to a Delinquent Submission


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– Reduce Fee Withholding from 15% to• 1.5% to 3.75%

– Use of the Quick Close Out Procedure• FAR 42.708

– Will Get the Virtually Unavoidable Audit Programmed/Scheduled


The Submission

• Objectives– To Familiarize the Participants with The

Schedules and Other Items Composing The Submission• The Schedules• The Interrelationships of the Schedules• Purpose of Each Schedule or Attachment


The Format of the Submission

• Formal Requirement Found in FAR 52.216-7(d)(2)(iii)

• Electronic Format – Found at

• www.dcaa.mil• “Incurred Cost Electronically”

– If You Use This –Check Annually for Changes

• Requires the Completion – 15 Schedules, plus– An Additional 14 “Suggested” Attachments &

Contract Briefs


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The Format of the Submission (Continued)

• Schedule A - Summary of Claimed Indirect Expense Rates

• Schedule B - General and Administrative (G&A) Expenses (Final Indirect Cost Pool)

• Schedule C - Overhead Expenses (Final Indirect Cost Pool)

• Schedule D - Occupancy Expenses (Intermediate Indirect Cost Pool)

• Schedule E - Claimed Allocation Bases



• Schedule F - Facilities Capital Cost of Money Factors Computation

• Schedule G - Reconciliation of Books of Account and Claimed Direct Costs

• Schedule H - Schedule of Direct Costs by Contract/Subcontract and Indirect Expense Applied At Claimed Rates

• Schedule H-1 - Government Participation in Indirect Expense Pools



• Schedule I - Schedule of Cumulative Direct and Indirect Costs Claimed and Billed (This Schedule MUST be Updated within 60 days of the date that the rates are settled)

• Schedule J - Subcontract Information• Schedule K - Summary of Hours and Amounts

on T&M/Labor Hour Contracts• Schedule L - Reconciliation of Total Payroll to

Total Labor Costs Distribution© Copyright Norman J. Lorch,

Chartered

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• Schedule M - Listing of Decisions/ Agreements/ Approvals and Description of Accounting/ Organizational Changes

• Schedule N - Certificate of Final Indirect Costs

• Schedule O - Contract Closing Information for Contracts Completed in this Fiscal Year


The Format – Attachments – Data to be Provided At Time of Audit• Comparative Analysis of Indirect Expense By

Account With the Prior Fiscal Year• Executive Compensation For The Top Five

Executives• Information on Prime Contracts Under Which

Effort is Performed as a Subcontractor


The Format – Attachments (Continued)

• Description of the Accounting System (Unless A CAS Disclosure Statement has Been Completed)

• Procedures for Identifying and Recording Unallowable Costs

• Certified or Other Financial Statements • Management Letter from Outside CPAs

Concerning Internal Control Weaknesses• Corrective Actions Implemented or to be

Implemented to Correct Internal Control Weaknesses


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• List of Internal Audit Reports Issued During the Year.

• Listing of Scheduled Internal Audits for the Year

• Federal and State Income Tax Returns• Securities and Exchange Commission 10-K

Annual Report



• Minutes from Board of Directors meetings• Listing of Delay and Disruptions and

Termination Claims Submitted Which Contain Costs Relating to the Subject Fiscal Year.

• Contract Briefs


Once Rates Are Finalized

• FAR 52.216-7(d)(2)(v) Requires– Schedule of Cumulative Allowable Direct and

Indirect Costs Claimed and Billed (Schedule I)• Must Be Updated Within 60 Days after

– Rates are SettledMeaning That Over & Under Billings must be

corrected to reflect the Settled Rates & Any Audit Adjustments to Direct Costs Billed


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A Sample Submission Using the DCAA”ICE” Model

• Refer to the Submission Provided to You• Key Schedules & Their Purpose

– Schedule A – Rate Summary– Schedule B – G&A Expense Pool– Schedule C – Overhead Expense Pool– Fringe Pool– Schedule E – Claimed Allocation Bases– Schedule H & H-1 Costs By Contract & Participation


