government-compliant accounting: really? what does it mean? how do i get there?

“Business Growth Through Effective Compliance”MAI Proprietary

2012 DENVER METRO SBDC VETERANS CONFERNCE

GOVERNMENT CONTRACT COMPLIANCE & ACCOUNTING

SYSTEMS

Mr. Gary Henry, Vice PresidentMcNew & Associates

Mr. Roland Wick, Sr. ConsultantMcNew & Associates

“Business Growth Through Effective Compliance”MAI Proprietary2

Overview• Introduction

• Compliance Overview

• Current Audit Environment

• Internal Controls

• Audit Types

• Accounting System – The Foundation

• Business Strategies

• Questions


Mr. Gary L. Henry, CPCM, PMPVice President, OperationsMr. Gary Henry is Vice President, Operations, for McNew & Associates, Inc. (MAI), Colorado

Springs, Colorado. He provides subject matter expert support related to Federal Acquisition Regulation requirements, federal contract proposal development guidance, business development, teaming strategies and post award contract management requirements. He is a retired Air Force officer, with a career spanning over twenty years in the operational, acquisition, contracting, and mission support disciplines.

Roland WickSenior ConsultantMr. Roland Wick is a Senior Consultant with McNew & Associates, Inc. (MAI), Colorado

Springs, Colorado. In this role he provides subject matter expert support related to Federal Acquisition Regulation (FAR) , Defense FAR Supplement (DFARS), and Cost Accounting Standards (CAS) requirements and proposal development guidance and support. Prior to joining MAI, Mr. Wick was a supervisory auditor for the Defense Contract Audit Agency.

McNew & Associates provides:• Government Cost Accounting & Bookkeeping• Proposal Pricing Development & Strategy• Contract Management & Administration• Business System Implementation, Review, and Maintenance• DCAA Audit Support• Proposal Management• Business Development Support


Challenges Within the Acquisition LifecycleCarefully Balancing External Factors to Gain Competitive Edge

CompanyProcesses

Business Systems

Established

Proposal Development

Contract Negotiation/

Award

Contract Administration

Contract CloseoutBD/Capture

Proposal Dev & Pricing

“Back Office” Support Accounting/Financial Management

Business Systems Compliance – Estimating, Accounting, Purchasing, EVMSDCAA/DCMA/FAR/DFARS/CAS

Contract/Subcontract Management

Growth Opportunities

Business Challenges

Changing Federal Regulations

Workforce & Skill Set Changes

Competitor Influence


Current Gov’t Audit Environment• GAO Report Dec 2008

• DCAA, DCMA oversight issues• Congressional Committee on Government Contracting

• DCAA has significantly increased defense contractor scrutiny• No longer provide guidance, hands-off, increased hiring• Focus is on “Quality Audits”• Significant backlog in “incurred cost audits”• More accounting system failures – slow turn around for revaluation

• Significant change in the audit process• One deficiency noted, entire system is non-compliant (Pass/Fail)• Proposal adequacy (FAR 15-2) bar significantly raised

• Prime Contractors getting systems deemed inadequate by DCAA• Estimating, Accounting, Billing, Purchasing, EVMS, Property• DCMA getting increased systems status requests from KO

• DFARS Interim Ruling for Business System Compliance


DFARS Interim Rule• DoD is adopting as final an interim amending DFARS to improve the effectiveness of DoD oversight of contractor business systems

• Rule will add Subpart 242.70 – Business Systems and would define six separate business systems:

• Accounting System• Earned Value Management System (EVMS)• Estimating System• Material Management & Accounting System (MMAS)• Property Management System• Purchasing System

• DoD is implementing compliance enforcement mechanisms in the form of a business systems clause which includes payment withholding as a percentage of payments

• Business systems clauses contains a requirement for contractors to respond to initial and final determinations of deficiencies


Internal Controls - General

• Strong internal controls tend to reduce DCAA’s audit efforts, while weak internal controls tend to increase audit scrutiny

• When evaluating internal control systems, DCAA will consider:• Amount of systems testing previously performed or currently planned• Self-governance programs

• The accounting and management systems should be considered in the context of the following:

• Contractor’s size, organization and ownership characteristics• Nature of the contractor’s business • Diversity and complexity of the contractor’s operations • Contractor’s methods of processing information• Applicable legal and regulatory requirements

• The “foundational” internal control is the Accounting System


Accounting System “Status”

