Contractors working for the federal government must consent to an audit of their accounts and systems by the DCAA (Defense Contract Audit Agency). If you’re a first-time contractor, the process can seem overwhelming. However, if you’re informed about the objectives of the audit and have taken measures to prepare for it, you can easily pass the examination.
The DCAA holds the right to carry out an audit at any given time during the contract. At times, the evaluation is started even before the contract is awarded. Therefore, you need to ensure your accounting system complies with the DCAA’s policies, procedures, and regulations.
In addition to complying with the DCAA, you’ll also have to follow other federal regulations. These may include Generally Accepted Accounting Principles (GAAP) to the Federal Acquisition Regulation (FAR) and the Cost Accounting Standards (CAS). This guide will provide comprehensive details to help you understand DCAA compliance.
A Quick Intro To The DCAA
When contractors work for the government, federal authorities must provide adequate funding to complete the project. Essentially, the government is also responsible for making sure that the funds provided to the contractor are used for ethical and politically accurate means.
To certify the proper use of funding, the government carries out comprehensive audits on the contractor’s accounting. The audits ensure that the contract costs are authorized, proficiently allocated, and reasonably spent.
Executing these audits is a job reserved for the Defense Contract Audit Agency (DCAA). The DCAA carries out the auditing for the Department of Defense (DoD) and similar federal agencies. The conclusion provided by the DCAA plays a significant role in providing recommendations to contracting officers within the government.
Contracting officers use the results provided by the DCAA to negotiate rates and offer contracts and services by assessing the DCAA recommendations. The agency only carries out audits for contractors. It does not have any role in conducting internal audits of DoD.
That said, the DCAA does not directly influence selecting the companies awarded with the contracts. Instead, the agency only holds the responsibility of providing government officials with recommendations. These recommendations offer an insight into which contractors they can select to carry out government-funded work. The DCAA also includes information on the price negotiation for the products or services presented.
Why You Must Be DCAA Compliant As A Contractor
Contractors are considered DCAA compliant if they abide by all the agency’s regulations and guidance. Therefore, contractors that are DCAA compliant follow the requirements of the federal law and are prepared for the audits.
For example, if your business’s accounting system can track the direct and indirect costs for accounting, billing, and labor independently, you are considered DCAA compliant. Moreover, your accounts should also be synchronized with the timekeeping system to track reports that the DCAA will want to review during the audit.
As the DCAA plays a significant role in providing recommendations to DoD, it is critical to ensure that your business passes this audit with flying colors. This is because the DoD typically grants contracts that have the potential to be worth hundreds of millions or billions of dollars.
The monetary benefits extended by these contracts can prove highly influential for any business. Essentially, the financial reward for securing these contracts can justify the DCAA audits.
Moreover, the funding for government contracts is collected from the taxes paid by US citizens. Therefore, DCAA compliance and audits are extremely thorough to ensure that taxpayer money is put to good use.
Types Of DCAA Audits
The DCAA carries out several audits, each designed to meet a specific objective. The contracting officers often provide a detailed list of guidelines that the business needs to meet. Such audits are called ‘special’ or ‘other’ audits.
However, the main types of DCAA audits are as follows:
These audits are typically carried out before the contract is awarded to the business. At this stage, the DCAA assesses the overall cost of acquiring products or services from a contractor. The forward pricing audit helps the contracting officers negotiate rates with the contractors.
The DCAA carries out special audits before or after the contract is awarded. In most cases, the DCAA creates reports to cater to the individual requirements of the contracting officers.
In such scenarios, the contracting officers must show that they have independent opinions on the financial intricacies of the contract or the contractor’s accounting systems before deciding to move forward with the deal. Essentially, these audits are a high priority.
This type of DCAA audit examines the accuracy of the contractor’s annual allowable cost representations. These are usually carried out when the price of the contract is flexible. Therefore, the DCAA examines the incurred cost after the contract is awarded to ensure the contractor cost representations.
The pre-award surveys are audits that the DCAA carries out to gauge an understanding of the contractor’s accounting system. The pre-award surveys assess small businesses and their compliance with the DCAA Standard Form (SF).
In this audit, the DCAA has to complete the SF 1408 form and execute the Pre-Award Survey of a Prospective Contractor (Accounting System) to determine if the contractor’s system and processes are suitable for a government contract.
Additionally, the contractors that undergo the pre-award surveys must show their accounting processes to the auditor before sustaining any costs on a contract.
Other audits are carried out after the contract is awarded. This type of audit is conducted by the DCAA itself or carried out at the contracting officer’s request. Other audits are typically initiated in cases of high risk. For instance, if the contractor has an unsuitable business system, the DCAA may assess risks with other audits.
Consequences Of Noncompliance For Contractors
If your business wants to secure a government contract, you need to stay compliant with all the rules and regulations set forth by government organizations. If your company does not have a proper system, an audit or investigation can reveal the inconsistencies.
The repercussions of carrying out illegal activities, unethical conduct, or noncompliance would result in penalties, including suspension, debarment, voiding or termination of the contract, and a listing in the Excluded Parties List System (EPLS). Your business can even suffer from criminal and civil penalties in some cases.
Criminal and Civil Penalties
Violations per invoice usually determine civil penalties for noncompliance. Essentially, the government holds the right to retrieve thousands of dollars for such violations. Therefore, as a contractor, you will also have to face the possibility of paying the government up to 3x the contract awarded to your business.
However, criminal penalties are much more severe. Depending on the type of illegal activity, the individual who signed the certificate of cost and pricing can face several years of imprisonment.
Debarment is one of the most significant penalties the federal government can inflict on the contractor. If you are a contractor, you can be debarred in the cases of committing fraud in securing or signing up for a contract. You can also be disqualified for violating the antitrust laws or engaging in other offenses.
Unfortunately, if you are banned from one government agency, the reputational damage will follow for other departments as well. This is because the solicitation bids and proposals from debarred contractors are not considered for any job, no matter how big or small. The only exception occurs when the agency head presents a convincing argument in writing to allow the contract.
Voided or Terminated Contracts
The Federal Acquisition Regulations (FAR) provide agencies with authority to deem the contracts void and revoke the agreement in the following cases:
- The contractor is convicted for bribery.
- There is a conflict of interest.
- There is a disclosure of receipt of contractor bid or proposal information.
- There is a final conviction of source selection information in return for a valuable item or to provide a competitive advantage.
Role Of FAR And CAS In DCAA Context
The CAS and FAR is a set of regulations that apply to the government contractor who gets into an agreement with the US federal government. The DCAA and the federal government use the FAR and CAS regulations to determine contractor compliance and liability.
FAR is a set of rules that agencies take into account when they intend to purchase goods or services from a contractor. These regulations are a guide for government procurement.
On the other hand, CAS stands for Cost Accounting Standards. These were created back in 1968 to regulate consistency within the cost accounting practices that government contractors must meet.
The CAS provides a comprehensive guide on the price rates for specific contracts, the maintenance of accounting systems, and the overall cost flows from one point of origin to others. The CAS also informs contractors about accounting for various costs.
Work With Experienced Professionals
If your business is ready to leverage government contracts and build a strong reputation, you must immediately become DCAA compliant. You can work with certified public accountants to ensure your accounting system meets all the requirements that the DCAA will examine. Contact an experienced CPA firm to consult, plan, and form a strategy with your organization to ensure you are DCAA certified.