The Sample Submission

• Discussion of Other Schedules– Purpose

• Auditor• Contractor Perspective

• Please Refer to the Sample Submission Provided to you– We will use it later to Discuss the Audit

Process


Allowable and Unallowable Costs

Objectives• Provide the background to

– Account for Allowable and Unallowable Costs• To Delete Unallowable Costs From ICE Submission

– Be able to prepare the Incurred Cost Submission and to Support and Survive the Audit of the Submission and Sign the Required Certification


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The Accounting Regulations

• Found in the Federal Acquisition Regulations or FAR– Part 30 - Cost Accounting Standards– Part 31 - Contract Cost Principles and

Procedures– Appendix B - Actual Cost Accounting Standards

on CAS

• Available at www.arnet.gov/far


Cost Principles

• Allowability– Reasonableness– Allocability– CAS– GAAP– Contract Terms– Part 31 of the FAR


Accounting for Unallowable Costs• Items requiring Special Handling

– Credits– Directly Associated Costs

• Penalties for Claiming Unallowable Costs– Up to 300%

• of the amount that would have been allocated to cost reimbursable contracts or recovered against those contracts


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Specifically Unallowable Costs

• Public Relations and Advertising• Bad Debts• Contingencies• Contributions and Donations• Entertainment• Fines, Penalties and Mischarging Costs• Interest


Specifically Unallowable Costs (Continued)

• Losses on Other Contracts• Organization Costs• Goodwill• Alcoholic Beverages• Costs resulting from a “Step-up” in Basis


Partially Unallowable Cost• Compensation

– Executive Compensation in Excess of • $952,309 for 2012 & Beyond (Reg. Issued 12/4/13)

– Except Compensation for ALL employees Limited to $487,000 After June 24, 2014

• $763,029 for 2011 • $693,951 for 2010• $684.161 for 2009

• Idle Facilities• Employee morale, health, welfare, food service, dormitory

costs and credits• IR&D and B&P Cost

• Labor Relations Costs - Costs Related to Collective Bargaining, Training, Organization Are Unallowable

• Relocation Cost© Copyright Norman J. Lorch,

Chartered

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Partially Unallowable Costs (Continued)• Depreciation –

– Limited to the Amount Used for Financial Statement Purposes• Consistent With Non-Government Related Business

– Ignore Residual Values of 10% or Less– Depreciation on Assets Acquired from the

Government at No Cost is Unallowable– May Adopt CAS 409

• Must reflect the expected useful life• account for salvage value – If in Excess of 10%• Lives should reflect historical experience


Partially Unallowable Cost (Continued)

• Rental Costs• Taxes

– Fines and penalties– Federal Income Taxes– Deferred Tax Expense– Allowable include

• State Income Tax

• Travel (Next Screen)© Copyright Norman J. Lorch,

Chartered

Partially Unallowable Costs –(Continued)

• Travel– Air Fares– Per Diem Rates

• FAR Limits• JTR Limits

– Only if Specifically Required by The Contract)

• Specific Contract Limits

– Receipt Requirements


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Partially Unallowable Cost (Continued)

• Mileage Rates– Changed to $0.55 per mile for 2014– Not Effective for Government Contract Costs until

Adopted by GSA• Usually a 30 day delay

• Defense of Fraud Proceedings• Pre-contract costs• Defense of Fraud Proceedings• Pre-contract costs


Other Unallowable Costs

• Additional Costs Resulting from the Late Funding of Defined Benefit Pension Plans– Plan Must Be Funded Quarterly– If not Funded The Cost is Unallowable Until it is

Funded• Costs Associated With Merger/Acquisition

Activities– Special Rules in the DFARS

• Recapture of Gains from Pension Plan Terminations


More Cost Limitations• Limitations on Pass – Through Charges

– Must Disclose • % of Work to be Subcontracted• When in Excess of 70% provide

– Information on indirect costs and fee attributable to the pass through subcontracted effort

