For government contractors, understanding what is necessary to demonstrate that a business meets DCAA audit requirements can be challenging. The purpose of DCAA audits is to protect taxpayer money by preventing fraudulent billing. They generally concentrate on three main areas: the way accounts are set up, the flow of transactions in the accounting system, and the computations derived from the system. Outlined below is a DCAA compliance checklist that government contractors can use to prepare for audits.
1. Ensure DCAA Accounting Software Is Compliant
One of the most essential elements of successful government contracting is using an accounting system or software that is DCAA-compliant and uses the Generally Accepted Accounting Principles (GAAP) that specify how financial transactions are accounted for, recorded, and measured.
Demonstrating that your company follows GAAP is part of the pre-award survey. DCAA also monitors your continued compliance with government accounting standards throughout your contract period.
2. Update Records and Timesheets Daily
A large component of DCAA-compliant time tracking is ensuring that every employee completes their own timesheet daily with an accurate record of the hours they worked.
Software can be used to store records securely online so that employees can easily update them from wherever they are located. Many software programs also offer daily reminders.
3. Keep Timekeeping and Payroll Separate
DCAA’s audit manual states that timekeeping and payroll accounting should be handled separately. In nearly every company, except for those that are very small, the supervisors in charge of meeting contract budgets should not be given the responsibility of initiating employee time changes.
DCAA auditors will check that you have a process in place that is used throughout the business consistently by every employee for recording their time.
4. Record Overtime Hours and Time Off
Another important aspect of DCAA compliance is ensuring that overtime and time off are recorded accurately.
In a DCAA audit, your labor costs are based on the total number of hours that your employees worked rather than the number of hours for which they got paid.
This is to reduce the risk of labor accounting fraud, and it means that it is essential to know precisely how much overtime every employee worked, whether they were paid by the hour or not.
Recording overtime and time off properly can be very complicated and is often best left to outsourced accountants.
5. Review and Submit Required Reports
It is important to review and submit all the relevant documents for DCAA audit compliance. These documents can be found in DCAA-compliant software like QuickBooks. You should look at the following:
- Chart of accounts: This is a list of general ledger accounts in which financial transactions are posted with costs separated into direct, indirect, and unallowable. Indirect costs must be broken down further into pools for overhead, general and administration, and fringe expenses.
- Trial balance: A trial balance summarizes the debits and credits on your accounts.
- General ledger detail: This report provides beginning balances, transactions, and ending balances for every account during a specific time period.
- Profit and loss by job: One of the key requirements in the pre-award survey is to have an accounting system with the ability to accumulate costs by project. DCAA-compliant software can generate profit and loss by job reports.
- Labor distribution report: Labor distribution entails allocating labor costs, both direct and indirect, to the total time that is recorded on time sheets. DCAA auditors want to see that labor costs have been fairly distributed among customers.
- Contract backlog report: The contract backlog report shows the percentage of work completed and the remaining cost to complete for every job. This indicates how much money is left on each contract and whether there could be a contract overrun.
- Rate calculations: A system-generated figure of rate calculations is not necessary for compliance. It is enough to show a template on an external spreadsheet that can correctly calculate indirect rates. For wrap rates, you will need to justify the basis of the calculations using trends and budgetary data.
6. Check DCAA Audit Readiness
Whether you have just won your first government contract or have been working on government contracts for many years, it is essential to be prepared for an audit at any moment.
Inspectors can show up at your office or job site unannounced for a floor check to talk to your employees and find out how well they know the tracking procedures and ensure that they are being adhered to.
Even if you were recently audited, it is still possible that you could be audited again.