For government contractors, few things evoke as much anxiety as a DCAA compliance review. The Defense Contract Audit Agency (DCAA) is known for its strict compliance standards to instill financial responsibility and accountability in government contracts.
Plainly stated, non-compliance with DCAA regulations results in penalties, fines, or contract termination. However, all it takes to pass a DCAA audit is a thorough understanding of DCAA compliance accounting and proper preparation.
Understand the Requirements of DCAA Compliance Accounting
A DCAA audit is a specialized review of a government contractor, usually requested by an administrative contracting officer (ACO) or a procuring contract officer (PCO), in accordance with Federal Acquisition Regulation 52.215-2.
At the core, DCAA audits test financial practices or compliance with Generally Accepted Accounting Principles. They evaluate various aspects, including cost accounting standards, billing practices, indirect cost allocation, and timekeeping procedures.
The Role of The Defense Contract Audit Agency (DCAA)
The DCAA was established in January 1965 to provide standard audit services for the Department of Defense (DOD). It also offers accounting and financial advisory services to DOD departments tasked with procurement and contract administration.
Its primary mission is to ensure that taxpayer dollars are not squandered through fraudulent, excessive, or unallowable contract expenditures. In pursuit of this mission, the agency provides a range of services. These include:
To assess the proposed costs for reasonableness, audits are conducted before a government contract is awarded to a contractor. They also review the integrity of the contractor’s accounting systems to ensure that they align with federal guidelines.
Government contractors are also audited during the lifetime of their contracts. These audits cover costs incurred under the contract and compliance with Cost Accounting Standards (CAS) and the Truth in Negotiations Act (TINA). The contractors’ financial capability and claims made against them by other contractors are also subject to these audits.
Contractor Business System Audits
These audits evaluate internal controls and processes. They cover accounting, estimating, purchasing, billing, material management, and timekeeping, among other business systems.
Negotiation Assistance to Contracting Officers
As the name suggests, these audits are conducted at the request of the contracting officer. They are meant to assist in negotiating contract prices. This is done by reviewing the contractor’s cost proposals and evaluating reasonableness.
Resources for DCAA Compliance Accounting and Audit Preparation
One of the biggest challenges in DCAA compliance accounting and government contracting is keeping up with regulatory changes. To accomplish this, the DCAA’s website provides several resources to guide contractors. These include:
Contract Audit Manual (CAM): The CAM is a detailed summary of various audit objectives and appropriate approaches to meet those objectives. Chapter 5, for instance, provides guidance on internal control, and Chapter 6 relates to contract costs.
Open Audit Guidance: Open audit guidance is a collection of memorandums sent to DCAA’s regional directors and made available to the general public. Contractors can rely on these memorandums to gain insights into the DCAA’s audit policies and to stay current on any changes in DCAA audits.
Standard Audit Programs: This is a collection of audit programs by activity code. The audit programs help government contractors understand the requirements corresponding with their DCAA audit.
Criteria for Adequate Contract Pricing Proposals: This resource outlines DCAA’s criteria for evaluating the adequacy of pricing proposals.
Information for Contractors (DCAA Pamphlet No 7641.90): This is a detailed explanation of the contract audit process and its requirements.
Federal Acquisition Regulation (FAR): The FAR is the primary source of government contracting regulations. It covers everything from contract administration to management.
Preparing for a DCAA Compliance Review
There are general steps that every contractor can take to ensure that they pass a DCAA audit with ease. However, if you are unsure of any step in the process, partner with certified government contracting consultants. With or without expert guidance, the following steps are generally applicable:
Understanding What the DCAA Audit Will Be About: Understand the coverage of the audit. Also, confirm if your contracts are subject to the audit. This will require a thorough understanding of the applicable provisions of the Federal Acquisition Regulation (FAR).
Review DCAA Resources: Visit the DCAA’s website to familiarize yourself with the applicable audit programs and the corresponding guidance in the CAM.
Appoint a Single Point of Contact: Assign one individual to be the liaison between your company and the DCAA. This person will be responsible for answering requests and providing explanations.
Maintain Open Communication During the Audit: The designated point of contact should be responsive to the auditor’s requests and queries.
Maintain Audit Reports and Copies Documents Provided to the Auditor: Ensure that interim and final audit reports are securely filed. Also, maintain copies of documents submitted to the auditor.
Turn to Certified DCAA Compliance Accounting Experts
Each government contractor is unique, which means favored approaches to DCAA compliance accounting may vary. The services of DCAA compliance accounting experts can bring in a broad perspective of the best practice.
This will prove invaluable in ensuring compliance and passing audits. Diener & Associates has a dynamic team of CPAs specializing in DCAA compliance accounting.
Their wealth of experience and expertise make them uniquely qualified to assist government contractors, from establishing and maintaining solid accounting systems to preparing for DCAA audits. Contact Diener & Associates today to schedule a free consultation.