Accounting for government contracts is usually different from regular commercial accounting. Oversight is stricter, as contractors have to adhere to Federal Acquisition Regulations (FAR) and Cost Accounting Standards (CAS) in addition to Generally Accepted Accounting Principles (GAAP).
The Defense Contract Audit Agency (DCAA) is responsible for this oversight, often via pre-award and post-award audits.
DCAA Requirements
The DCAA ensures that businesses receiving public funds for the delivery of goods or services comply with regulations set forth by the government. This includes accurate cost allocation and reporting to avoid overbilling the government.
DCAA requirements are usually vast; some are specific to certain types of contracts. DCAA compliance experts can help decipher these requirements, identify those that apply to a particular contract, and ensure compliance.
Steps to Achieve Audit-Readiness
By implementing the following, government contractors can have their accounting audit-ready at all times:
Establishing Robust Accounting Policies and Procedures
Government contractors must establish and document comprehensive accounting policies and procedures in order to pass a DCAA audit. These should align with the requirements of FAR, CAS, and GAAP.
The policies include instructions for tracking and allocating direct and indirect expenses. They can also include segregation of duties, timekeeping requirements, internal controls, etc. All accounting staff should follow these policies to maintain consistency in record-keeping and financial reporting.
Implementing DCAA-Compliant Accounting Systems
The DCAA does not have or endorse approved accounting software systems. However, contractors must implement DCAA-compliant accounting systems. For an accounting system to be DCAA-compliant, it must:
Facilitate the tracking of costs by contract, task, and work order.- Properly segregate direct and indirect costs.
- Provide detailed cost information.
- Allow for consistent and accurate allocation of indirect costs to contracts.
- Provide detailed audit trails.
- Facilitate the preparation and submission of incurred cost proposals (ICPs).
- Use provisional billing rates (PBRs) to facilitate timely and accurate invoicing.
- Enable the preparation of contract-specific reports.
Establish DCAA-Compliant Timekeeping Systems
The DCAA requires government contractors to have a timekeeping system that accurately records employee time and allocates it to the appropriate cost objectives. These systems must be capable of:
- Denoting labor by employees across various contracts, tasks, or other cost objectives.
- Record time in decimals rather than fractions.
- Preventing and detecting timekeeping fraud, such as buddy-punching or misallocations.
- Producing detailed, auditable records demonstrating the distribution of labor hours and associated costs.
Training and Educating Accounting Staff
All accounting staff should receive adequate training on DCAA regulations in addition to general accounting principles. They should also be trained on the proper use of accounting and timekeeping systems as well as accounting policies and procedures.
It’s also important to train the accounting staff on the different types of government contracts and their accounting implications. These include cost reimbursement, fixed-price, time and materials, cost-sharing contracts, etc.
Conducting Mock Audits
Simulating DCAA audit procedures can help identify irregularities or deficiencies in accounting practices. In this way, contractors get to address all concerns proactively rather than manage a backlog of costly corrections or suffer the consequences of a failed audit.
The internal audits should evaluate the accounting systems, practices, and policies, and should be conducted regularly.
Subcontractor Oversight
Government contractors are responsible for the oversight of their subcontractors’ accounting practices. They must ensure that the subcontractors comply with DCAA regulations, especially accurate allocation of costs to contracts. Contractors can do this through:
- Establishing clear expectations.
- Providing training and guidance.
- Monitoring performance.
- Reviewing documentation.
- Conducting audits and reviews.
Addressing Findings from Previous Audits
When the DCAA audits contractors, they often provide detailed audit reports containing findings and recommendations for improvement.
Contractors must successfully address all deficiencies uncovered prior to the next audit. Failure to do so can lead to disapproval of incurred cost proposals (ICPs) or even contract termination.
Maintaining Accurate and Adequate Documentation
All accounting and financial records must be accurate, complete, and readily available for a DCAA audit. All backup documentation supporting expenses, such as invoices, subcontractor agreements, and timekeeping records, must also be maintained.
The DCAA, through FAR, requires that these records be kept for at least three years after the final contract payment.
Engaging Experienced DCAA-Compliance Consultants
Executing a government contract is an arduous task, not to mention accounting for it. The deliverables must be high quality and within schedule and budget.
The government also demands accountability and transparency in the use of taxpayers’ dollars, hence the strict oversight from the DCAA. Additionally, compliance enhances competitiveness and profitability through accurate cost tracking and recovery.
For compliance, contractors should consider engaging DCAA-compliant accounting and consulting services. These services can assist with audit preparation, internal controls reviews, risk assessments, and training for seamless contract execution and accounting.
Work with the DCAA-Compliance Experts at Diener & Associates
The CPAs at Diener & Associates have a deep understanding of DCAA regulations and how to ensure compliance. We can help establish policies and procedures, set up accounting and timekeeping systems, and conduct mock audits to keep contractors audit-ready. Schedule a consultation with Diener & Associates today for expert guidance and support in DCAA- compliance.