Delivering goods and services to the federal government is a lucrative venture for many companies, with long-term contacts and steady revenues as some of the rewards. However, companies must adhere to stringent regulations to secure and retain government contracts.
Various government agencies, such as the Defense Contract Audit Agency (DCAA) and the Government Accountability Office (GAO), oversee compliance with regulations and set standards.
Below is a compliance readiness guide for contractors preparing for DCAA and other government audits.
Audit Requirements for Government Contract Accounting
As the primary auditing agency, the DCAA reviews government contractors’ accounting systems, practices, and internal controls for compliance with Federal Acquisition Regulations (FAR), Cost Accounting Standards (CAS), and the Truth In Negotiations Act (TINA).
These are key regulations and standards governing procurement, allocation, reporting, and recovery of costs in government contracts.
The DCAA and other auditing agencies also review compliance with FAR supplementary regulations that apply to specific government sectors, and therefore, specific contracts. These include:
- Housing and Urban Development Acquisition Regulation (HUDAR)
- NASA Federal Acquisition Regulation Supplement (NFS)
- Defense Federal Acquisition Regulation Supplement (DFARS)
- Department of Energy Acquisition Regulation (DEAR)
- Agriculture Acquisition Regulation (AGAR)
- Transportation Acquisition Regulations (TAR)
Initial Steps for Audit Preparation
A solid foundation for government compliance begins with the following two steps:
Establish an Internal Audit Team
A contractor’s internal audit team should include experienced CPAs specializing in government contracts. The audit team conducts periodic mock audits as a proactive measure to identify compliance issues which must be addressed before government audits. If the contractor has been audited before, reviewing the previous audit reports can help with compliance.
Establish a Compliance-Focused Culture
Government contractors must establish a compliance culture as a preliminary step for audit preparation. This includes established policies/procedures for all accounting activities, regular compliance training for all employees, and a designated compliance officer.
Design and Implement Adequate Business Systems
A full DCAA business system audit is the longest and most challenging audit faced by government contractors. The comprehensive scope of a DCAA audit means the review can last months or sometimes over a year.
Passing these audits requires contractors to have strong business systems. These systems and their standard requirements are contained in DFARS 252.242-7005 and include:
Accounting system: Contractors’ accounting systems must comply with applicable laws and regulations to minimize the risk of misallocations and mischarges and ensure cost allocations and charges are consistent with acceptable billing procedures.- Purchasing system: For a purchase system to be compliant, it must provide effective control over procurement in the best interest of the government. This includes ensuring that all purchase orders are authorized and include an accurate and complete history of purchase transactions showing vendors selected, prices, subcontract/purchase order files, etc.
- Earned value management system (EVM): A compliant EVM generates timely, reliable, and verifiable information for the Contract Performance Report (CPR) and the Integrated Master Schedule (IMS).
- Estimating system: The estimating system should only be fed with accurate source data, employ reliable estimating methods, maintain consistency in approach, and follow established policies and procedures.
- Material management and accounting system (MMAS): A compliant MMAS ensures that the costs of fabricated and purchased material allocated to a contract accurately reflect the timing of requirements and that restrictions in minimum or economic order quantity are taken into consideration.
These systems must be regularly updated to stay current with changing regulations.
Documentation and Record Keeping
One of the DCAA’s main tasks is to ensure that all costs billed to the federal government are incurred at a reasonable price. Contractors must be able to demonstrate how the funds were spent to include providing supporting documentation of all costs in the last three years, including invoice payments and payment receipts to subcontractors.
Unlike material costs, labor is not easily validated by external documentation. To ensure accuracy, timesheets signed and dated by employees must be used and reconciled to the accounting records. Additionally, these documents must be retained for a minimum of three years. Contractors are also required to maintain documentation for their procedures and policies.
Implementing Strong Internal Controls
DCAA audits include an examination of the contractor’s internal controls to maintain integrity and accountability in financial reporting through the prevention of fraud, waste, and abuse. As part of the audit process, the agency reviews the contractor’s policies, procedures, and practices for non-compliance, weaknesses, or vulnerabilities.
Below are some of the internal controls assessed by DCAA:
- Segregation of duties
- Approval processes for expenses and contracts
- Regular reconciliations of accounts
- Access controls to sensitive systems and information
- Contract management and oversight
Passing DCAA audits enables companies to secure and maintain government contracts. Establishing government compliance also allows companies to demonstrate a commitment to integrity and accountability, which gives them an edge when bidding for new contracts. It also allows contractors to realize more profits and growth through cost recovery.
Government Audit Preparedness With Diener & Associates
Diener & Associates CPAs are trained and experienced in assisting government contractors with regulatory compliance. We design and implement DCAA-compliant business systems, conduct mock internal audits, and establish a compliance culture. Contact Diener & Associates today for expert help in audit readiness.