DFARS Accounting System Reviews

Transcription

1 DFARS Accounting System Reviews Presented by CohnReznick s Government Contracting Industry Practice Kristen Soles, Partner

2 PLEASE READ This presentation has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. This presentation and its content are the property of CohnReznick LLP and are protected by applicable copyright laws. Any unauthorized use of the information herein will be considered a violation of CohnReznick LLP s intellectual property rights. Unless stated otherwise herein, no part of this presentation may be copied, distributed, or published, in whole or in part, without the prior written agreement of CohnReznick LLP. 1

3 AGENDA Assessment Confusion SF1408 s Pre-Award Survey s Post-Award Survey s Accounting System Review / Approved Accounting System / Adequate Accounting System / Super Awesome System DFARS Accounting Systems A deeper dive Why do I need an accounting system in compliance with DFARS criteria? What are withholding requirements? Who has responsibility for review? What is an Accounting System? What are the DFARS Criteria? Common Deficiencies The future of Accounting Systems Proposed rulings 2

4 Assessment Confusion

5 WAYS YOU ARE ASSESSED Pre-award Survey of Prospective Accounting System Used when a company is new to government contracting or new to cost reimbursement contracts. Contractor fills out Determines the readiness of a contractor for an SF1408 Provides no assurance, no pass or fail, no procedures are performed. It CANNOT be relied upon to determine adequacy. Involves the evaluation of the design effectiveness not the operating effectiveness of the accounting system. (no tests of transactions) 4

6 WAYS YOU ARE ASSESSED Pre-award Survey of Prospective Accounting System 5

7 WAYS YOU ARE ASSESSED Post-award Accounting System Audit at Nonmajor Contractors Used on Nonmajor contractors not normally subject to DFARS. Provides assurance on the adequacy and suitability of a nonmajor contractor s accounting systems for accumulating and billing costs under Government Contracts. The workprogram was revised to align more with the DFARS criteria however it does not test nor opine on compliance with the criteria. 6

8 WAYS YOU ARE ASSESSED Post-award Accounting System Audit at Nonmajor Contractors 7

9 WAYS YOU ARE ASSESSED Accounting System Audit Used when a company is subject to DFARS criteria. Opines on compliance with criteria as prescribed in the DFARS Denotes significant deficiencies CO determines adequacy of the system 8

10 WAYS YOU ARE ASSESSED Accounting System Audit 9

11 Why Is An Adequate System Important?

12 YOU D LIKE A SHOT AT THAT SOLICITATION PCO s have jumped on the bandwagon and are increasingly more comfortable with the business systems concept Solicitation provisions often demand evidence of acceptability, adequacy, or approval as a condition of award Most often for accounting systems More frequently for purchasing systems Not permitted by FAR for EVM systems Prime contractors may also request as part of their subcontract monitoring 11

13 SOLICITATION REQUIREMENTS CONSEQUENCES Reducing the pool of competitors by requiring systems adequacy is seen as a benefit by the acquisition community Unaudited or unassessed contractors are at a significant disadvantage Provisions not consistent on authority Many agencies are adopting the DFARS criteria as a sound model for an acceptable system Most agencies will accept a CPA firm opinion on accounting system adequacy Strategy for purchasing systems CPSR readiness engagements are valuable 12

14 SOLICITATION REQUIREMENT PROTESTS There have been multiple protests alleging that a requirement to show evidence of an adequate system is burdensome or inappropriate none have been successful. GAO consistently refuses to disturb the contracting officers judgment with respect to the agency s requirements regarding goods, services OR status of systems. 13

15 RFP EXAMPLE 1 The Contracting Officer will make a contract award only to an otherwise successful offeror who has an adequate cost accounting system. In this context, adequate is defined as the Contracting Officer s determination that the offeror s cost accounting system is at a risk level sufficient for the Government to enter into a contract. In making the adequacy determination, the Contracting Officer may consider the following factors: audit reports from Government agencies (e.g., Defense Contract Audit Agency); testimony from the offeror s cognizant Defense Contract Audit Agency office; audit reports from a qualified external independent accounting firm; and the adequacy, compliance, and status of the offeror s corrective action plan, if applicable. 14

