Transcript Document

Mysteries of a Compliant
Accounting System
Susan Moser, CPA
Partner, Cherry, Bekaert & Holland, L.L.P.
[email protected]
September 23, 2010
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Objectives

Requirement for adequate systems

General data requested

Preparing for audit

Real world stories

Proposed rule

Closing remarks
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The Myth
 “Approved” Accounting Systems
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The Truth
 “Adequate” Accounting Systems
o Based on contract type and requirements
o FAR 16.301-3 – adequate to determine costs applicable to
cost reimbursement contracts (no FAR requirement for T&M or
FFP contracts)
o 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
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When are Audits Conducted?
 Prior to award of cost or T&M type contract
 After award of contract to verify system functioning
properly
 If accounting software changes
 Mergers and Acquisitions
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Why We Should Care
 Contracting Officers use audit report to help determine
contractor responsibility
 Negative report may result in not winning cost type or
T&M work
 Both Government and Prime contractors are asking
contractors to certify whether or not system(s) are
adequate
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Accounting System Defined

Software

People

Processes

Policies
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Basic Requirements

Segregation of Duties

Written policies and procedures

Method to consistently allocate costs

Identify costs by project
Software is a tool to accomplish this
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Size Matters
 Compliant system varies by company size
 1 man shop requires little controls or written
policies
 1000 person company needs segregation of
duties, employee training, written policies
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Requested Data
 Chart of Accounts
 Trial Balance – in accrual; ties to all subsidiary reports
o May also request G/L
 Financial Statements
 Project Report(s)
 Organization Chart
 List of government contracts
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Requested Data, contd.
 Policies and Procedures
o Timekeeping
o Billing
o Indirect Rates
o Budgeting
o Segregating costs (emphasis on unallowable)
 Survey of Contractor’s Organization
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Preparing for Audit
 Always be audit ready
o Expected to provide info quickly (see MRD from 12/19/08)
 Request audit number & name
 Review audit program to understand scope
o Pre-award Survey of Prospective Contractor Accounting
System – Activity Code 17740
o Standard Form 1408
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Preparing for Audit, contd.
 Written description of basic account structure
o System used (Deltek, QuickBooks)
o Identify pools and bases for indirect rates and how to identify
within the chart of accounts
o Define company’s allocation methods and indirect cost pools
o Overview only – may only be a few pages
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Preparing for Audit, contd.
 Reconcile all reports and correct variances or have a
thorough explanation available prior to audit
 Select a variety of timesheets
o self-audit that timekeeping procedure was followed and time
properly recorded in accounting system
 Identify contracts with special accounting/billing
requirements and verify contract terms followed (75%
notice)
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Surprises
 Post Award Accounting System Audits
 Pre-award Survey – conducted again?
o But everything was fine in the last audit
 Proposed change to DFARS
o Potential for withholding if systems are inadequate
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Post Award Accounting System Audit
 Scope: adequate system to segregate and bill costs
IAW contract requirements
 Not designed for overall accounting system review
 Not testing internal controls
 May be requested by Contracting Officer or follow-up
to pre-award
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Real World Examples
 Was adequate, now it’s inadequate
 Special requests
 Written policies
 Timekeeping
 Fully utilizing accounting system
 New business
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Adequate to Inadequate
 Accounting System: Deltek FMS
 Revenue > $20 million
 Original pre-award audit deemed system adequate
 Several years later, updating with a post award audit
o System deemed inadequate
 Significant issues:
o Lack of billing policies and procedures
o Lack of training on proper billing procedures
o Billings not based on current accounting information
o Not reconciling booked to billed costs
o Not excluding unallowable costs (travel)
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Adequate to Inadequate, contd.
 Contractor Response:
o Develop policies and procedures to exceed DCAA’s
recommendations
o Hire additional accounting staff
o Develop training plan
o Revise method to calculate invoices
