Mastering the Pre-Award Accounting System Review

Mastering The Pre-Award Accounting System ReviewAisha Mian and La-Tasha Patel | April 28, 2016

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Agenda• What is a Pre-Award Accounting System Survey Audit?

• When is a Pre-Award Accounting System Survey Audit necessary?

• Who is Responsible for Monitoring the Accounting System?

• Details of the Standard Form 1408 Review Process

• Standard Form 1408 Criteria

• Policies & Procedures

• What do the Results of a Pre-Award Accounting System Review Mean?

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Pre-Award Accounting System Review – The Basics







The BasicsWhat is a Pre-Award Survey of Prospective Contractor Accounting

System Audit? • An examination of the accounting system at either a large or small

contractor before contract award to determine the acceptability of a contractor’s accounting system for accumulating costs under a prospective Government contract.

• Generally recommended for flexibly priced contracts including: – Cost-reimbursement contracts– Cost-sharing– Cost-plus-incentive –fee– Cost-plus-award–fee– Cost-plus-fixed –fee– Fixed Price or Time & Materials contracts with cost-reimbursable line

items







The BasicsThe Pre-Award Accounting System review determines the adequacy of a contractor’s cost accounting system -- not the Financial Accounting System!

• Financial Accounting System: reports total amounts incurred for each cost element (labor, materials, etc.) at a company wide level

• Cost Accounting System: distributes and allocates costs among specific contracts, jobs or other cost objectives in a causal/beneficial relationship







The BasicsA Pre-Award Accounting System Review (DCAA Activity Code 17740) involves:• Evaluation of the design effectiveness, not the operating

effectiveness of the system

• A mix of inquiry of appropriate personnel, observation of the entity’s operations, and inspection of relevant documentation

• Walkthroughs of the accounting system that include a combination of the above procedures

Detailed testing of transactions, and re-performance of the controls are not necessary when testing the design effectiveness.







The BasicsA Pre-Award is different from a Post Award Accounting System Review! • A Post Award Accounting system review is usually performed at the

request of the Contracting Officer (CO) when: – A follow-up audit to a pre-award survey is recommended or– A pre-award survey was not conducted prior to contract award,

and the contracting officer determines that an audit is now required to support contract requirements

• The post award accounting system audit program includes detailed testing of transactions through the accounting system such as tracing costs billed to source documentation.







When is a Pre-Award Accounting System Audit Necessary?







When is Pre-Award Necessary?• Preparing to bid on a proposal which requires an adequate

accounting system per FAR 16.301-3(a)(3)FAR 16.301-3 (a)(3)– A cost reimbursement contract may be used only when the contractor’s accounting system is adequate for determining costs applicable to the contract or order

• Performed by the DCAA or other Cognizant Federal Agency at the request of a CO or Administrative Contracting Officer (ACO)

Common misconception is that contractors can request the audit when they need it. Contractors cannot simply request the audit!







When is Pre-Award Necessary?What if you already have an adequacy letter from a cognizant federal agency?

• The adequacy determination is valid typically for three years or until a material change in the system occurs. – Material Change: Change in software– Immaterial Change: Addition of a new overhead pool for

additional contract work, minor revision to the policies and procedures

Keep in mind the new DCAA MRD released on DCAA’s Audit Support to Non-Defense Agencies!







Responsible Parties







Responsible PartiesIf you’re a prime contractor:

• The CO or ACO is responsible for approving or disapproving the accounting system

• The auditor serves as the technical advisor to the CO or ACO on the accounting system review through performance of the pre-award accounting system audit







Responsible PartiesIf you’re a subcontractor: • The Prime contractor is responsible for managing its subcontracts

per FAR 42.202(e)(2). The prime contractor should “flow down” the requirement for an accounting system if awarding a contract based on cost.

