Post-award accounting system audits are important to confirm a contractor’s ongoing compliance with federal requirements after a government contract has been awarded.
These audits, often led by the Defense Contract Audit Agency (DCAA), focus on verifying that accounting systems operate according to the Defense Federal Acquisition Regulation Supplement (DFARS) criteria and that costs billed to the government are allowable, allocable, and reasonable.
For contractors handling cost-reimbursement, incentive-type, time-and-materials, or labor-hour contracts, the outcome of these audits can directly influence payment flows and overall contract performance.
Comprehending how these audits function, what is examined, and how results are determined provides a valuable perspective for organizations seeking to maintain a strong financial compliance posture over the long term.
The Purpose of Post-Award Accounting System Audits
Post-award accounting system audits evaluate how well a contractor’s accounting system functions in actual practice after a contract has been awarded.
For the Department of Defense, an “acceptable” accounting system is essential when cost-reimbursement, incentive-type, time-and-materials, or labor-hour contracts are involved, as well as for certain fixed-price contracts that allow progress payments based on costs or percentage-of-completion.
The findings can directly influence contract payments, as loss of system approval may trigger withholds until deficiencies are resolved.
Legal Framework and Governing Criteria
DFARS clause 252.242-7006 sets the standard for an acceptable accounting system, outlining 18 criteria covering areas such as cost segregation, allocation methods, timekeeping, labor distribution, and the exclusion of unallowable costs.
DFARS 242.75 explains when the clause applies and clarifies the contracting officer’s authority to approve or disapprove a system. Payment withholds are addressed in DFARS 252.242-7005, linking deficiencies in the accounting system to financial consequences.
Related guidance in the Procedures, Guidance, and Information (PGI) section of the DFARS provides templates for initial and final determinations, while the Federal Acquisition Regulation (FAR) Part 31 and FAR 52.216-7 address cost allowability and billing requirements.
How The DCAA Conducts a Post-Award Audit
Audits begin when a contracting officer requests an examination or the DCAA identifies potential risk based on prior findings or operational changes.
Contractors receive notification and are asked to participate in a system walkthrough, which allows auditors to map processes to the DFARS criteria. Fieldwork then involves detailed testing of transactions and controls, tracing billed costs to source documentation, reviewing reconciliations, and evaluating indirect cost allocations.
Timekeeping and labor charging are frequently examined through real-time labor evaluations, which may include unannounced visits to verify compliance with time entry policies and supervisor approvals. After testing, the DCAA reports its findings to the contracting officer, who then issues initial and final determinations.
If weaknesses are found, contractors typically have 45 days to correct them or submit an acceptable corrective action plan.
Common Areas of Examination
Auditors often focus on labor-related practices since labor charges can significantly impact contract costs. Daily time entry by cost objective, documented supervisor approvals, and prevention of unauthorized timesheet changes are examined closely.
Another frequent focus is handling unallowable costs, as the system must identify and exclude these costs in real time to prevent unpermitted charges to the government. Billing reconciliations are reviewed to confirm that invoices match the general ledger and job cost records, while allocation methods for indirect costs are assessed for consistency and accuracy.
Interaction With Other Post-Award Audits
Post-award accounting system audits may occur alongside other DCAA post-award examinations. Public voucher audits check the accuracy of billings to the government, while floor check audits assess timekeeping practices on-site through employee interviews and observation of work areas.
Provisional billing rate audits examine projected indirect rates for the upcoming year, which are later adjusted once final actual rates are determined through incurred cost audits. Finally, contract closeout audits confirm that all contractual actions are complete before officially closing the agreement. .
While each audit type has a distinct focus, the accounting system audit often supports or is supported by findings from these related examinations.
Consequences of Material Weakness Findings
DFARS defines a material weakness as a deficiency or combination of deficiencies that reasonably increases the possibility of a significant misstatement not being prevented or detected in time.
When the contracting officer issues a final determination that includes such findings, payment withholds can be applied. The default withhold is typically 5% of progress and performance-based payments and 5% on interim vouchers for applicable contracts.
An approved corrective action plan that is actively implemented promptly can reduce the withhold to 2%. Limits apply, capping withholds at 5% for one system and 10% across multiple systems.
Timelines and Cadence for Audits
A full post-award audit is often conducted if more than four years have passed since the last review or if substantial changes have been made to the accounting system. In other cases, follow-up audits may be narrower in scope, focusing on specific deficiencies or updated processes.
The overall lifecycle includes the audit request and planning, fieldwork, interim communications for urgent deficiencies, reporting to the contracting officer, and monitoring corrective actions. Approval of the system and withhold release occur once deficiencies have been addressed and verified.
Preparing for a Smooth Audit
Readiness involves mapping each DFARS criterion to a specific control, assigning ownership, and identifying evidence that demonstrates compliance. Frequent internal reviews, strong timekeeping practices, and reconciliations between billings and accounting records can reduce the likelihood of adverse findings.
Documenting corrective action strategies in advance allows for faster resolution if issues are identified during the audit. Maintaining updated policies, training staff on applicable requirements, and keeping documentation accessible for auditor review contribute to a more efficient process and a greater likelihood of receiving system approval without extended delays.
Moving Forward With Complete Confidence
A well-functioning accounting system is more than a compliance requirement; it’s a foundation for accurate billing, reliable financial data, and sustained contract performance. Post-award audits confirm whether processes and controls operate as intended, and promptly addressing findings can help maintain uninterrupted payment flows.
At Diener & Associates, decades of experience serving government contractors, combined with the responsiveness and personal attention of a dedicated team, allow us to guide organizations through the complexities of DCAA requirements.
Book a straightforward consultation online or call 1-(703)-386-7864 to work with our professional CPAs for accounting and consulting services designed to strengthen compliance and support lasting success.