– Justification and explanation of the benefits to the Government for the pass trough arrangement – Now Required on all Government Contracts – Previously limited to DoD, NASA and Coast Guard Contracts


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The Government Audit Process

• Objectives• Understand The Government’s Incurred Cost

Submission Audit Process – How it Starts– How It Ends

The Use of Key Schedules in the Submission Sensitive Account Review Your Records What to Have How Much The Process – Beginning to End


The Audit Process-Getting Started

• Usually initiated by the Government Auditor– Without a Request from the Contracting Officer– Usually Scheduled by the Audit Agency

• For the GFY after the receipt of the Proposal or• Later

• Final Indirect Rate Submission and the Final Incurred Cost Submission are the Same

• Currently DCAA is behind 5 to 8 years in completing Indirect Rate Audits


The Audit Process – Getting Started

• DCAA will call to set up a time– The Audit May Not Get Started Until 5 Years after the

Submission or Longer

– To Meet at the Contractor’s Office– Will arrange for an Entrance Conference

• This will be attended by– The Auditor or Auditors Assigned to The Audit– The Audit Supervisor– The Administrative Contracting Officer (ACO) or the CO

(Invited)© Copyright Norman J. Lorch,

Chartered

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The Entrance Conference –Proposal “Walk-Through”

• Explanation of Audit Purpose & Scope

• Time Frame for The Audit– Expectations for Support and

Furnishing Documents

• Possible Disclosure of Completion Date

• Discussion of the Audit Scope


The Entrance Conference – Proposal “Walk-Through” (Continued)

• The “Walk-Through”– Overview of the Organization

– Contractor Will Go Thru the Submission Explaining• Each Schedule

– Source of the Costs Presented– Job Cost Reports

• The Accounting System and Software Platform

• The Cost Allocation Scheme and Rate Structure


The Entrance Conference – Proposal “Walk-Through” (Continued)

• Location of the Records– If in Storage You will need to Explain

• Location• Retrieval Time Requirement

• Identification of The Contractor Personnel Coordinating the Audit– Their Authority

• Location of Office Space for Use of the Auditor (s)• Operating Hours


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And the Walk-Through Continues

• Discussion of Policies and Procedures Which Will Include– Accounting– Labor Accounting

• Time Recording & Reporting• Payroll Preparation

– Purchasing & Procurement– Recording Unallowable Costs



• CAS Compliance– If CAS Covered

• Full Coverage– Disclosure Statement

• Modified Coverage

– If, Not, Why Not?• Exempt Small Business



• Format of Source Documentation– Paper – Electronic

• May Require The Auditor to Evaluate the Policies, Procedures & Practices For Creation of Electronic Documents

• Discussion of Billing Procedures for– Cost Plus Contracts– Labor Hour/T&M Contracts

• Discussion of The Organization– Divisions– Locations – # of Employees


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Let the Audit Begin – The Audit

• Once the Walk-Through is Over– The Auditor Will Return and Begin to Request

Documents• Chart of Accounts• Trial Balance• Detail General Ledger – May be too large to provide• Profit & Loss and Balance Sheets• Copies of Policies & Procedures• Board of Directors Minutes

– Recommend you limit this to access© Copyright Norman J. Lorch,

Chartered

More Document Requests

• Copies of Federal & State Income Tax Returns

• Detail Listing of Transactions by Account– May hold this request until the auditor selects

specific accounts for review

• Labor Distribution Reports• Employee Roster, by location


More Document Requests

• Adjusting Journal Entries– For Moving Labor Charges– Adjustments Between Contracts and Task