16 RFP EXAMPLE 2 All Offerors are required to have an adequate accounting system as defined in DFARS Clause Accounting System Administration to be eligible for an award. All prime Contractors must have an approved purchasing system as prescribed in FAR The Offeror shall provide evidence of its accounting system being adequate in accordance with FAR , , , and in compliance with FAR Part 31 Contract Cost Principles and Procedures. Evidence in the form of (a) Third party audited financial statements to include audit of accounting system and methods, (b) Current Defense Contract Audit Agency (DCAA) cost accounting system audit report shall be accepted. Self certification or unsubstantiated statements of possessing an adequate accounting system are insufficient and may render the Offeror s proposal non-responsive. 15

17 RFP EXAMPLE 3 Section C Offerors shall indicate if they have a Government-determined adequate billing system. If the Offeror has such a system, it shall submit evidence to support the adequacy determination (e.g., Defense Contract Audit Agency audit report). 16

18 RECAP SF1408 Recommendation Prospective contractor s accounting system is acceptable for award of prospective contract Post-award Accounting System Audit Opinion In our opinion, the Contractors accounting system is adequate for accumulating and billing costs under Government contracts. Accounting System Audit Opinion In our opinion, the Contractor complied in all material respects, with the system criteria in DFARS Part (c)

19 EXPIRATION DATE Generally every 3 years (per workprogram and many RFP s) Change in risk to include New System New Rate Structure M&A activity Etc. 18

20 AUDIT PROCESS Accounting System Audits are audits and generally require the following steps: 1. Planning and Risk Assessment 2. Test work 3. Notification of deficiencies 4. Corrective action 5. Test work of corrective action 6. Partner and Quality Control review 7. Issuance of Report 19

21 COMPETITIVE = PROACTIVE Audits take time, especially if you don t want deficiencies noted in your report Competitive pools are narrowed down through business system requirements Be proactive on all of the systems for which you are at risk on future awards and LINE UP YOUR ASSESSMENTS Your competitors are. 20

22 BUSINESS SYSTEM CLAUSE FUNCTION Any CAS-covered contract of any value may contain the DFARS Business Systems Rule clause Requires ACO to withhold a percentage of payments when any single system is determined to have a significant deficiency Percentage set at 5% per deficient Business System once determination made Total withholding is capped at 10% including other withholds Contractor required to correct or submit plan (45 day clock) ACO required to reduce withhold once an acceptable plan is submitted (90 day clock) DFAR indicates CO should reduce withhold by at least ½ DFAR indicates that CO should reduce withhold to 2% 21

23 WHAT IF I M NOT CAS COVERED? Then you aren t subject to withhold penalties but could be considered nonresponsive to solicitations if not in compliance. 22

24 WHO IS RESPONSIBLE (OR ARE THEY?, MORE LATER ) 23

25 TIMELINE OF ASSESSMENT 24

26 What is a DFARS Acceptable Accounting System?

27 ACCEPTABLE ACCOUNTING SYSTEM DFAR An acceptable accounting systems as a system that complies with all 18 system criteria and provides reasonable assurance that---- Applicable laws and regulations are complied with; The accounting system and data are reliable; Risk of misallocations and mischarges are minimized; and Contract allocations and charges are consistent with billing procedures Accounting System Business Rule Applicability Cost, T&M; labor-hour; incentive; or FP w/ cost-based progress payments 26

28 DFARS (A)(2) Defines accounting systems as: The contractor s system or systems for accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting in compliance with applicable laws, regulations, and management decisions. May include subsystems for specific areas such as: indirect and other direct costs, compensation, billing, labor, and general information technology. 27

29 DFARS - COMPLIANCE WITH 18 CRITERIA 18 Criteria which can be segregated into 4 categories: Accumulating and Segregating Costs Billing Compliance Controls 28

30 ACCUMULATING AND SEGREGATING COSTS CRITERIA Criteria 2 - Proper segregation of direct costs from indirect cost Criteria 3 - Identification and accumulation of direct costs by contract Criteria 4 - A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives Criteria 14 - Segregation of preproduction costs from production costs 29