• Myth: “Approved” Accounting Systems

• Truth: “Adequate” Accounting Systems•Based on contract type and requirements

•FAR 16.301-3 – adequate to determine costs applicable to cost reimbursement contracts (no FAR requirement for T&M or FFP contracts)

•FAR 9.103 – KO must determine responsibility IAW FAR 9.104-1•May request a pre-award survey (FAR 9.106)

•No longer adequate in part – either adequate or inadequate


What This Really Means

•The prime contractor has to have an adequate accounting system for award and performance of cost and flexibility priced contracts

• The prime has to assess its subcontractor’s system• This has become an increasingly highlighted requirement pre and post contract award

• Incurred cost audits at prime level

•Contracting officer will request audits by DCAA


DCAA Audits

• Preaward Contract Audits• Price Proposals

• Audits of contractor price proposal submission allowability, allocability, and reasonableness• Preaward Surveys

• Audit to determine whether the contractors accounting system is adequate and suitable for accumulating costs under Government contracts

• Forward Pricing Labor & Indirect Rates• Provisional Billing Rates – Audit of indirect cost rates used for obtaining reimbursement on cost type contract

billings• Forward Pricing Rate Agreements – Audit of projected or forecasted bidding rates and pricing factors

• Post Award Contract Audits• Incurred Costs

• Year end audit of total year costs incurred to ensure reasonableness, allowability, and allocability.• Truth In Negotiations Act (TINA) Compliance

• Basically ensure no deception in pricing at negotiation time• Cost Accounting Standards (CAS) Compliance & Adequacy

• Only applicable to contracts over $7.5M or $50M (A whole different conversation)• Claims

• Audit of requests for Equitable Price Adjustments, financial assistance, or Economic Price Adjustment• Financial Capability

• Audit to determine whether the contractor’s finances are adequate to perform the contract


Accounting System

• Accounting System: Software, People, Processes, and Policies

• An acceptable accounting system provides reasonable assurance that• Applicable laws and regulations are complied with• Accounting system and cost data are reliable• Risk of misallocations and mischarges are minimized• Contract allocations and charges are consistent with invoice procedures

Business System DCAA ICAPS and Other System Audits

Accounting System Control Environment and Overall Accounting System Controls

Indirect and Other Direct Cost Controls

Compensation System Controls

Billing System Controls

Labor System Controls

Pre-Award and Post-Award Accounting System Review

General Information and Technology System Controls


Elements of anAccounting System• The accounting system center is the general ledger (G/L).• Feeding the hub information are sub ledgers that include the following components:

•Accounts Receivable •Accounts Payable•Order Entry• Inventory Control•Cost Accounting•Payroll•Fixed Assets Accounting

•Must meet form 1408 accounting system adequacy criteria


Accounting System RequirementsReference Standard Form (SF) 1408

• In compliance with Generally Accepted Accounting Practices (GAAP)• Proper Segregation of Direct Costs from Indirect Costs• Identification and accumulation of direct costs by contract• A logical and consistent method for the allocation of indirect costs to intermediate and

final cost objectives• Accumulation of costs under general ledger control• A timekeeping system that identifies employees’ labor by intermediate of final cost

objective• A labor distribution system that charges direct and indirect labor to the appropriate cost

objectives• Interim (at least monthly), routine posting of books of account• Exclusion of unallowable costs specified in the contract or specifically identified in FAR

31.205• Identification of costs by contract line item number (CLIN)• Separation of pre-production costs from production costs• Accounting system provides financial information for limitations of cost and payment• The accounting system is designed and maintained to provide adequate and reliable

data• The accounting system is in full operation


Minimal AccountingSystem Requirements IAW SF 1408

Purchases Job Cost Record Job Cost Ledger

DirectMaterials

Direct Costs by

Job

Summary of all job cost reports

Direct Costs

Payroll

Overhead

Direct Labor

Indirect Labor

Indirect accounts for

indirect allocationTime Cards

General Ledger

The central “books” of the system. Every transaction flows

through the general ledger. These records remain as a

permanent track of the history of all financial transactions

since day one of the life of the company.


How To Support

• Take each line item on the 1408 and separately document that process

• Put the documentation in a folder by each criteria

• Provide requirements in accordance with Generally Accepted Accounting Principles:

• ICQ, flowcharts• Audited or reviewed financial statements • Written accounting policies• Organization charts• Chart of accounts. • Show the overall system process and flow of the recording processes


Common Failures• No written policies or procedures

• Software is not open or started.