• The prime contractor’s internal control system over subcontracts should provide for appropriate flow down clauses into the subcontract that require: – Government or contractor access to the sub’s books and records– For billings to only include allowable costs – The subcontractor to submit annual incurred cost proposals







Responsible PartiesThird Party Certifications: • Third party reviews are accepted by prime contractors as evidence

of an adequate accounting system (if subcontractor passes)

• Some Prime Federal RFPs allow for third party certifications for accounting systems. Language included in the RFP may state the following: “Because of the need for contractors to respond to Cost Reimbursement task orders, offerors must have verification from the DCAA, DCMA, any federal audit agency, or a third-party accounting firm of an accounting system that has been determined adequate for determining costs applicable to this contract are in accordance with FAR 16.301-3(a)(1).”







The Pre-Award Accounting System Review Process







The Process• Prior to the CO or ACO requesting an audit of a contractor’s

accounting system, they will ask the contractor to complete the Pre-Award Survey of Prospective Accounting System Checklist – Located on the DCAA’s website (www.dcaa.mil Checklists

and Tools Pre-Award Accounting System Adequacy Checklist)

• CO/ACO provides the completed checklist to the auditor of your Cognizant Federal Agency (e.g. DCAA, USAID)

• Checklist provides documentation to the auditor on how and if your accounting system meets the criteria in the Standard Form (SF) 1408, Pre-Award Survey of Prospective Accounting System



http://www.dcaa.mil/





The Process

• Onsite visit by the auditor generally for one to two days to complete the SF 1408 (DCAA Activity Code17740):– Audit scope is limited to obtaining an understanding of the

design of the prospective accounting system– Not heavy on transaction testing!– Auditor will determine if the system is one of the following:

(1) In operation(2) Set up, but not in operation (3) Anticipated(4) Nonexistent







Standard Form 1408 Criteria







SF 1408 Criteria Proper segregation of costs

Identification & accumulation of direct costs by contract

Logical & consistent method for the allocation of indirect costs

Accumulation of costs under general ledger control

Timekeeping system that identifies employees’ labor by intermediate or final cost objectives

Labor distribution system







SF 1408 Criteria Interim determination of costs charged to a contract through routine

posting to books of account

Exclusion of unallowable costs

Identification of costs by contract line item

Accounting System provides financial information required by contract clauses concerning limitation of cost and limitation of funds

Required to support requests for progress payments







SF 1408 Criteria - Policies & ProceduresReview all Policies & Procedures including:

Direct Versus Indirect Costs Allocation of Indirect Expenses Accounting for Unallowable Costs Time and Expense Reporting Policy Invoicing Subcontractor Costs Policy







The Results of the Standard Form 1408







The Results• Compliant with Criteria in SF 1408:

– The DCAA will submit the audit report with the SF 1408 completed to the CO or ACO

– In most cases, the ACO will make the report available for future use of adequacy determination and will provide an adequacy letter

– If the award is pending, the ACO may not release the report until the selection team has finalized

Remember - You can ask the ACO if you can have a copy of the results!







The Results

• Non-Compliant with Criteria in SF 1408:

– Auditor will notify both the contractor and the procurement official of the deficiencies

– Auditor will identify recommendations for correcting the deficiencies

– Once the required corrective actions have been taken by the contractor to correct the deficiencies, if requested by the CO, the auditor will perform a follow-up audit of the revised system and/or corrected deficiencies







The Results• Compliant with a recommendation that a follow-on accounting

system audit be performed after contract award:

– An accounting system audit may be performed after contract award and is usually performed at the request of the CO when a follow-up pre-award survey is recommended

– Auditors may self initiate a post contract award accounting system audit based on audit risk at a contractor location!







In Conclusion…• If you have prime contracts, try to have the PCO or ACO trigger a

DCAA/ other cognizant audit agency to conduct a review• If performing work only as a subcontractor, attempt to work through

the prime contractors to trigger the review• If you have prime work and no system determination/review, you can

try to claim that the government has already determined you are suitable for award by means of previous contracts awarded (which may work if the prior awards are cost or T&M)

• Engage a third party to conduct a review• Self-certify the system







About Aronson LLC

Aronson LLC provides a comprehensive platform of assurance, tax, and consulting solutions to today’s most active industry sectors and successful individuals. For more than 50 years, we have purposefully expanded our service offerings and deepened our industry specialties to better serve the needs of our clients, people, and community. From startup to exit, we help our clients maximize opportunity, minimize risk, and unlock their full potential.







