DCAA stands for Defense Contract Audit Agency; it was created in 1965 to provide advisory and financial services primarily to the United States Department Of Defense as well as other U.S. federal entities that manage contracts administration.
DCAA ensures the DoD and other federal entities receive the maximum benefit on defense contracts while the U.S. taxpayers and military service members can rest assured that their money is properly spent.
However, the primary function of the DCAA compliance audit is to analyze contractors to ensure that they can be trusted with government contracts. These audits oversee the professionalism and independence of defense contractors. DCAA decides to allow the contract to proceed when they are satisfied with the results of their analysis.
What Are The Purpose Of DCAA Audits
When a contractor is conducting business with the Federal government, they should be familiar with regulations that distinguish them from other contracts. Government contractors enjoy many benefits, but they are also subject to different DCAA government audits.
The Department of Defense has vast requirements for supplies, weapons, services, state-of-the-art technology, and other services that are essential for the armed forces of the United States to maintain their effectiveness in terms of securing the nation and state’s interests.
The DCAA audit is designed to:
- ensure maximum return on investment for government bodies
- set standards for fair competition between the vendors and suppliers
- obtain the best quality equipment, services and goods which meet the DoD requirements
Regular audits ask companies to align with generally accepted accounting principles (GAAP) but the DCAA conducts a different audit. To secure the agency’s interest of national benefit, DCAA has the following services:
The DCAA conducts a pre-award audit before the contract is awarded to any contractor. It includes the auditing of pricing, pricing rates and analysis of the contractor’s accounting system.
The pre-award survey establishes that the contractor can complete the task required in the contract within the budget. DCAA reviews cash flows, loans, tax returns and other significant financial information to assess a contractor’s financial position.
An officer from Defense Contract Management Agency (DCMA) will assist the contractor with completing standard form 1408. There are many requirements by the DCAA for contractors to follow, these requirements include:
- Separation of direct cost from indirect cost
- Accumulation and identification of all direct costs in the contract
- Allocation of direct costs with consistency
The post-award audit requires a compliance check of the contractor. DCAA reviews the contractor to confirm that they align with the Truth in Negotiations Act (TINA), Cost Accounting Standards (CAS) and its financial capability. DCAA will confirm the ability of the contractor to deliver accurate pricing and the total cost of the project.
Audit For Contractor Business System
DCAA conducts this audit under chapter 5 of the DCAA contract audit manual. This includes an audit of all significant business systems of the contractor including billing systems, accounting methods, financial estimation, project timeline, inventory control, supply management and purchasing of materials.
Real-Time Labor Audit
The bills provided by service-based contractors consist of a high portion of labor charges. DCAA maintains strict monitoring of the labor, as outlined by the contractor within the contract. DCAA must confirm the actual labor is reflected in price and hours.
DCAA randomly selects an employee to obtain in-depth knowledge of the current situation and determine if the contractor is following the timeline. The details include time entries, access to timesheets and many other factors.
Timekeeping compliance can harm real-time labor evaluation if:
- more than one person has access to an employee’s timesheet
- labor is improperly categorized
- changes to employee time can not be tracked
- employee consent is ignored when overriding subordinate time
- no specific method is used in applying labor costs to employee timesheets
What Happens When A Contractor Fails a DCAA Compliance Audit
There are consequences when a contractor fails a DCAA audit, and there are many reasons an audit can fail. It can be due to the organization’s faulty timekeeping, cost accounting or inadequate systems, all resulting in a failure by the government to trust the contractor. The following can result if a contractor fails an audit:
- Unable to procure future government contracts. This means that the government will select other contractors over your organization.
- Unable to receive payments. The contractor may suffer financial losses due to incorrect accounting errors. The DCAA evaluates all financial entries and analyzes how responsible contractors are with maintaining their data.
- Legal Action. There can be possible legal actions if it is determined that the contractor has defrauded or attempted to defraud the government.
- Damage Reputation. A contractors’ reputation is at stake when they have a DCAA audit. Failing an audit may raise suspicion about the organization.
Iron-Clad Audit Preparations With Diener & Associates
The CPAs at Diener and Associates provide consulting and advisory services to government contractors, non-profit organizations and small businesses. From business tax services to outsourced accounting services, we can expertly address your concerns. Visit our website today, schedule a consultation and prepare for the DCAA audit.