31 ACCUMULATING AND SEGREGATING COSTS CRITERIA Criteria 9 - A timekeeping system that identifies employee s labor by intermediate or final cost objectives Criteria 10 - A labor distribution system that charges direct and indirect labor to the appropriate cost objectives 30

32 ACCUMULATING AND SEGREGATING COSTS CRITERIA Criteria 5 - Accumulation of costs under general ledger control Criteria 11 - Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account Criteria 13 - Identification of costs by contract line item and by units if required by the contract 31

33 COMPLIANCE CRITERIA Criteria 8 - Management review or internal audits of the system to ensure compliance with the Contractor s established policies, procedures, and accounting practices Criteria 12 - Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of FAR part 31 and other contract provisions Criteria 17 - Adequate, reliable data for use in pricing follow-on acquisitions Criteria 18 - Accounting practices in accordance with standards promulgated by the CAS Board and GAAP 32

34 CAS STANDARDS INCORPORATED INTO FAR 33

35 CONTROLS CRITERIA Criteria 1 - A sound internal control environment, accounting framework, and organizational structure Criteria 6 - Reconciliation of subsidiary ledgers and cost objectives to general ledger Criteria 7 - Approval and documentation of adjusting entries 34

36 BILLING CRITERIA Criteria 15 - Cost accounting information as required for: o Limitation of Cost ( ), Limitation of Funds ( ) and Allowable Cost and Payments ( ), o Readily recalculate indirect rates from books of account Criteria 16 - Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms 35

37 DFARS ACCOUNTING SYSTEM AUDIT Subsystems of Accounting 36

38 BILLING PROCEDURES Criteria 15 - Does the contractor s accounting system provide cost accounting data required by contract clauses concerning limitation of cost (FAR ), limitation of funds (FAR ), or allowable cost and payment (FAR ) (DFAR (c)(15i)) Is the system able to provide current period total costs, cumulative to date total costs and total funded amount? Criteria 16 Does the contractor s accounting system provide for billings that can be reconciled to cost accounts for both current and cumulative amounts claimed and comply with the terms of the contract (DFAR (c)(16)) Is the system able to provided data for actual costs incurred by cost element and labor categories? Do costs billed, both current and cumulative, agree to job cost ledgers, including various labor categories? (booked to billed reconciliations) 37

39 EXTENDED BILLING PROCEDURES Were the rates adjusted to reflect the most current available year-end rates; i.e., the most current of the following: year-end actuals, rates per the incurred submission, or final negotiated rates? Were the billed costs incurred within the contract period of performance? 38

40 BILLING PROCEDURES- SUBCONTRACTORS As required by FAR (e)(2), the prime contractor is responsible for managing its subcontracts. A critical part of subcontract management is the payment of subcontractor billings, which the prime contractor includes in billings to the Government. Determine if the prime contractor: performed procedures to determine if the subcontractor s accounting and billing systems were adequate. monitored the adequacy of the subcontractor s accounting and billing systems during the subcontract performance. performed an adequate review of the subcontractor billings prior to making payment. Verify that subcontractor and vendor costs are only included in billings if payment to the subcontractor or vendor will be made in accordance with the terms and conditions of the subcontract or invoice and ordinarily within 30 days of the contractor s payment request to the Government. 39

41 COMMON DEFICIENCIE$ Policies and Procedures Lack of evidence of approval of review of vendor invoices Lack of evidence of approval and documentation of adjusting entries Lack of evidence of management s reviews of compliance with established policies, procedures and accounting practices Allocation issues (treating like costs unalike) Improper inclusion of unallowable expenses (training/new costs) Improper timesheet reporting Not completing a timesheet daily Not properly processing timesheet corrections Lack of proper supervisory signature Lack of subcontract management Improper reporting of rate ceilings (on ICE, on billings, on both) Management of LCAT requirements With QuickBooks harder to determine routine posting of accounts (Criteria 11), identification by CLIN, SLIN and ACRN (Criteria 13), readily recalculate indirect rates (Criteria 15) 40

