Best Practices in Dealing with the DCAA Bag Lunch Webinar December 7, 2016 1
Presenter: Paul H. Calabrese Rubino & Company, CPAs & Consultants Senior Manager Tel: 301-214-4137 pcalabrese@rubino.com www.linkedin.com/pub/paul-calabrese/20/293/645/ 2
Co-Presenter: G. Chris Brown Aldebaron, Inc. d/b/a SYMPAQ Vice President Tel: 301-670-0858, Ext. 3007 cbrown@sympaq.com https://www.linkedin.com/in/chris-brown-b1b516 3
Today s Materials & Future Webinars Today s webinar materials located at http://www.rubino.com/resources page-down to find today s webinar materials WINTER WEBINAR SERIES: In January 2017 we will return with more informative webinars, starting with a list and understanding of Expressly Unallowable expenses per DCAA s MRD on this subject matter. Enjoy the Holiday Season! 4
Sources DCAA Contract Audit Manual DCAA Information for contractors DoD IG Hotline Review, October 6, 2011, Report No DODIG-2012-002 Hotline Complaint Involving Auditor Independence Games People Play by Eric Berne
Overview IG report of DCAA relocating auditor w/impaired independence The Most Common Types of DCAA Audits The Role of DCMA in Audits The information you should have prepared and available for each type of audit Statistical sampling used by DCAA that will streamline the audit process Techniques for dealing with auditors who step out of bounds Consequences of adverse findings When to hire an industry expert to interact with DCAA 6
How A DCAA Auditor Was Relocated Due To Impairment
How DCAA Auditor Was Relocated Story Line: Background Auditor and supervisor met with contractor reps Purpose: to discuss outstanding request for info Following the meeting: contractor rep met with supervisor to advise that the auditor exhibited cynical behavior toward several contractor employees Supervisor counseled auditor to be professional at all times. 8
How DCAA Auditor Was Relocated Story Line: Auditor s Inappropriate Behavior The next day the auditor sent an email to the Chairman of the DoD contractor Due to the auditor s frustration in obtaining info and embarrassed by his supervisor counseling him, the auditor made in appropriate statements: The contractor has a termination claim that is filled with frivolous costs and I have been diligently working to analyze and question this claim I also hope you speak to the general counsel and make him realize that his slanderous accusations will only increase my diligence. His supervisor not cc d on that email. 9
How DCAA Auditor Was Relocated Story Line: Independence Was Impaired Legal counsel met with supervisor with copy of email and stated that the auditor might not be objective in performing audits of his company 11 contractor employees witnessed the auditor s inappropriate behavior towards the contractor The supervisor advised the branch manager and regional audit manager of the situation They agreed that the auditor s independence was impaired based on the email sent to Chairman Note: the contractor did not ask for the auditor to be relocated 10
How DCAA Auditor Was Relocated Story Line: Auditor Relocation Supervisor told the auditor that his independence was impaired and instructed the auditor to move out of the contractor facility to the main DCAA office Supervisor instructed the auditor to continue to work on the audits already assigned to him The auditor issued a DOD IG Hotline complaint that DCAA was incorrect in it s position that the auditor had his independence impaired 11
How DCAA Auditor Was Relocated IG s Issues with DCAA IG reviewed the auditor s complaint and position towards DCAA: IG agreed to the auditor s relocation DCAA did not re-assign 3 audits in process affected by independence impairment DCAA did not initiate an investigation of contractor complaints that would have constituted auditor misconduct 12
How DCAA Auditor Was Relocated DCAA Initiated Their Own Corrections Rescinded 1 audit report impaired by auditor The impaired auditor continued to work on 2 audits working at another location Issued alert that all auditors fully eliminate any independence impairments Revised training on identification and removal of auditor independence impairments Investigate complaints of auditor misconduct 13
How DCAA Auditor Was Relocated Impaired Auditor Working on Old Work The impaired auditor also finished the contractor s termination settlement with 92% questioned cost The impaired auditor said: I would also request that someone else finalize the termination. I have lost respect for this company due to its recent personal attack and think that they could use this fact against DCAA in negotiations because my removal will be viewed as an independence issue. 14
How DCAA Auditor Was Relocated IG Found DCAA Corrections Inadequate IG recommended that the entire audit report on the Termination Settlement be rescinded and start over Re-assign any ongoing audits impacted by the impairment to another field office Establish a disciplinary mechanism to promote compliance. Consider administrative action for the failure to exercise proper professional judgement DCAA did not investigate contractor complaints against the impaired auditor 15
How DCAA Auditor Was Relocated IG Found DCAA Corrections Inadequate IG stated that DCAA does not have formal procedures for investigating contractor complaints of inappropriate behavior 16
Common Types of Audits Preaward Survey of a Prospective Contractor s Accounting System Audit of Cost Estimates and Price Proposals Forward Pricing Rate Proposals (Provisional Rates) Real-Time Labor Evaluation (Floor Check) Incurred Cost (ICE) Audits. (Click here for the Full List of Audit Programs) 17
