An unfavorable outcome from a DCAA audit can introduce serious challenges to government contractors, particularly when the accounting system is noncompliant with DFARS requirements. The ramifications can extend beyond payment delays, potentially affecting contract eligibility and business continuity.
Knowing how to respond methodically, correct deficiencies, and reestablish system approval is essential for maintaining a competitive position in the federal contracting space. The following breakdown outlines actionable steps based on DCAA and DCMA protocols, offering a path forward when audit findings highlight significant system shortcomings.
Analyzing the Initial Determination and Audit Findings
When a DCAA audit results in a failed accounting system review, the process typically begins with a formal notification from the Administrative Contracting Officer (ACO).
The Initial Determination Letter outlines specific deficiencies, references applicable DFARS criteria, such as those found in DFARS 252.242-7006, and describes how the issues affect the government’s ability to rely on the accounting system.
Contractors are expected to review the findings in detail, comparing the audit results against internal documentation, system design, and procedural records. Internal alignment between operational practices and federal standards often determines the scope of correction required.
Common issues cited in DCAA reports include inconsistent application of cost principles, inadequate documentation of approval authority, and employee noncompliance with timekeeping procedures. For example, charging a program manager’s time as a direct cost on one contract and indirect on another without justification often triggers scrutiny.
Another frequent deficiency involves including unallowable costs, such as executive compensation or improperly classified travel expenses, within indirect cost pools. Errors tied to daily timesheet entries, supervisor-made corrections without employee acknowledgment, and incomplete time reporting across all hours worked are additional red flags that can lead to audit failure.
Developing and Executing a Corrective Action Plan
After receiving the Initial Determination, contractors typically have 30 calendar days to submit a response. The response must include a Corrective Action Plan (CAP) that addresses each deficiency with defined steps and realistic timelines.
A strong CAP draws direct links between each finding and the intended fix, whether through revised policies, system enhancements, or employee training. For example, if the finding relates to inaccurate labor distribution reporting, the CAP might involve updating the accounting software configuration, revising labor entry procedures, and scheduling department-wide instruction sessions.
Implementation of the CAP should begin as soon as possible. Early action signals accountability and can influence the overall timeline of reapproval. All corrective measures must be documented in full, from revised procedures and system screenshots to staff memos and training records.
Thorough documentation supports transparency and provides a foundation for future verification efforts. Where applicable, interim controls may be introduced while permanent fixes are developed, particularly in areas involving time-sensitive reporting or invoicing practices.
Addressing Billing System Discrepancies
Billing-related issues frequently surface during accounting system audits, particularly when system-generated invoices include costs exceeding contract ceilings or funding limits. Additional problems may include failure to apply fee withholdings, use of outdated provisional billing rates, and lack of adjustment invoices following rate revisions.
These findings often result from breakdowns between contract briefs and accounting procedures. In many cases, the absence of documented contract briefs for cost-reimbursable or time-and-material (T&M) contracts contributes to billing discrepancies and increases the likelihood of noncompliance with FAR 52.216-7.
To address these gaps, contractors should align billing system outputs with real-time cost tracking and contract terms. Cross-functional reviews involving accounting, project management, and contract administration can help validate invoice accuracy and funding thresholds.
Delays in paying subcontractors and insufficient reconciliation between job cost reports and the general ledger can further signal systemic issues. Proactive review and correction of these factors form a fundamental component of the CAP and may be monitored during the validation phase.
The Verification Process
Once corrective actions are submitted and implemented, the ACO, sometimes with assistance from DCAA or DCMA functional specialists, initiates a verification review. The goal is to confirm that the corrective measures have addressed the deficiencies in both policy and practice.
Satisfactory resolution leads to a Final Determination approving the accounting system. If issues remain unresolved, the ACO may disapprove the system, potentially leading to withholds on progress payments or loss of eligibility for certain contract types.
In more complex or disputed cases, the matter may be escalated to the Contractor Business Systems (CBS) Panel, which includes representatives from DCMA, DCAA, and other legal advisors.
The panel reviews the case and offers recommendations to the ACO before making a final decision. While the panel’s input does not override the ACO’s authority, it adds structure to the review and may influence final outcomes in contested situations.
Proactive Preparation and Audit Response Strategy
Waiting for a formal audit report or ACO correspondence can delay important remediation efforts. Contractors are encouraged to begin corrective measures during the audit period, particularly once DCAA has issued a draft Statement of Conditions and Recommendations.
The draft report serves as an early indicator of potential final findings, and in many cases, deficiencies can be addressed quickly through policy updates, system reconfiguration, or revised workflows. Submitting adjustment vouchers, issuing updated procedures, or initiating targeted staff communication are examples of low-effort, high-impact steps that can be executed in parallel with the audit.
During the exit conference, contractors have the opportunity to clarify miscommunications, present additional documentation, or dispute incorrect conclusions. If necessary, it is advisable to request additional time to assemble a complete response to the draft report.
Providing supplemental information during this phase can lead to corrections before the report is finalized. In turn, this reduces the risk of more serious consequences during the final determination phase.
Maintaining System Integrity After Reapproval
Once the accounting system receives final approval, maintaining compliance requires ongoing attention. Internal audits, management reviews, and periodic training are pivotal in preventing future deficiencies.
Reconciling subsidiary ledgers to the general ledger, reviewing timekeeping compliance, and validating indirect cost allocations should become part of routine internal controls. Documentation and communication remain central to compliance efforts, particularly in fast-growing organizations or those with decentralized financial operations.
Building an internal matrix mapping DFARS requirements to existing accounting system capabilities helps create transparency during future audits. Presenting this matrix and relevant supporting materials during the entrance conference can streamline the process and reduce DCAA’s documentation requests.
When executed properly, these preparatory steps improve audit outcomes and reduce the burden on internal teams throughout the review cycle.
Moving Forward With Confidence After an Audit Setback
Recovering from a failed DCAA accounting system audit requires more than quick fixes. It demands a structured, transparent response backed by well-documented corrective actions and sustained internal oversight.
Addressing deficiencies early, engaging proactively with auditors, and maintaining a clear link between DFARS requirements and internal controls can significantly reduce future risk. To succeed in government contracting, companies need financial systems that meet regulatory standards and adapt quickly.
At Diener & Associates, our team of experienced CPAs supports contractors through every stage of DCAA audit response, from system reviews and corrective action planning to training and documentation. Schedule a consultation online or contact us at 1-(703)-386-7864 to discuss how we can help strengthen accounting compliance and streamline audit readiness.