About Aronson LLC• Thinking ahead for clients for more than 50 years• 225+ professionals located in Rockville, MD• 80+ professionals dedicated to supporting government contractors • Aronson helps clients rethink the way they approach their business

through innovative, industry-specific services and advice:– Audit, Assurance and Tax– Deltek Systems and Outsourcing– Financial and Contract Compliance– GSA Schedules

• www.aronsonllc.com/blogs/fedpoint/ – News and trends and insight for today’s savvy government contractor



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Awards / Accolades / Affiliations

The Gazette of Politics & Business Exceptional 53 Business Award In 2012, Aronson received the PB53 award for the third year in a row. The program acknowledges the top businesses and organizations in Maryland based on criteria that includes the company’s annual revenue, employee growth, noteworthy product or service innovations, community service efforts and more.

Accounting Today Top Firm In 2013, Aronson was once again named to Accounting Today’s list of the top 100 firms in the country. Accounting Today is a leading provider of online business news for the tax and accounting community.

Washington Business Journal Top 25 Aronson is ranked #12 on the Washington Business Journal’s Top 25 Accounting Firms in the DC Metropolitan area.

INSIDE Public Accounting Top 100 Once again, Aronson has earned a spot in the top 100 of this prestigious list, released by INSIDE Public Accounting. This is the longest running, most comprehensive and accurate independent analysis focusing on management and operations of America’s large local, regional and national firms.

Washington Business Journal Best Places to Work Aronson has been recognized five times as one of the Metro area’s “Best Places to Work.” The award recognizes a company’s achievements in creating a positive work environment that attracts and retains employees through a combination of employee satisfaction, working conditions and company culture.

Montgomery County Chamber Corporate Social Responsibility AwardIn 2010, Aronson was honored to receive the MCCC’s Corporate Social Responsibility Award based on the depth and breadth of the company’s energetic commitment to support young people, in the areas of education, housing and health.







Aisha N. Mian is a managing consultant in Aronson LLC’s Government Contract Services Group. She has more than eight years of experience in the government contracting industry, with expertise in both project control and financial compliance. Her professional skills include contract/project financial analysis and various areas of financial compliance, including preparation of incurred cost submissions; support in evaluating, preparing and advising appropriate indirect rate structures; preparation of disclosure statements; and analysis and impact of cost accounting standards (CAS). She has also worked alongside in-house DCAA auditors supporting audits for incurred cost submissions during her time in the industry. Aisha has been a guest speaker on financial and government contracting topics at the GWSCPA Government Contracting Conference and has hosted Aronson LLC webinars related to government contracting topics. She earned her bachelor’s degree in finance from George Mason University and her MBA from the Robert H. Smith School at the University of Maryland College Park.

Managing Consultant, Government Contract Services Group

240.364.2614

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Aisha N. Mian







La-Tasha S.R. Patel, CPA is a managing consultant in Aron son LLC’s Government Contract Services Group. With more than eight years of experience in the government contracting industry, she focuses on cost accounting standards (CAS), business systems, federal acquisition regulation (FAR), and audit support.Throughout her career, La-Tasha has served the government contracting community in several capacities, using her in-depth knowledge of accounting areas related to business combinations, revenue recognition, consolidations, GAAP, internal control systems, financial reporting and analysis, financial risk, indirect rates and account reconciliation. This diverse knowledge gives her the ability to perform an analysis with an understanding of the motivation of the stakeholder from each sector. As a result, La-Tasha is adept at providing practical solutions that achieve positive results for her clients.La-Tasha is a motivated mentor and teacher, committed to sharing her knowledge with peers and helping her clients rethink their business strategies to achieve their goals. La-Tasha earned her bachelor’s degree in accounting from the University of South Florida. La-Tasha is a licensed CPA in the state of Maryland and is a member of the AICPA.

Managing Consultant, Government Contract Services Group

301.231.6260

[email protected]

La-Tasha Patel, CPA







240.364.2614

Contact Aisha Mian/Aronson LLC

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Contact La-Tasha Patel/Aronson LLC

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Mastering the Pre-Award Accounting System Review