Orders– Adjustments between Expense Pools or

Between Direct and Indirect Expenses


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Now the Field Work Begins

• Reconciliations– Job Costs and the General Ledger – Labor Claimed to

• IRS Form 941 • Labor Distribution Reports

– Schedule H to Job Cost Control Accounts and the General Ledger

• Gross Profit Analysis on Labor Hour/T&M Contracts


The Sensitive Accounts

• Direct & Indirect Labor• Executive Compensation• Business Development• Marketing• Travel• Professional Development/Business Conferences• Consulting• Legal & Professional Fees


The Sensitive Accounts (Continued)

• Let look at the Key Schedules in the Submission– Schedule B– Schedule C– Fringe Schedule– Schedule H-1 Government Participation– Schedule I


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SCHEDULE B

ICE (version 2.0.1c)

General and Administrative (G&A) Expenses (Final Indirect Cost Pool)

RECHECK FORMULAS AND LINKS AFTER COMPLETING SCHEDULETOTAL PER G/L,

F/SACCOUNT

NUMBER DESCRIPTION Amount & TRIAL BAL. ADJUSTMENT CLAIMED NOTES ReferenceAcct Balances

Schedule B is linked to the following schedules:Sched D (x), Intermediate Allocations Sched E, Bases

Sched H, Contract Costs Summary Sch H

Sched P, IR&D/B&P ICE MANUAL

HIGH TECH JAMS, INC. OWINGS MILLS, MD

General and Administrative (G&A) Expenses Fiscal Year End - 12/31/2013

6010 Accounting/Legal 55,300 55,300 10,500 44,800

6020 Administrative Labor 1,606,962 1,606,962 30,343 2,529,271 Attachment BOfficer Compensation 952,652 952,652

6030 Advertising 53,567 53,567 53,567 -6040 Advertising - Help Wanted 3,987 3,987 - 3,9876050 Amortization of Goodwill 8,400 8,400 8,400 -6060 Auto & Delivery 18,762 18,762 2,500 16,2626070 Bad Debt Expense 4,575 4,575 4,575 -6080 Business Interruption Insurance (Covers C 22,500 22,500 22,500

6110 Computer Supplies 15,488 15,488 15,4886120 Consultants 10,876 10,876 10,8766130 Contributions 5,500 5,500 5,500 -6140 Depreciation 727,626 727,626 727,6266160 Dues & Subscriptions 11,828 11,828 1,250 10,5786165 Employment Agency Fees 15,890 15,890 15,8906175 Entertainment 32,039 32,039 32,039 -6235 Executive Travel 45,793 45,793 45,793 -6245 Fines & Penalties 5,095 5,095 5,095 -6255 Business Development & Strategic Planni 40,000 40,000 5,000 35,000

6265 Indirect B&P Expenses 7,893 7,893 7,893

SCHEDULE B

ICE (version 2.0.1c)

General and Administrative (G&A) Expenses (Final Indirect Cost Pool)

Schedule B is linked to the following schedules:Sched D (x), Intermediate Allocations Sched E, Bases

Sched H, Contract Costs Summary Sch H

Sched P, IR&D/B&P ICE MANUAL


General and Administrative (G&A) Expenses Fiscal Year End - 12/31/2013

IR & D Labor (Sum SCH H)

RECHECK FORMULAS AND LINKS AFTER COMPLETING SCHEDULE ACCOUNTAcct Balances TOTAL PER G/L, F/S

NUMBER DESCRIPTION Amount & TRIAL BAL. ADJUSTMENT CLAIMED NOTES Reference

6275 Insurance 65,098 65,098 65,0986285 Interest 15,771 15,771 15,771 -6295 Congressional & Other Legislative Relatio 25,783 25,783 25,783 -6305 Office Supplies 37,908 37,908 37,9086320 Permits & Licenses 4,500 4,500 4,5006325 Professional Seminars & Conventions 35,433 35,433 35,4336330 Trade Shows & Training - Domestic 100,000 100,000 35,000 65,0006331 Trade Shows & Training - Foreign 65,000 65,000 - 65,0006335 Property Taxes 36,120 36,120 36,1206340 Rent 66,390 66,390 66,3906350 Resort Vacation House For Employees / G 5,500 5,500 5,500 -6375 Telephone 40,577 40,577 5,000 35,5776385 Employee Awards 21,877 21,877 - 21,8776395 Travel 32,680 32,680 32,6806405 Travel - Executive Travel Expenses 125,253 125,253 125,2536430 Utilities 12,805 12,805 12,8056455 Income Taxes 1,300,000 1,300,000

