There are many upsides to passing a DCAA audit — eligibility to bid for lucrative federal contracts, a streamlined contract execution, and increased credibility. On the flip side, if they fail a Defense Contract Audit Agency (DCAA) audit, contractors expose themselves to penalties, contract cancellations, and debarment from future government contracts.
This, combined with the intense scrutiny of a DCAA audit, makes it imperative for government contractors to adopt a strategic approach to compliance.
The DCAA Audit Process
The DCAA doesn’t initiate an audit. It only responds to requests by federal agencies that awarded the contracts under review. Also, the DCAA doesn’t audit the contractors’ accounts but only those related to the contract.
After an audit request, the DCAA notifies the contractor in writing, detailing the scope of the audit, and may request specific documents. Once the contractor produces all requested records, the DCAA conducts an entrance conference to discuss the objectives and procedures of the audit.
During the actual audit, DCAA auditors evaluate accounting systems, financial records, and internal controls, and conduct interviews with personnel.
The DCAA Contract Audit Manual
The DCAA Contract Audit Manual (CAM) is the primary guidance for DCAA auditors conducting contract audits on behalf of the DCAA. It outlines audit policies, procedures, and techniques to ensure consistent and effective auditing practices. Government contractors can leverage the CAM to understand the DCAA’s audit process and what to expect during the audit.
Different Types of DCAA Audits
The DCAA conducts various types of audits depending on the nature of the contract and the information requested from the contractor. Below are the main types of DCAA audits:
- Pre-award Survey: This audit evaluates the contractor’s capabilities and financial stability to inform the award decision. Its scope may include cost accounting system adequacy, financial stability, past performance on similar contracts, and management capabilities.
- Forward Pricing Audit: This audit reviews the contractor’s cost proposal for new contracts to ensure that it is fair, reasonable, and complies with applicable regulations.
- Incurred Cost Audit: In this evaluation, DCAA auditors assess the actual costs incurred by the contractor while meeting contractual obligations and compare them with the costs claimed. This helps ensure that the government only pays for allowable, allocable, and reasonable costs.
- Special Audit: A DCAA audit may also stem fromirregularities in contract accounting or management or issues flagged by the contracting officer or a whistleblower. Examples include labor mischarging, defective pricing, and unallowable costs. A special audit is usually less predictable.
Common Compliance Challenges Faced by Government Contractors
Government contractors face myriad challenges while striving for DCAA compliance. Common hurdles they have include the following:
Complex Regulatory Requirements
Federal contractors under the DCAA’s oversight must comply with the Federal Acquisition Regulations (FAR), Defense Federal Acquisition Regulation Supplement (DFARS), Cost Accounting Standards (CAS), and the Defense Contract Audit Agency Manual. The technicalities and frequent updates to these regulations can be overwhelming for contractors.
Inadequate Accounting Systems
Government contractors’ accounting systems should accurately capture and classify costs according to their nature, purpose, and contract requirements. The system should also incorporate indirect rates, cost pools, and allocation bases. The design of such systems may be challenging.
Inadequate Internal Controls
Without proper internal controls, government contractors risk errors in financial reporting, fraud, and waste, amounting to non-compliance with DCAA standards.
Insufficient Documentation
During DCAA audits, the burden of proof lies squarely on the contractor. As such, they must provide sufficient supporting documentation for claimed costs and incurred expenses. Also, the DCAA can request documentation spanning several years, which may be hard to retrieve.
Strategies for Ensuring DCAA Compliance
Contractors looking to remain compliant with DCAA regulations can implement the following strategies:
- Establish Robust Accounting Systems: A reliable accounting system prevents overcharging, unallowable costs, and other compliance pitfalls. The system should accurately track indirect and direct costs and allocate them to relevant cost objectives.
- Implement Internal Controls: When contractors formulate comprehensive policies and procedures for their accounting practices, they ensure consistency in financial reporting and prevent accounting errors that compromise DCAA compliance. These include segregation of duties, monthly reconciliations, and periodic internal audits.
- Educate Personnel on Compliance Requirements: Accounting staff should be well-trained on DCAA requirements and their roles in compliance. They should also be educated on internal controls and updates on the same.
- Stay Up to Date With Regulatory Changes: Changes in regulations can significantly impact compliance efforts. As such, contractors must keep up with changes to FAR, DFARS, CAS, and CAM. They should also review their accounting practices to ensure adherence to the updates.
- Consult Government Contract Accounting Professionals: Cost accounting is usually complex, more so for government contracts where oversight is strict. Contractors may benefit from the professional guidance of government contracting accountants. These experts can help establish accounting systems, implement internal controls, and conduct internal audits to test compliance.
Enhance Your DCAA Compliance Efforts With Diener & Associates
Diener & Associates’ seasoned government contracting CPAs have extensive knowledge of DCAA requirements and over three decades of industry experience.
We help contractors with the procurement, establishment, and maintenance of DCAA-compliant accounting systems, and internal audits. Contact Diener & Associates today for professional DCAA compliance assistance.