Being awarded a government contract can open an organization up to a wealth of opportunity, but with that reward comes the responsibility of ensuring that the relevant accounting rules are being followed.
These regulations exist to make government contracting fair and efficient and to protect taxpayers, but they can be incredibly challenging to implement without help from professional government contract accountants.
Federal Acquisition Regulations (FAR)
The Federal Acquisition Regulations, or FAR, are a set of rules laying out uniform policies and procedures related to the purchase of services and goods by federal government agencies. These regulations are aimed at ensuring governmental agencies award and administer their contracts in an impartial manner, and full compliance is essential for government contractors.
FAR has several sections relating to accounting policies. For example, part 15 addresses the pricing of contracts and related data requirements.
Part 16 defines the various types of contracts and sets out some cost and pricing information. Part 31 outlines which costs can be charged to government contracts and sets standards for unallowable costs and the allocation of direct and indirect costs.
In addition, some agencies have their own specific FAR regulations. For example, the Defense Federal Acquisition Regulation Supplement, or DFARS, applies to defense contractors.
Cost Accounting Standards (CAS)
The Cost Accounting Standards, or CAS, were established to promote consistency and uniformity in cost accounting. CAS encompasses 19 standards governing how contractors assign, allocate, accumulate, and measure costs.
CAS aims to level the playing field for government contractors by outlining how different types of costs must be treated.
Some contracts require that all 19 standards are followed, while others only require modified coverage. Government auditors often rely on CAS to guide their evaluations and recommendations.
Defense Contract Audit Agency (DCAA)
The Defense Contract Audit Agency, or DCAA, is responsible for protecting the public interest by scrutinizing how taxpayer dollars are used.
The agency has developed several types of audits covering the procurement cycle from before the contract is funded through its conclusion.
Being DCAA compliant means an organization has procedures and systems in place that enable them to comply with DCAA audits.
The DCAA does not issue any formal statement of compliance. Instead, they check if organizations are meeting FAR, CAS, and other government rules.
Passing these audits requires verifying that financial management meets the standards laid out by the DCAA.
This involves clearly documenting how contract money is being used as well as the results achieved and proving finances are aligned with the rules.
Different Types of Audits
An accounting system review is a multi-day, on-site audit that looks at nearly every aspect of the accounting system.
A provisional building rate audit focuses on the provisional billing rates for reimbursing contractors.
A progress payment audit is carried out on individual invoices to provide visibility into contract costs as the work on a contract progresses.
A surprise timesheet audit looks at the timekeeping policies of a contractor to make sure there are no irregularities.
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles, or GAAP, are a common set of accounting standards and procedures that are used by the Financial Accounting Standards Board.
All public companies in the United States are required to follow GAAP when compiling their financial statements, which is why having accountants who are well versed in these principles is essential.
The Governmental Accounting Standards Board, or GASB, is the entity that is responsible for establishing the accounting and financial reporting standards used by state and local governments who follow GAAP.
The main principles of GAAP are discussed below.
Principle of Regularity
The principle of regularity states that accountants must adhere to GAAP regulations as standard.
Principle of Consistency
The principle of consistency states that accountants must commit to applying the same standards for the entire reporting process across periods to ensure that the periods are financially comparable. Any changes or updates to the standards must be disclosed and explained in the footnotes to the financial statements.
Principle of Sincerity
The principle of sincerity states that accountants must endeavor to provide an impartial and accurate portrayal of the company’s financial situation.
Principle of Permanence of Methods
The principle of permanence of methods states that the procedures used for financial reporting must be consistent so the company’s financial information can be easily compared.
Principle of Non-Compensation
The principle of non-compensation states that the full financial details should be reported with complete transparency and without any expectations of debt compensation.
Principle of Prudence
The principle of prudence states that financial data must be represented as facts without the influence of speculation.
Principle of Continuity
The principle of continuity states that valuing assets should be done with the assumption that the business is going to continue to operate.
Principle of Periodicity
The principle of periodicity states that all entries must be distributed across relevant periods of time.
Principle of Materiality and Good Faith
The principle of materiality and good faith states that accountants must thoroughly disclose all accounting information and financial data in their financial reports.
Principle of Utmost Good Faith
The principle of utmost good faith states that the parties involved must be honest in all transactions.
Internal Revenue Service (IRS)
The IRS defines a federal contractor as a person or entity who possesses a federal government contract for selling or leasing property, goods, or services.
Speak with a Government Contract Accounting Firm
Accounting for government contractors is a very complex undertaking, which is why many choose to leave this important task in the hands of professionals.
If you need help with any aspect of accounting related to federal contracts, speak to the government contract accounting experts at Diener & Associates.