-

250,000 1,050,000

-SUBTOTAL 5,635,428 5,635,428 541,616 5,093,812

Intermediate Allocations: ADD: Fringe Allocation Fringe

SUBTOTALIR & D Mat'l,Trvl,ODC(Sum SCH H)

D

IR & D Overhead(Sum SCH H & SCH E) B & P Mat'l,Trvl, ODC(Sum SCH H)

1

B & P Labor (Sum SCH H)B & P Overhead(Sum SCH H & SCH E)

1

TOTAL G & A EXPENSE POOL

814,175 (11,564) 802,612

5,635,428 6,449,603 530,052 5,896,424- -

375,833 375,833204,002 (8,118) 195,884

- -177,530 177,530

96,363 (3,834) 92,529-

7,303,331 518,100 6,738,200

SUM SCHE

SUM SCHE D

SUM SCHE DSCHED

SUM SCHE D

SUM SCHE D

SUM SCHE DSCHED

ACCOUNT Acct Balances TOTAL PER G/LNUMBER DESCRIPTION Amount & TRIAL BAL/FSADJUSTMENTS CLAIMED Notes Ref.

Schedule C is linked to the following schedules:

Schedule D(x)

5010 Advertising - Help Wanted 23,534 23,534 23,534

5030 Auto & Delivery 19,788 19,788 19,7885040 Computer Supplies 32,333 32,333 32,333

5050 Consultants 82,500 82,500 82,5005060 Depreciation 125,473 125,473 125,4735080 Dues & Subscriptions 4,500 4,500 4,500

5140 Employment Agency Fees 3,500 3,500 3,5005150 Entertainment 15,549 15,549 15,549 -5160 Fines & Penalties 7,235 7,235 7,235 -5170 Indirect Labor 1,670,882 1,670,882 - 1,670,882

5190 Insurance 38,756 38,756 38,756

5200 Interest 33,503 33,503 33,503 -5210 Office Supplies 13,658 13,658 13,6585220 Overhead B&P Expenses 22,456 22,456 22,4565230 Relocation Expenses 24,000 24,000 12,000 12,000

5240 Rent 337,550 337,550 127,466 210,0845250 Telephone 67,112 67,112 5,000 62,112

5260 Tickets for Sporting Events 31,190 31,190 31,190 -5270 Travel 125,690 125,690 125,690

5280 Utilities 68,343 68,343

-

68,343

-Subtotal 2,747,552 2,747,552 231,943 2,515,609

SCHEDULE C (1)ICE (version 2.0.1c)

ICE MANUAL

4,758,380 (67,584) 4,690,796

7,505,932 164,359 7,206,405

RECHECK FORMULAS AND LINKS AFTER COMPLETING SCHEDULE

ADD: Fringe Allocation

Total Overhead Pool

Fringe


LABOR OVERHEADFiscal Year End - 12/31/2013

Overhead Expenses (final indirect cost pool)

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Less Net

To Penalty ClauseNote (2)

SettledTotalCostsNote (3)

Prior Year Costs FYE

Note (4)

Current Year Costs FYE

Note (4)

Cumulative Settled or Claimed

Contract Limitations

Rebates/Credits

Note (5)

Cumulative Settled or

Claimed Note (6)

Order No.

PV No.

