MACPA 2013 Government Contractors Conference. Current Accounting Issues

Transcription

1 MACPA 2013 Government Contractors Conference Current Accounting Issues Jim Thomas Partner, September 23, 2013

2 Agenda 1. Current Environment 2. Compliance Initiatives 3. Regulatory Update 4. Business Systems Update 5. DCMA and DCAA Matters 6. Generally Accepted Accounting Principles 7. Q&A 2

3 Observations on the Current Environment Contractors continue to face challenges from budget pressures, demands on accountability and a lack of coordination between DCMA and DCAA. Incurred cost audit backlog is diverting resources away from other audits especially pre-award and business system approvals. Regulations are ahead of enforcement audits. Access to records and people are being sought for audit leads and attempts to uncover fraud. Compliance organizations are becoming more strategic and use more formal control systems with advanced business processes and technology. Innovative pricing strategies are critical to remain competitive and sustain margins. 3

4 Weathering the Current Environment Issues Higher standards for compliance Cost control Market opportunity expansion Commercial or international markets Joint ventures / partnerships M&A Restructuring Margin sustainment Initiatives Strategic and proactive compliance process Refinement of cost allocation methods CAS compliance Cost accounting practice changes Organizational considerations Commercial ventures Supply chain management (compliance, counterfeit parts, etc.) Risk management (fraud risk, FCPA) Intercompany issues Commercial item exemptions Use of fixed priced line items Change order management Optimizing business processes & technology 4

5 Strategic Compliance The mission: Remain aware of and be prepared for ever changing regulations and compliance pressure. Contractors need to transform the compliance function from reactive to proactive and identify ways to leverage compliance into a competitive advantage: compliance organizations will think more strategically, craft a strategic vision, and develop approaches ensuring compliance with regulations compliments overall business strategy and concept of operations of the enterprise. A methodology to proactively adapt to an ever-changing business environment and monitor the performance of business processes to achieve a competitive and strategic advantage. It enables a contractor to navigate the regulatory implications of changes on the organization, resources, processes and technology as the business model evolves. 5

6 Example of Optimizing Business Process & Use of Technology Business System Requirements for Estimating Process Flow Documentation of Estimating Process, start to finish Proposal Planning Vendor Quoting Rate Development Technical Estimating Proposal Review and Submission Negotiations Maps the Estimating Process, identifies controls, and contains a narrative description of the process Internal Control Matrix Aligns Estimating System internal controls to DCAA control objectives and audit procedure guidance Includes assessment of whether internal controls are sufficient to meet DCAA audit standards Gap Analysis, Remediation, and Automation Documents gaps between current Estimating System controls and U.S. Government control objectives Provides observations for improvement based on leading industry practices Includes references linking gaps to process flowcharts and internal control matrices Considered the contractor s To Do list for compliance after assessment is complete Leverage technology for process automation 6

7 Process Flowchart Estimating Example Numbered Control References Supporting Documentation Compliance Gap 7

8 FAR & DFARS Final Rule on Nondisplacement Qualified Workers Under Service Contracts: Effective Jan. 18, 2013, amends FAR to implement Executive Order Requires service contractors/subcontractors under successor contracts to offer employees of the predecessor contractor and subcontractors a right of first refusal of employment for positions for which they are qualified; applies to service contracts that succeed contracts for the same or similar services at the same location. DFARS Final Rule on Contractor Requirements for Reporting Alleged Crimes: Effective Feb. 2, 2013, DFARS Applicable to Department of Defense (DoD) Contractors Working Overseas. Contractor shall institute/implement a program to prevent violations of the law by its employees and subcontractors; includes training on applicable laws, directives, and regulations including what constitutes violations under the Uniform Code of Military Justice and the Military Extraterritorial Jurisdiction Act. Final Rule Updates DFARS to Require an Adequacy Checklist for Proposals Requiring Certified Cost or Pricing Data: Effective Mar. 28, 2013, DFARS incorporates a proposal adequacy checklist in solicitations requiring the submission of certified cost or pricing data. Ensures offerors submit thorough, accurate, and complete proposals. Checklist contains 36 detailed line items and covers Materials and Services, Subcontracts, Inter-organizational Transfers; Direct Labor; Indirect Costs and Other Direct Costs. 8