The Role of DCMA in Audits DCMA Contract Cost / Price Analyst Contract Price/Cost Analyst is assigned conduct a review of the proposal in accordance with FAR 15.404 Proposal Analysis. The scope of this effort does not constitute an audit or attestation engagement under Generally Accepted Government Auditing Standards. All information collected during this review is to support the Procuring Contracting Officer's (PCO) efforts during the source selection process for anticipatory contract awards. 18
Pre-Award Survey Information to provide to the auditors includes: Fully functional General Ledger that segregates direct, indirect and unallowable costs A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives A timekeeping system that enables employees to charge hours by final and intermediate cost objectives A labor distribution system that charges direct and indirect labor to the appropriate cost objectives A billing capability to support requests for progress payments on flexibly priced contracts 19
Price Proposal Audit Information to provide to the auditors includes: Detailed schedules of the labor rates and hours used in the proposal. The basis of proposed labor rates and classifications including any escalation factors The basis of proposed labor hours, comparisons of proposed hours to experienced hours for the production of similar items 20
Price Proposal Audit (con t) Information to provide to the auditors includes: Materials - The basis for pricing (vendor quotes, invoice prices, competitive bids, etc.) Subcontracts - Cost or pricing data as part of your own cost or pricing data, as well as your analyses of the subcontractor s cost or pricing data Indirect Costs - The basis of the proposed indirect expense rates 21
Forward Pricing Rate Proposals Information to provide to the auditors includes: Proposed billing rate calculations (Pool and Base) with brief rationale Prior fiscal year pool and base (Analysis of Indirect Rates) Current FY to date pool and base 22
Real-Time Labor Evaluation (Floor Check) Information to provide to the auditors includes: Timekeeping policies & procedures A current list of employees and their locations Procedures for Work at Home program (telecommuting) 23
Incurred Cost (ICE) Audits Information to provide to the auditors includes: Schedules listed in FAR 52.216-7 Contract Briefs (Summary of Modifications) List of Contract Closeouts Subcontract Information Supporting documentation to demonstrate allowability and allocability of costs Certificate of Indirect Costs 24
DCAA Statistical Sampling of ICE Proposals Audit Scope Incurred Costs Classification of Low-Risk Contractors High-Risk Incurred Cost Proposal vs. Low-Risk Approximately one-third of low-risk proposals will be selected for audit using random sampling techniques. There were no significant questioned costs in the prior audit. If significant questioned costs are found in the sample audit, all other incurred cost proposals on hand for the contractor must be audited using multi-year audit techniques. 25
Dealing with DCAA Auditors DCAA auditors provide an advisory role to a contracting officer who has a contract award decision to make. An auditor has inherent power that may materially affect your company. That power is based on the authority of the agency that has employed the auditor to make an assessment based on the professional opinions that guide the auditor's actions. DCAA expects auditors to always act professionally, objectively, and without bias when conducting audits and interacting with contractor personnel. 26
Dealing with DCAA Auditors Transactional Analysis Eric Berne 3 Ego States (Adult, Parent and Child) Auditors tend to take the role of the Controlling Parent and expect the contractor staff members to behave in the role of a Cooperative (Adapted) Child The contractor should make an effort to eliminate conflicts (e.g., Controlling Parent vs. Rebellious Child) by making their interactions with the auditor Adult to Adult which are rational, logical and analytical 27
Dealing with DCAA Auditors Achieving Adult to Adult TA when dealing with an overbearing (Controlling Parent) DCAA Auditor Be prepared for the audit.have the required information available to the auditor Do not volunteer information beyond what is being asked of you. Preface your questions and comments with softening statements when the Auditor asks for information that is outside the scope of the audit (e.g., You must be asking me for that for a reason would you mind sharing with me why you brought that up at this time?) 28
Consequences of Adverse Findings Findings from audits are distributed to all of your PCOs and ACOs Flash audit findings may overstate the problem to your PCOs You most likely loose a contract on a proposal audit Inadequate RFP proposal means you will loose contract Inadequate ICE submission delays settled rates Continuous and material questioned costs will result in time-consuming incurred cost audits vs. rate letters Contractor must correct deficient controls else loose on proposal contracts Voucher audits will result in non-payment and more scrutiny 29
Things to consider When to seek outside expertise Outsourced compliance officer Know the rules and industry practices Establish strong internal controls Learn to protect the governments interests Be prepared and being ready Understand DCAA s psychology and patterns Make sure you have 1 DCAA liaison Don t be afraid to stand up for your position 30
Any Questions? 31