Contract No. Subcontract #

other non-DoD (civilian) agencies. Provide details in the same level for billing costs (e.g. by delivery order, etc.).2.FAR 42.709 implements 10 USC 2324(a) - (d) and 41 U.S.C. 256(a) through (d) which requires that penalties be assessed if a contractor claims a cost in an indirect cost settlement proposal which is expressly unallowable. See Far 42.709 for applicability.

Indicate a "Yes" in this column if the penalty clause is applicable to this contract.

3.These totals, by contract, should be computed using the negotiation or rate agreement document.4.These totals, by contract, should be the same as shown in the incurred cost proposal using the claimed indirect rates.5.Contract limitations include costs incurred that are included in the column entitled " Total Cumulative Settled or Claimed" and are either (i) in excess of contract ceiling rates, (ii) unallowable per contract terms,

(iii) outside the period of performance, or (iv) in excess of contract ceiling amounts,6.The cumulative amounts in this column should not exceed the contract ceiling. If amounts exceeding the ceiling are in dispute, or if you have requested that the contracting agency increase the contract ceiling, please include the amounts in the " Contract Limitations" column and provide an explanation in a footnote.7.Indicate those contracts for which work effort was physically completed during the fiscal year claimed. (Complete Schedule O for these contracts.) Shortly after the final agreement on rates, you will need to submit final vouchers on these completed contracts.

8.Hidden rows have been inserted that will allow for automatic adjustment of the column totals when additional rows are inserted.

9.LINK CONTRACT DATA FROM SCHEDULES H & K TO THIS SCHEDULE

Linked to Other Worksheet Current Year Contract Costs, Schedule H and K

Cell Contains a Formula Formulas calculate Total and Net Cumulative Claimed and or Settled Amounts

None

Cumulative Billed (Manual Entry)

Schedule I is linked to the following schedules: Schedule H, Contract Costs

Schedule K, T&M

ICE MANUAL

SCHEDULE IICE (version 2.0.1c) RECHECK FORMULAS

Schedule of Cumulative Direct and Indirect Costs Claimed and Billed by Contract and Subcontract

Unsettled/Claimed Direct And Indirect Costs Using

ClaimedPrior YearsSubject Total

Fiscal Year End - 12/31/2013

Cell Contains a Formula With Links


Date Cost Billed Through

Amount Over (Under) Billing

SCHED H SCHED H

Cost Type & Flexibly Priced:

(note 1)

N00600-09-C-9899 57133 Yes 1,533,370 3,533,577 - 9,324,982 35 12/31/2013 9,105,770 (219,212)

N02300-10-C-1234 57144 Yes - 1,473,357 10,372,105 48 12/31/2013 9,973,544 (398,561)

DAA36-08-C-1389 57203 Yes 2,350,755 4,750,000 7,124,538 108 6/30/2013 6,933,590 (190,948)

UNALLOWALE TRAVEL 57000 Yes 10,078 (10,078)

- -Subtotal-Cost & Flexibly Priced Contracts

26,831,703 26,012,904 (818,799)

SCHED K

Time & MaterialF33657-09-C-1458 0020 Yes 6,500,000 18,238,087 57 12/31/2013 18,185,129 (52,958

)

M0065-11-C-0028 0001 Yes 2,535,333 5,944,749 25 12/31/2013 5,894,451 (50,298)

- -

- -

- -24,079,580 (103,256)

4,258,035 9,324,982

8,898,748 10,372,105

23,783 7,124,538

10,078 10,078

- -26,831,703

SCHED K

11,738,087 18,238,087

3,409,416 5,944,749

- -

- -

- -24,182,836

Subtotal-Time & Material Contracts 24,182,836

Total- Cost/Flexibly Priced and Time & Material Contracts 51,014,539 51,014,539 50,092,484 (922,055)

PREPARATION NOTES:

1. Cost and flexibly priced contracts should be sorted and subtotaled by Federal Agency if you perform work for both DoD and

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More Special Items

• Other Income Items on the P&L Statement– Rental Income– Income From Employee Activities– Purchase Discounts