• Indirect rate structure is not developed.

• Vouchers do not trace directly to job cost report.

• No time cards for officers and owners.

• All time is not reported

• Cash to bank does not reconcile.

• Total of job cost reports does not reconcile to COGS.

• Funding and cost limitations are not correct.

• No billing to cost reconciliation is performed.

• No contract briefing cards.


Business Strategy - Subcontractors

• Should ensure compliant systems are put in place – 3rd party audit• Primes requiring review of subcontractor systems • Increased sub pricing information required for gov’t proposals• DCAA assist audit requirements – even if Fixed Price

• Can use compliant systems as a discriminator in capability • Discriminator now, requirement in near term • Auditable systems help prime selection & price reasonableness

• Ensure compliance culture throughout contract life cycle

• Benefits• Reduced risk in DCAA audits, government proposal analysis• Reduced overhead, wasted resources defending audits• Business Development – key prime selection criteria

• Bottomline: compliant systems increase chance of subcontract award


Key Take Away’s

• GAO critical of DCAA, DCMA

• DCAA and Government in increased oversight mode

• DFARS Interim Rule will increase requirements

• Contractors must have adequate accounting systems to perform cost type contracts. FAR Part 9

• Primes selecting subcontractors like government – Risk!

• Compliance will result in increased business opportunities


McNew & Associates:Email: [email protected]: www.mcnewassociates.com

Gary Henry, PMP, CPCM Vice PresidentTel: (719) 559-0670Email: [email protected]

Roland Wick, Sr. Consultant Tel: (719) 559-0670Email: [email protected]

Contact Information


QUESTIONS?


BACK UP SLIDES


Proper segregation of costs.

•Provide chart of accounts and written accounting policies. How does the contractor define direct and indirect costs? Provide written policies which state contractor procedures.


Direct costs by contract

•Provide policies on how contract numbers are established, provide job cost numbers in the system, show the cost element breakout at the job cost level, show current and cumulative costs, provide job cost reports.


Allocation of indirect costs.

•Provide cost accounts that record indirect costs by pool. Provide written policies on pools and bases, to include description of pool/base elements, and the methodology for calculating indirect rates. Provide current rates and pools and bases that tie directly to the accounting records. Provide interim indirect rates and final year-end actual indirect rates.


Accumulation of costs under general ledger control

•Pick specific job cost report, trace it to the higher level of total job cost report summary, trace that top level job cost summary to the income statement COGS. Assure the income statement for that period ties to the balance sheet (retained earnings).


Timekeeping system. Time cards and labor distribution.

•Provide the total labor distribution report for all jobs.

• Select the same job cost report from above and trace labor to that section of the distribution report.

•From the specific labor distribution report for that job cost report trace selected labor to time cards. Assure time cards support hours in the labor distribution.

•Provide selected payroll records to assure effective labor rates are applied for all hours worked.

•Assure that costs computed in labor distribution are correct (all hours worked and rates applied correctly).


Interim determination of costs.

•Provide bank to cash reconciliation for the balance sheet selected for the job cost to income statement to balance sheet trace. This should show the accounting system is currently posted. (Also verified in trace of current vouchers to source records).


Exclusion of Unallowables.

• Provide written policies on FAR 31 exclusion.• Provide the accounts in the chart of accounts that accumulate unallowable costs. •Demonstrate indirect pools have no unallowable accounts and that bases include appropriate unallowables as required under FAR 31.


Costs by Contract Line Item

•Demonstrate the numbering system to allow lower level codes to contract charges. Demonstrate all cost elements, down to the lowest level, are incurred and recorded by line item, for each specific contract in the detailed job cost ledgers.


Limitation of Costs/Billings:

•Demonstrate you have policies, contract briefing forms, and show indirect rates are readily calculated from records. Explain and document who monitors these rates, who will monitor limitation of billings, who will review costs vs billings?


Adequate, Reliable Data:

•If the costs are properly recorded and accumulated this will be accepted. If the costs do not reconcile or are not in detail to allow cost element bid support per FAR part 15 then this criteria will fail.

government-compliant accounting: really? what does it mean? how do i get there?

Documents

job cost report

provide written policies

indirect labor

business growth

income statement

general ledger

labor distribution

accounting system