9 FAR & DFARS Proposed Rule to Update the DFARS to Require the Submission of a Forward Pricing Rate Proposal Adequacy Checklist: May 16, 2013, the DoD proposes to amend DFARS to instruct contracting officers to request contractors submit a proposed forward pricing rate proposal adequacy checklist with forward pricing rate proposals (FPRP). Checklist would be included new DFARS subpart , Instructions for submissions of certified cost or pricing data or data other than cost or pricing data pursuant to the procedures in FAR (b). Contains 27 items and divided into General Instructions, Direct Labor, Indirect Rates, Cost of Money, and Other. (Similar checklist incorporated in DFARS and by final rule on March 28, 2013). Proposed Rule to Update the DFARS to Strengthen the Detection and Avoidance of Counterfeit Electronic Parts: May 16, 2013, to support Sections 818 and 833 of the National Defense Authorization Act (NDAA) for FYs 2012 and 2013, DoD proposes to hold contractors responsible for detecting/avoiding use or inclusion of counterfeit electronic parts or suspect counterfeit electronic parts. Includes new subsection making expressly unallowable the costs of counterfeit electronic parts or suspect counterfeit electronic parts and the cost of rework or corrective action that may be required to remedy the use or inclusion of counterfeit electronic parts. Subsection prescribes policy and procedures for preventing counterfeit parts and suspect counterfeit parts from entering the supply chain. 9

10 Compensation Limitations for Contractor Personnel June 26, 2013, Section 803 of NDAA for FY 2012 expanded applicability of existing executive compensation cap to all contractor employees for DoD, NASA, and Coast Guard contracts: The compensation cap shall apply with respect to costs of compensation incurred after January 1, 2012, under contracts entered into before, on, or after the date of the enactment of this Act (December 31, 2011). The FAR Councils issued: (1) an interim rule implementing Section 803 effective June 26, 2013 for contracts awarded on or after December 31, 2011; and (2) a proposed rule implementing Section 803 retroactively to contracts awarded before December 31, 2011 relating to contractor compensation cost incurred after January 1, Two court case decisions (General Dynamics v. U.S., 47 Fed. Cl. 514 (2000) and ATK Launch Systems, Inc., ASBCA 55395, April 9, 2009, 09-1BCA 34118) held that applying the cap to contracts entered into before the date of the statute breached those contracts. 10

11 Ineligible Dependent Health Care Benefit Expenses Unallowable - but not Expressly Unallowable Memorandum issued Feb. 17, 2012, Director of Defense Pricing to DCAA and DCMA: DoD will not pursue the application of expressly unallowable cost penalties under FAR for contractors found to have claimed expenses for ineligible employee dependent health care benefits: reversed prior position that such expenses were expressly unallowable - penalties therefore should not be assessed. DoD Should-Cost Management Initiative: DOD continues to pursue limitations and reductions in contractor indirect expenses To drive reductions in overall program costs, some contractors were asked to provide information to DCMA on their indirect expense management and monitoring programs. 11

12 Contractor Business Systems - Disapproval and Withholding Update DCMA continues to enforce DFARS , Contractor Business Systems, with contract payment withholds for contractors found to have significant deficiencies with one or more of the six DFARS defined business systems. Recent statistic include: (1) 15 contractors subject to withholds due to a disapproved business system; (2) 7 contractors with withholds lifted due to disapproved business system being corrected; (3) systems subject to disapproval/withholding: 1/3 Accounting; 1/3 Purchasing; and 1/3 all others. Recommendations for contractors: (1) have system monitoring and improvement capabilities in-place; (2) perform critical system reviews to reduce your audit risk; (3) be ready to provide system demonstrations to DCAA auditors; (4) have plans ready to react quickly to deficiency findings; (5) understand your contract exposure; (6) have cash-flow interruption contingency plans in-place. 12