• Tax Return – Schedule M Adjustments– Depreciation Differences– Non-Deductible Items

• Officer’s Life Insurance


The Rest of the Audit - Fieldwork

• Based on the review of the key submission schedules the auditor will– Plan the Audit

• Getting Supervisory Approval

– Will provide a listing of• Documents to Be Reviewed• Invoices, • Entries• Other Supporting Documentation


More Fieldwork

• Request Detailed Transaction Listings– By Account Selected For Review and Then– Supporting Documentations for Selected

Entries• Invoices• Purchase & Payment Approvals• Purpose of Purchase or Proof of Services Rendered• Proof of Payment

– Cancelled Checks


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More Fieldwork

• Consulting Agreements– Copy of the Consulting Agreement– Description of Services Rendered– Consultants Work Product– Other Proof of Services Rendered– Based on a Recent MRD

• May be Able to Reduce Documentation Required – Where Services are Readily Apparent

Accounting/Audit Services


More Fieldwork

• Legal Fees– Access to Billings Setting Forth

• Detail of the service Performed• Purpose is to Insure Allowability

– Unallowable CostsMerger & Acquisitions Bid ProtestsDefense of Fraud InvestigationsObtaining PatentsObtaining Lines of Credit


More Fieldwork

• Business Development – Potential Unallowable Costs– Entertainment– Golf & Sporting Events– Trade Show Display Fees– Undocumented Travel or Business Meals– Unsupported Costs– Lobbying– Advertising


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More Fieldwork

• Labor– Both Direct & Indirect

• Labor Distribution Reports– By Contract /Cost Objective

• Time Records/Time Sheets• Journals Entry Transfers• Policies & Procedures

– Employees Account for All Time

– “Total Time Accounting” Paid or Uncompensated Necessary for Equitable Allocation of Labor Cost to Cost

Objectives© Copyright Norman J. Lorch,

Chartered

More Fieldwork – Labor Costs

• Selection of Employee’s Time– From Labor Distribution Report or– From Detail Labor from Billing File– Trace

• To Time Sheets or Time Entry in the System• To Actual Payroll Journals and Payment

– Showing Withholdings and Payroll Taxes– Check # or Evidence of EFT Payment



• More Verification– Trace Individual Net Payroll to Proof of Payment

• Cancelled Check• Proof of EFT• Possibly to the Bank Statement

– Employee Proof• W-4• Company Picture ID• Driver’s License


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• Still More– Floor-check– Discussions with Employee Concerning

• Work Performed– Knowledge of What was Done– Relationship to the Job Charged

• Supervisory Involvement– Directed Charge?



• Floor-Checks– Always Possible at any time

• When the Auditor is Present for Other Purposes– As Part of the Incurred Cost Audit or

• A Separate “Surprise” Audit by the Auditor– Usually Preceded by a request for

Personnel Rooster by Location

– Auditor will Interview Pre-selected Employees• Will Not Provide a List of Employees in Advance



• More on the Floor-Check– Questions to Employee

• Concerning Completion of Time Report on Input into System• Are Changes Directed by Management/Supervisors• Have you Been Requested to Change your Time Entries?

– By Management – Supervisor

• Did you Charge Time to A Job that You were not working on? Why?


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• Still More on The Floor-Check– Auditor Will Request Copies of the Labor

Distribution Report for the Period covered By the Floor-Check• Will Trace the Time Charge of the Employee Floor-

Checked to the Labor Distribution Report

• Now More Labor Related Items



• Testing the System– Policies & Procedures

• How Job Charge Number are Assigned• How Payroll Is Processed• Instructions to Employees

– Complete Time Entry At the End of the Day or End of the Job Whichever Comes First

– Signing or Approval Code Process and Supervisory Approval

– Employee Handbook– Human Relations Policies & Procedures



• Compensation– How is Reasonableness/Salary Level

Determined– Special Attention to Owners, Executives

• Particular Attention to Compliance with Salary Caps– Also Applies to ALL Positions (Refer to Discussion Earlier)

• Are Employees Actually Working• Are Salaries Below the Cap Reasonable?

