The Defense Contract Audit Agency (DCAA) is responsible for auditing government contracts and ensuring compliance with federal regulations. For government contractors, DCAA audits are one of the most significant hurdles if adequate accounting practices are not in place.
Professional services from accounting compliance experts can help prepare for audits, setting a solid foundation for DCAA accounting compliance and a long-term relationship with the government. This blog presents an overview of DCAA audits, why they are important, and successful preparation.
Key Components of DCAA Audits
The DCAA’s main objective is to protect the government’s interests in its business dealings. This means ensuring that the proceeds of taxation are properly and efficiently utilized.
As an agency, the DCAA does not make or maintain its own regulations but operates within a framework of federal regulations related to auditing and oversight of government contracts.
The Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS) are two sets of regulations highly relevant to DCAA audits. It also adheres to Generally Accepted Government Auditing Standards (GAGAS). DCAA audits tend to focus on these critical areas:
Cost Accounting Practices
The DCAA looks at how businesses accumulate, allocate, and recover costs. The objective is to ensure correctness and consistency in the cost accounting practices of government contractors as per FAR Part 31. The DCAA also audits cost accounting practices in accordance with CAS and GAAP (Generally Accepted Accounting Principles).
Billing Systems and Practices
As part of FAR compliance, the DCAA ensures that contractors’ billing systems align with contract terms, allowable costs, and applicable regulations. It assesses if the systems support accurate and timely invoicing, as well as proper segregation of direct and indirect costs.
Contract Cost Documentation
The DCAA also reviews records of costs incurred and then compares them to the contract’s terms. The documentation trail must be adequate, accurate, consistent, and compliant with regulations.
Essential clauses for this include allowable cost and payment (as per FAR 52.216-7) and subcontractor cost or pricing data (FAR 52.215-12), among others. The DCAA auditor may also request purchase orders, job cost ledgers, and labor distribution records.
For timekeeping systems to be DCAA compliant, they must be accurate, complete, and supported by valid timesheets. The DCAA also requires that timekeeping systems track all direct and indirect labor to verify the accuracy of billing rates.
Importance of Compliance With DCAA Regulations for Contractors
When government contractors uphold DCAA accounting compliance by passing audits, they can establish themselves as trustworthy and reliable. As a result, they are assured more rewarding opportunities with the government.
If they fail DCAA audits, the consequences are costly penalties, contract termination, and damaged reputation.
Essential Tips for Preparing for DCAA Audits
The journey to DCAA accounting compliance is strewn with challenges, as evidenced by the frequency of audit failures. In 2022, the failure rate of DCAA audits was 7.7%. Contractors must exercise vigilance in their accounting practices to meet the demanding standards set by the DCAA.
Here are actionable tips for government contractors looking to strengthen their DCAA accounting compliance:
- Establish an Adequate Accounting System: Bookkeeping for government contractors heavily depends on an accounting system due to the vast amount of financial data to record, classify, and report. For DCAA accounting compliance, contractors need an accounting system that supports a general ledger account structure for segregating costs according to FAR regulations.
- Implement Effective Internal Controls: The DCAA expects contractors to have adequate internal controls to prevent and detect errors, fraud, waste, abuse of government resources, or inefficiencies. It can be helpful for contractors to document their internal control processes ahead of any DCAA audit.
- Keep Detailed Records: To meet the DCAA’s expectations, contractors must have detailed records of their financial transactions, including invoices, contracts, timesheets, and other supporting documents. These help to verify and substantiate the costs billed to the government.
- Stay Updated on Regulations: The DCAA operates within a framework of FAR, CAS, and GAGAS regulations, meaning changes in any of these can impact the outcome of a DCAA audit. For that reason, contractors should stay abreast of developments while updating their strategies accordingly.
- Perform Internal Audits: Mock audits help identify accounting errors ahead of a DCAA audit, providing opportunities for correction and improving chances of passing the audit.
The Importance of DCAA Accounting Compliance Experts
When government contractors outsource accounting to seasoned accounting compliance experts, they can easily pass DCAA audits.
They gain access to essential tools necessary for DCAA accounting compliance, such as state-of-the-art accounting systems, internal controls, financial reporting formats, and templates.
They also gain access to a wealth of expertise that government contract accounting demands. In addition, they’re assured real-time updates on changes to relevant regulations.
Depend on the DCAA Accounting Compliance Experts at Diener & Associates
Diener & Associates has 35 years of experience in providing government contract accounting services. Our team of seasoned CPAs offers exceptional DCAA compliance and other government contracting accounting services.
Contact Diener & Associates today for the best results in government contract accounting and DCAA audits.