One of the most important components of becoming a government contractor is abiding by a set of federal regulations and rules. This requires formulating compliant business systems with the DCAA, which carries out audits on the contractors for many agencies, including the Department of Defense (DoD).
Government contractors are required to pass several DCAA audits. Failing to pass these audits can place the reputation of the company at grave risk within the government community.
As a contractor, it is imperative to acquaint yourself with DCAA standards for auditing. Structuring your company in order to remain compliant with multiple requirements can be challenging. Knowing how to prepare and pass a DCAA audit can help you significantly reduce the risk of failure and keep your company competitive within the government sector.
Whether as a new government contractor or an existing one, you may be preparing for DCAA audits. If so, you may have various organizational units recheck accounting/financial software programs and ensure that everything is in place and accurate.
This guide addresses the most important aspects of passing a DCAA accounting system audit, shows how a contractor can alleviate risk by preparing for audits beforehand and outlines the consequences of non-compliance.
How to Pass a DCAA Audit
While a DCAA audit may seem daunting, if your company abides by the necessary guidelines, it is more likely to pass a DCAA accounting system audit successfully.
Focus On Staying Prepared Instead of Getting Prepared
When working as a government contractor, your business should keep close tabs on their guidelines and requirements. At the same time, having a clear and in-depth understanding of the types of DCAA audits and which one your business may go through is pivotal.
This will allow you to be prepared for a DCAA audit at all times, and help prevent last-minute preparations. When you receive a notification, you will know what to anticipate from the audit process and minimize your company’s chances of failing the audit.
Be Detailed With Expenses, Project Information And Time
When participating with a government contract, the structure is highly systematic; therefore, your business should be as well. While preparing documentation, you must ensure that you are precise with expense reports, project information and time reports. A good guideline is that it is preferred to include additional details rather than possibly omitting an important piece of information.
When working on and preparing documentation, take adequate time to organize your employees for your company’s DCAA audits.
The contracting officer and auditor must receive an adequate final indirect cost rate proposal from the contractor within six months of the end of each fiscal year, as required by FAR 52.216-7, the clause which governs allowable costs and payments.
The DCAA audit is designed to ensure that your timekeeping system is accurate. A government contractor timekeeping system is designed to ensure that labor costs are timely and accurately recorded in the accounting system.
Since labor expenditures are charged directly to the government under cost contracts, your timekeeping system must always be accurate. You must demonstrate that your employees are working asd reported and adhering to the proper timekeeping standards. In addition to updating their timesheets, your employees should know what to expect from interviews and be aware of and understand surprise floor checks.
Ensure Accurate Reporting Capabilities
For a government-to-contractor association, financial reports are a key component. In order to be well-prepared for any DCAA audit and pass it successfully, it is critical to set up a system that helps you promptly generate the necessary reports, such as indirect cost reports.
DCAA-compliant reporting structures are not only relative to passing the audit successfully. Adequate and detailed reporting makes the auditor’s job easier while also expediting the process; this sets your company up for a more successful audit. These practices also help you streamline your standard business operations and ensure that all the company facets align and comply with the government’s expectations.
Align Your Company Accounting System
According to the Federal Government’s SF1408 Pre-award Audit Survey and FAR Part 31, a DCAA-compliant accounting system must have the following features and meet the following conditions:
- It must comply with Generally Accepted Accounting Principles (GAAP).
- Direct and indirect expenses must be kept separate.
- It is necessary to accrue costs on a project-by-project and cost-element basis.
- The general ledger must be kept up-to-date with the accrual of costs.
- Monthly general ledger reconciliations of direct and indirect costs are required.
- The timekeeping system must comply with DCAA standards.
- It must have a labor distribution system.
- It must give a monthly cost estimate and expense record.
- It must be able to recognize, exclude, and keep track of charges that are not allowed.
- All expenses must be recorded using a CLIN (contract line item).
- Pre-contract/award expenditures must be kept separate from contract costs.
- It must prove adherence to the Limitation of Funds clause and support progress payments with the relevant financial details.
From segregating indirect costs from direct costs to keeping a good timekeeping process, formulating a DCAA-compliant accounting system demands various robust tools. Facilitating them to work collectively requires a thoughtful approach to integration.
Consequences Of Non-compliance
The consequences of unethical and illegal non-compliance or conduct include debarment, suspension, terminated or voided contracts, civil and criminal penalties and entry into the Excluded Parties List System. Individuals and organizations on the Excluded Parties List System (EPLS) are not eligible for federal contracts or support from the United States government.
Criminal and Civil Penalties
Noncompliance with the law can result in civil fines and imprisonments, determined by the facts of the offense and the invoice. Contractors may be ordered to pay up to three times the damage they caused to the property.
Even though civil sanctions can be substantial, criminal punishments are almost always far more severe. The individual who signed the cost and pricing data certificate is held responsible for any criminal activity resulting from the contractor’s actions.
Debarment is one of the most severe penalties imposed on a contractor by the federal government. If a contractor commits antitrust violations, fraud in acquiring or completing a contract or other major offenses, they may be debarred by the government.
Debarment from one agency applies to all other federal agencies. A contractor who has been disbarred from doing business cannot be considered for a government project unless there are extraordinary reasons.
Pass A DCAA Accounting System Audit With Flying Colors
For any government-to-contractor relationship to be successful, a DCAA audit is a prerequisite. The ultimate and achievable goal of any wise government contractor is to be prepared for a DCAA audit in a way that isn’t stressful. This can be easily accomplished by incorporating the DCAA compliance standards into your daily work operations.
To create a DCAA-compliant environment and maintain compliance with all rules, you must have access to powerful tools. Consulting with an experienced CPA will pave your way for successful DCAA audits.
Diener & Associates work diligently to ensure the success of government contractors. Our CPAs can help you fortify your accounting systems and maintain conformity with DCAA audits. Get in touch with Diener & Associates to find out more about how our services can work for your company.