o Revise expense reimbursement policy
o Hired consultant to assist with project reconciliations and P&P
development
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Adequate to Inadequate, contd.
 Results
o Regular visits with DCAA to track progress
o Meetings with customers to assure of contractor’s
capabilities/responsibility
o High cost in labor and time to correct
o Follow-up audit conducted
o Received notice of adequate system 1 year after initial audit
began
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Prime & KO Request
 Accounting System: Peachtree
 Revenue > $10 million
 Prime contractor questioned propriety of subcontractor cost
allocations
 IG investigated subcontractor and found no improprieties
 Subcontractor awarded large prime contract - cost reimbursable
o KO read article on IG investigation and asked DCAA to perform
accounting system survey
o System found inadequate
o Different KO received report and stated no renewal of cost contract
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Prime & KO Request, contd.
 Negotiated with KO to receive FFP contract
 Significant issues
o Inconsistent treatment of fringe benefits as direct or indirect cost
 Mistake in presentation on the ICS
o Non-segregation of costs by contract type within a contract
 Accounting system is capable of this
 Setup corrected
o Indirect costs not billed using provisional billing rates
 Misunderstanding on ability to revise provisional rates
o Indirect rates not adjusted to actual year end rates
 Creating policy to make interim billing adjustments
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Prime & KO Request, contd.
 Results
o Incurred cost submissions amended and accepted by DCAA
o Negotiations with customers to award FFP contracts or extend
current contracts
o Large expense in time and money to resolve
o DCAA returned to review accounting system
 KO requested specific invoices be reviewed
 Debate on accuracy of invoices
 Adequacy of accounting system withheld pending result of
billing system
 Not resolved after 15 months
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Policies & Procedures
 Accounting System: Solomon
 Pre-award survey conducted
 Contractor activities were adequate
 Lacked written policies & procedures – inadequate
system
 Contractor put everything in writing within weeks
o DCAA not to return for 6 months to have sufficient data to test
 Contractor lost two contracts as a result of report
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Policies and Procedures, contd.
 DCAA returned and found directly
associated unallowable costs that were not
segregated
 Maintained system was inadequate
 As of March 2010, system still inadequate (9
months after initial report)
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Timekeeping
 Accounting System: Deltek Costpoint
 System found inadequate for not recording
time in and out
 No requirement to record this information
 Until contractor can overturn this decision,
remains on record and can affect future
awards
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Accounting System Features
 Accounting System: Deltek Costpoint
 Significant Issues
o Not segregating unallowable G&A travel
o Not maintaining adequate contract briefs
 Contractor Response
o Hired a consultant to review segregation of unallowable travel after
adjusting system
o Prepared contract briefs in Word format following Schedule S
o Hired a consultant to review briefs against contracts
o Consultant wrote report on procedures and results
 Letter provided to KO
o DCAA returned and deemed system adequate (took 6-8 months)
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New Business
 Accounting System: QuickBooks
 Pre-award survey prior to award of SBIR contract
 Revenue size < $1 million
 Redesigned chart of accounts prior to audit
 Improved policies to be more clear on timekeeping and payroll
 Improved company handbook
 Developed a policy on segregating unallowable costs
 Provided DCAA with organized package of info requested
o Explained why some items were not applicable
 Adequate system and promise that there will be a follow-up audit
to ensure system working
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DFARS Case 2009-D038
 Acceptable business system rule
 Mandatory - Withhold payments – up to 50%
o Interim payments
 Cost reimbursement
 Incentive type
 T&M
 Labor Hour
o Progress payments
o Performance-based payments
o No exception for commercial contracts
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DFARS Case 2009-D038, contd.
 Systems involved
o Accounting
o Estimating
o Material Management & Accounting
o Purchasing
o Earned Value Management
o Property Management
 Public Comments closed; committee report due
July 28
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Final Remarks
 Don’t assume system is adequate
 Continuous improvement
 Consider expert advice
o Before audit
o During audit
o Upon receipt of draft report
 Mock audit(s)
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QUESTIONS?
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