Preparing for a DCAA / DCMA Audit The Accounting Systems Audit Presented By: Janet Shea, CPA, MBA Principal, Arrowhead Solutions, LLC Arrowhead Solutions, LLC 2011

Arrowhead Solutions, LLC 2011 Discussion Overview Why &When DCAA Will Audit An Organization The Myths Today’s Focus: The Accounting Systems Audit Basic Components of Compliant Systems Is Your Organization Ready: Additional Compliance Issues Preparing For The “Visit” The Findings Get a feel for how many people have been in one or if any are preparing now for one. Arrowhead Solutions, LLC 2011

Arrowhead Solutions, LLC 2011 Why & When ? WHY (TYPE) WHEN Preaward Systems Audit Before Being Awarded a Cost Type Contract Financial Capability Audit Periodically or if Questions about Ongoing Concern Incurred Cost Audit At the end of every Fiscal Year Floor Check Audit At Will Concerns raised If there are Concerns About Impropriety There are actually many more types of audit depending on the nature of the organization and the size of the contracts, but We’re going to focus specifically on the preaward systems audit since this will most likely be the first one you bump up against Arrowhead Solutions, LLC 2011

Arrowhead Solutions, LLC 2011 The Myths I passed before – I’m sure I’ll pass again They won’t floor check “him” – he works remotely They won’t pick that contract to review … I can just tell them I don’t know what indirects are … Blame any problems on the former controller Arrowhead Solutions, LLC 2011

PreAward Systems Audit Technically Known as “Preaward Survey of Prospective Contractor Accounting System” An organization can be contracting with the government for years under T&M and FFP contracts and never deal with a Systems audit. This is usually completed once an organization has proposed on and been conditionally awarded a cost type contract. You’re going to hear the word compliance a lot – these audits are to ensure compliance with the FAR Arrowhead Solutions, LLC 2011

PreAward Systems Audit It is NOT an audit in the traditional meaning of the word – i.e. DCAA will not render an opinion on an organization’s internal controls “taken as a whole”. DCAA will review processes and controls for accumulating costs under specific contracts. The exam is limited to determining whether an accounting systems is operational and that the design of the accounting system is adequate (compliant) for cost accumulation. The exam includes not only reviewing the set up of the system itself, it also includes review of policies and procedures in place to support proper accounting. Arrowhead Solutions, LLC 2011

Basic Components of Compliance Based Upon FAR requirements Systems: Timekeeping Accounting System Set Up and Management Organizational: Policies and Procedures Contract Administration The FAR is the Federal Acquisition Regulations Arrowhead Solutions, LLC 2011

Basic Components of Compliant Systems: Timekeeping System – The #1 priority of the audit. Why?: Labor is the largest component of cost Easiest to manipulate or mis-state Involves every member of the organization – it is NOT just an “accounting issue” Arrowhead Solutions, LLC 2011

Basic Components of Compliant Systems: Testing the Adequacy of the Timekeeping Systems: Labor Distribution: All labor costs are traceable all the way through the system : Timesheet >> Labor Distribution By Contract >> Payroll Posting >> Contract Invoice Job Cost System in place and reconciled to G/L. System must be able to capture costs to the CLIN level! In qb you can use the customer as the k level and the job as clin level Arrowhead Solutions, LLC 2011

Basic Components of Compliant Systems: Testing the Adequacy of the Accounting System: Segregation of Costs: DIRECT – those costs specifically identified with one “final cost objective” (c0ntract). INDIRECT – costs that benefit more than one final cost objective. UNALLOWBLE – costs incurred that are not allowable under FAR guidelines are identified and excluded from indirects. Allocation of Indirect Costs: Are Bases and Pools properly documented ? Are costs accumulated based on their pool ? Arrowhead Solutions, LLC 2011

Basic Components of Compliant Systems: Testing the Adequacy of the Accounting System: Timely Posting: Are Contract Costs Posted At Least on A Monthly Basis Billing: Are billings prepared regularly and costs reviewed for accuracy? Are billings reconciled to costs currently and cumulatively? GAAP compliant: NO cash based accounting; no section 179 depreciation on the books. Arrowhead Solutions, LLC 2011

Is Your Organization Ready?: Additional Compliance Issues Policies and Procedures: Do you have Policies and Procedures Written AND Implemented? Policies should encapsulate the organization’s understanding of FAR and GAAP requirements. Procedures operationalize the policies. Focal Policies & Procedures: Accounting Indirect Pool Definitions Timekeeping Travel Its fairly easy to write policies and procedures – it takes a lot more commitment to implement them. DON’T just write them and stick them in the drawer – they will be back Arrowhead Solutions, LLC 2011

Is Your Organization Ready?: Additional Compliance Issues Compliance must be an organizational mandate: Do All of Your Employees know the Timekeeping Policies? Have Your Employees Signed an Annual Timekeeping Policy Acknowledgement? Does the organization perform periodic floor checks? Are your financial statements current and reconciled? Arrowhead Solutions, LLC 2011

Preparing for the “Visit” If you don’t run a labor distribution as a standard report already – create a memorized report that you can refer to. Run some test cases on labor – pick random timesheets and trace them from timesheet to g/l. Make sure your balance sheet is reconciled. Prepare your staff – refresh everyone on the timekeeping policies Arrowhead Solutions, LLC 2011

Preparing for the “Visit” Limit the staffing of the audit team to those who are well versed in the requirements. Review the DCAA Audit Contract Manual – this is their guidelines for audit – you might as well know what they know. Treat the auditors with respect – don’t get defensive; if you don’t know the answer to a question, ask for some time. Arrowhead Solutions, LLC 2011

Arrowhead Solutions, LLC 2011 The Findings DCAA will issue a draft findings report and allow the contractor the opportunity to respond to any concerns. Report will be sent by DCAA to DCMA who is the official issuer of the report. If a system is found to be “inadequate”, contractor will prepare a correction plan and submit to DCAA. Arrowhead Solutions, LLC 2011

Arrowhead Solutions, LLC 2011 The Findings DCAA will have to re-audit the systems and processes before deeming the system adequate. If the system is not found to be adequate in the end, the contractor will not be allowed to work under cost type contracts. Arrowhead Solutions, LLC 2011

Arrowhead Solutions, LLC 2011 QUESTIONS ? Feel free to follow up with any additional questions: Janet Shea, Arrowhead Solutions, LLC 970.443.3006 j.shea@arrowheadsolutionsllc.com Arrowhead Solutions, LLC 2011