13 DCMA & DCAA Matters DCMA Contractor Business System Analysis Repository (CBAR) - System Capability Enhancements: Effective June 24, 2013, DoD Procurement Contracting Officers (PCO's) will upload their business clearance information and documentation to the CBAR database for all negotiated contract pricing actions above $25 million. PCO s also required to upload the same business clearance documentation for all definitized or awarded contract actions exceeding $100 million that occurred after Oct. 1, 2012, but prior to June 24, DCAA Clarifies Maximum Allowable Travel Per Diem Rate Limitations: DCAA released a Memorandum for Regional Directors (MRD) on Mar. 22, 2013 clarifying that contractor maximum allowable travel per diem rates are subject to only one ceiling, a total of lodging, plus meals and incidental expenses. DCAA Issues Updated Audit Guidance on Access to Contractor Internal Audit Reports: April 23, DCAA released a Memorandum for Regional Directors (MRD) providing audit guidance for Section 832 of the NDAA for Fiscal Year 2013: (1) DCAA may not use internal audit reports for any purpose other than evaluating and testing internal controls and associated business systems; (2) internal audit reports should be handled in accordance with procedures for proprietary data, and (3) requests for internal audit reports will occur only when the auditor/supervisor can demonstrate how the report may support the risk assessment or audit procedures in a current, ongoing audit. 13

14 DCMA & DCAA Matters DCAA Issues Audit Guidance on Detecting Instances of Fraud in Attestation Engagements: July 30, Guidance from findings/recommendations in DODIG Report No. DODIG , dated Mar. 7, 2013, titled 'Monitoring of the Quality of Defense Contract Audit Agency FY 2010 Audits'. DCAA agreed to develop tool-kits and/or guidance for auditors to use when assessing fraud risk in attest engagements. DCAA Issues Audit Alert on Access to Contractor Employees: July 30, 2013, 13-PPS-015(R). Guidance issued in response to contractors challenges to DCAA auditors requests to interview and observe employees as part of their audits. Contractors argued that FAR Part limits DCAA s access to records only, and does not include access to their employees. DCAA disagrees with this FAR interpretation and considers timely access to contractor employees essential for its audit activities. DCAA Quality Issues: DoD Inspector General (IG) Report (March 2013) found DCAA quality issues during FY Based on the IG sample of reviewed audits, 0% (zero) complied with government auditing communication standards, 8% achieved quality stan-dards, 22% met evidence standards, 26% complied with professional judgment standards. Continuing significant delays in incurred cost audits: DCAA s March 29, 2013 report on FY2012 to Congress indicated DCAA had completed 1795 incurred cost audits in 2012 and had an audit backlog of almost 26,000 incurred cost proposals ($710 billion in unaudited costs). DCAA has initiated steps to address the backlog using dedicated audit teams, concurrent multiple year audits, and low risk sampling. Backlog results in contractor document retention issues and potential statute of limitations problems for the Government. 14

15 Cost Reasonableness: Proof (Kellogg Brown & Root Services, U.S. COFC, Nos C and C, September 27, 2012, 107 Fed. Cl. 16, affirmed) A claim for costs to provide dining facility services was granted only in part because the contractor demonstrated its construction costs, but not its labor costs, were reasonable. The contractor sought reimbursement of subcontractor costs under a cost-plus-award-fee contract to provide logistics support services in Iraq. - The contractor contended it established cost reasonableness under FAR for the costs of providing dining facility services by showing it incurred the costs in performing the relevant task order. - It also maintained the prices in the subcontract's change order reflected its best efforts to perform in wartime circumstances. However, the urgency of the situation did not justify the acceptance of unreasonable prices. 15

16 Generally Accepted Accounting Principles Post-Retirement Benefits - references to GAAP replaced with specific criteria that replicate the substance of the formerly referenced GAAP. The criteria no longer exist in current GAAP. Leases May 16, 2013 FASB Exposure Draft would require recognition of an asset and liability for most leases. Neither FAR nor CAS recognize a Right of Use asset. Government contracting implications include: - CAS 404 Capitalization of Tangible Capital Assets - FAR Rental Costs - FAR Depreciation - FAR Interest and Other Financial Costs - FAR Cost of Money 16

17 Questions & Answers 17

18 Jim Thomas (703) This publication has been prepared for general guidance on matters of interest 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 given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any 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 All rights reserved. In this document, "" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.