– Special Analysis of Executive Compensation Reasonableness


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• Additional Effort on T&M/Labor Hour Contracts– Trace Hours Billed By Billing Category

• To Labor Distribution Reports– To Employee Payroll Payment– Employee

Job Title Function Qualifications Insure Employee Meets the Minimum Qualifications Set Forth In The Contract



• Efforts Related to IRS Form 941– Review of The Reconciliation – Schedule L– Trace Payments of Withholding Taxes

• Proof of EFT Payment/Deposit– Reconciled to Payments Claimed on the 941– Including Tracing to Bank Statement

• Could be Problematic if– Part of Consolidated “Single Payer” Account– Paid as Part of Corporate Wide Payroll– Or if Employees are “leased”


Fieldwork on Other Issues

• Supporting Documentation– Must Provide the Auditor With Supporting

Documentation• Failure to So Do Will Result in Cost Disallowance • Never Comment that You Do Not Have Any

Documentation– Reserve the time to do more searching– Copies of Missing Invoices Can Always be Gotten with A

Call to the Vendor– Don’t Give Up


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Fieldwork on Other Issues

• Healthcare – Review of Premium Costs

• Be Prepared to Demonstrate that– Cost for Premium & Benefits for Ineligible

Dependents orOthers

– Are excluded from Claimed Costs


Field Work Completed

• Indirect Rates Are Computed• Preliminary Audit Findings Are Discussed• Workpapers Are Submitted for Internal Review• Once Reviewed

– Exit Conference is Scheduled– Government Staff Usually in Attendance

• Auditor

• Supervisor• Contracting Officer



• Contractor– Given the opportunity to

• Provide Written Comments• Additional Support• Disagree with Proposed Disallowances

– Providing Support for their Position FAR References Agency FAR Supplement References Case Law

• Remember Auditors Do Not Negotiate© Copyright Norman J. Lorch,

Chartered

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• Auditor May Adjust Recommended Rate– Issue a Final Rate Determination Letter

• For Contracts With DoD and Other Agencies• Or Some Other Agencies

– Receive a Report of Recommendations– The Agreement is Negotiated with the Contracting Officer

• But You Don’t Agree– Now What


Rate Agreement or No Rate Agreement

• Contractor Agrees– Sign the Rate Letter– Submit a Revised Schedule I– Submit Billing Adjustments Within 60 Days



• Contractor Disagrees– At anytime During the Audit

• If You Indicate You Disagree, or• You Have No Supporting Documentation That the

Auditor Considers to Be Adequate– DCAA will Issue A DCAA Form 1

Suspending Payment Collecting the Disallowed Cost From You Next

Payment, if the Contract is still active If Not Active the ACO may begin the Collection

Action© Copyright Norman J. Lorch,

Chartered

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• But We Don’t Agree– Hire Legal Counsel– Appeal to the Contracting Officer– If Unable to Reach A Satisfactory Agreement

• Turn the Matter Over to Legal Counsel• File an Appeal with the Appropriate Board of

Contracts Appeals– Under the Provisions of the Contract Disputes Act


So We Are Done – Now What?

• Penalties May Be Assessed On– Claimed Expressly Unallowable Costs– At Up to 300% of Unallowable Costs

• That Would Have Been Recovered On– Cost Plus– T&M Contracts (G&A) applied to ODC’s– Fixed Price Incentive Contract

• After Consideration of Amounts Over Contract Ceilings


Almost Done

• Review Open Unaudited Year’s– Incurred Cost Proposals

• For Similar Disallowances• If Claimed

– Withdraw the Proposal Immediately– Remove Unallowable Costs & Resubmit

Will Avoid Penalties


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Now We Are Done

• Put Those Files Away


Questions???Go O’s & Ravens


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