42 Proposed Changes to the DFARS Rule

43 PROPOSED CHANGES TO DFARS RULING- DARS (07/14) All contractors subject to CAS must: Establish, maintain and comply with an acceptable accounting system Provide the Government with results of self-assessments ensuring compliance with the system criteria and established accounting system policies and procedures within six months of the end of the first fiscal year, and then annually. Qualify and engage a CPA firm to audit the accounting system in accordance with GAGAS The CPA audited report is required in year one and then every three years thereafter Contractor must be prepared to provide an out of cycle CPA report, if requested 42

44 PROPOSED CHANGES TO DFARS RULING- DARS (07/14) All contractors required to report on their accounting system must: Maintain and make available to the Government upon request: Documentation providing support of the self-assessment Information considered in the selection of the CPA firm Arrange for Government access to: CPA working papers Documentation supporting the CPA s independence and qualifications 43

45 PROPOSED CHANGES TO DFARS RULING- DARS (07/14) All contractors subject to CAS must: Establish, maintain and comply with an acceptable accounting system Provide the Government with results of self-assessments ensuring compliance with the system criteria and established accounting system policies and procedures within six months of the end of the first fiscal year, and then annually. Qualify and engage a CPA firm to audit the accounting system in accordance with GAGAS The CPA audited report is required in year one and then every three years thereafter Contractor must be prepared to provide an out of cycle CPA report, if requested 44

46 PROPOSED CHANGES TO DFARS RULING- DARS (07/14) All contractors required to report on their accounting system must: Maintain and make available to the Government upon request: Documentation providing support of the self-assessment Information considered in the selection of the CPA firm Arrange for Government access to: CPA working papers Documentation supporting the CPA s independence and qualifications 45

47 PROPOSED CHANGES TO DFARS RULING- DARS (07/14) All contractors subject to CAS and with more than $100 million in costs on cost reimbursable, time and materials and labor-hour contracts must: Provide the CPA firm s audit strategy, risk assessment and audit programs to the ACO and government auditor DCAA will review these documents and report any issues to the ACO The ACO will notify the contractor ONLY if any issues in audit strategy or risk assessment have been noted The contractors should note that they are not required to wait to hear from the ACO. However, should there be issues with the audit strategy or risk assessment, costs incurred for audits commencing prior to notice of issues will be considered unallowable 46

48 PROPOSED CHANGES TO DFARS RULING- DARS Interesting items to think about as it relates to these proposed changes: How does this affect non-cas covered contractors? There is concern over the timeline as mentioned on the previous slide There is concern over the CPA firm qualification process There is no money in the DCAA s fiscal 15 budget allocated to performing accounting system adequacy reviews. We assume it is because of contractor s ability to perform selfassessments We will keep you posted on any further updates to the ruling 47

49 NEW DOD CONTRACTING FOR AUDIT SERVICES POLICY The following comments are extracted from new DoD policy on obtaining audit services: The DoD Components will contract for audit services when applicable expertise is unavailable within the DoD audit organization, augmentation of the DoD audit organization s audit staff is necessary to execute the annual audit plan, or temporary audit assistance is required to meet audit reporting requirements mandated by law or a DoD issuance. The IG will review all statements of work for procuring audit services from outside sources. The review must be performed before the release of solicitations to prospective bidders to ensure the appropriate use of nonfederal auditors and compliance with applicable auditing standards. The exception to that policy is audit of non-appropriated funds. Non-federal auditors who perform work for the DoD Components are subject to GAGAS. Substandard work by a non-federal auditor may warrant referral for sanctions by the appropriate State licensing authorities or suspension and debarment by the contracting authority. 48

50 CONTACT INFORMATION CohnReznick LLP 8000 Towers Crescent Drive, Suite 1000 Tysons, VA Main: Fax: Kristen Soles, Partner (703) GovCon360 keeps you abreast of the ever-changing regulatory environment that is Government contracting. From reference materials, like searchable pdf copies of the FAR and DCAM, to our past Lunch and Learn seminar slide decks and thought pieces on industry matters, we ve got it covered. Subscribe to our RSS feed to receive short alerts on recent industry changes. It s always been our job to help our clients maintain a competitive advantage by staying ahead of the curve. This website is an extension of the services we ve been providing for over 35 years by putting useful resources and up-to-date information at your fingertips. 49