Transcript Slide 1

Surviving a DCAA Audit
January 28, 2009
Presented By: K. D. “Ken” Bricker, CPA, DABFA
Senior Partner, Government Contracting Service Group
© Copyright 2009. Goodman & Company, LLP.
 Founded 1932 w/ offices in throughout VA and MD
 Focused on offering full project lifecycle consulting to government
contractors
 Diverse staff with extensive government contracting backgrounds,
in government, industry and consulting
 Service Offerings:
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Accounting System Support
Indirect Cost Structure & Cost Proposal Development
Training - CAS, FAR,
Contracts Administration
FAR, CAS, & TINA Compliance & Noncompliance Support
Disclosure Statements and Accounting Practice Changes
DCAA Audit Management
Business Process & Best Practice Reviews
Interim Controller/CFO Support
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DCAA: Who They Are, A Quick Overview
 Provide audit and other financial advisory services to Contracting
Officers
 Potential for an audit before, during and after contract
award/performance; Auditor should share audit program & findingsconclusions (BEWARE OF INTERIM AUDITOR FEEDBACK)
 DCAA auditors must be independent and unbiased. Cannot ask
about employment, nor should he/she refer to contractor as
“dishonest”, “ a crook”, etc.
 DCAA is audited by DOD-IG and/or GAO
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General DCAA Auditing Concepts & Philosophies
Audit guidance used by auditors in planning and performing audits is
found in DCAA’s Contract Audit Manual (DCAAM 7640.1)
 Represents guidance only, but contains information that
contractors should be familiar with in understanding audit
positions and procedures
 Does not represent authoritative/regulatory guidelines
 As such, DCAAM is not used as reference in audit reports as
basis for audit conclusions
 Only regulatory guidance (FAR, contract terms, etc.) are used as
basis for audit findings
 DCAA Policy “fills in the blanks” where regulations are silent or
very general (e.g. specific control objectives for internal controls)
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General DCAA Auditing Concepts & Philosophies
Other important guidance documentation used by
auditors in performing audits (other than regulations)
Various guidance pamphlets including “Information for
Contractors”
FAR cost principles guide
DCAA guidance memorandums
DCAA ICES manual
DCAA training manuals and modules
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Using DCAA Charter & Info to Defend Clients
DCAA is charged with:
 Producing findings based on sufficient evidential data and
performing enough testing and review?
• Did auditors have all facts when evaluating and formulating
position (questioned costs)? Is there more data available to
refute audit challenge?
• Are findings adequately stated in report?
• To what extent was reasonableness criteria used—highly
judgmental
• Did auditors accurately calculate questioned costs?
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Using DCAA Charter & Info to Defend Clients
DCAA is charged with:
 Being independent, objective and competent:
• Did auditor insert personal preference into findings?
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What was basis for finding?
“I’ve never seen it done that way before”?
“At DCAA, we aren’t allowed to do that”
• Is auditor knowledgeable of area audited?
• Do auditor calculations demonstrate objectivity and
competence—ex. Question only amt of air fare above regular
coach, instead of throwing whole amt out and then letting
contractor call attention to this stupid act
• Did auditor allow adequate time to review auditor findings and
respond?
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IG or
GAO
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DCAA
Supv & Mgr
GAO Report July 2008
 “Allegations that Certain Audits at Three Locations Did Not
Meet Professional Standards Were Substantiated”
 DCAA Policy states that audits are performed in accordance
with GAGAS (Government Auditing Standards), GAO found
numerous examples where DCAA failed to comply
• Independence issue: contractor and DoD contracting
community improperly influenced scope, conclusions
and opinions.
• Audit findings were changed (dropped)
• Audit findings were not supported by sufficient audit
work
 DCAA Management intimidated auditors i) to drop audit
findings and ii) to avoid talking to the GAO
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GAO Report July 2008: Repercussions-Formal
 DCAA will not participate in any “teaming” process
 DCAA (with help) is performing an internal assessment of
i)audit quality ii) metrics (such as audit budgets and due
dates) and iii) management intimidation
 DCAA revised and reissued its policy when an auditor and
supervisor disagree on audit findings conclusions
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GAO Report July 2008: Repercussions-Informal
 DCAA will distance itself from Management Councils and
various contractor actions which are pre-implementation
(e.g. DCAA will not informally advise a contractor on
alternative cost accounting practices in the context of a
revised CAS Disclosure Statement)
 DCAA auditors will minimize “audit scope” discussions
before or during the audit
 DCAA auditors will not communicate potentially minor
issues during the audit (it will all roll into the draft report)
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GAO Report July 2008: Repercussions-Informal(cont)
 DCAA Supervisors will not eliminate “weak” audit findings,
but will defer to the contractor to resolve in the rebuttal
process
 DCAA Field Audit Managers (who sign the audit report) will
include “weak” audit findings unless contractor rebuttal
clearly and absolutely refutes & provides the
DOCUMENTATION
 ACOs will be left to decide additional “weakly” supported
audit findings
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GAO Report July 2008: Parting Comments
 Biased GAO reporting (credibility given to allegations unless
DCAA management could disprove through existing
documentation)
 GAO discounted the DCAA internal peer review process
because “questionnaire design can bias study results”
 GAO stated that if DCAA reports internal control
deficiencies, the contractor is required to take corrective
action (This is incorrect)
 GAO stated that DCAA failed to report estimating
deficiencies and the contract price has grown from $967MM
to $1.2B
 DCAA’s “bad news” is your bad news (if you are audited by
DCAA)
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Additional Updates
•Annual Incurred Cost Submissions & the Allowable Cost
& Payment Clause
•Select Areas of Unallowable Costs
•Time & Material Contract Updates
•Strategies for the Auditee (Yes that’s YOU!)
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52.216-7 Allowable Cost and Payment Clause
•Adequate final indirect cost rate proposal within 6
months following expiration of fiscal year
•In accordance with FAR 42.7
•42.703-2 Certificate of indirect costs
• Failure to certify (unilateral rates set low enough to
ensure that unallowable costs will not be reimbursed)
•42.704 Billing rates
• (e) Contractor and Government may mutually agree to
revise to reflect proposed indirect rates (certified)
•42.709 Penalties
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52.216-7 Allowable Cost and Payment Clause
•42.705-1 (b) Procedures (final indirect rate
determination)
• Final indirect rate proposal, “required content and
supporting data will vary depending upon business
type, size, accounting system capabilities”
• Guidance on what generally constitutes an adequate
final indirect cost proposal and supporting data, refer to
the Model Incurred Cost Proposal in DCAA Pamphlet
7641.90
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52.216-7 Allowable Cost and Payment Clause…In
application
•Solutions:
• Contractor incurred cost proposal should be consistent with
accounting system capabilities
• Supplemental data readily available if not provided with incurred
cost proposal
• Must have reconciliations which minimize inefficient or nonproductive use of auditor’s resources
• Post-audit conference to discuss “sufficiency issues” or lack
thereof and document (to mitigate chances for next year’s auditor
insisting on more)
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New or “In-process” Regulations
T&M (Time and Material Contracts)
FAR and DFAR Changes February 12, 2007
Three types of T&M Contracts and Contract Regs.:
 FAR 52.216-29 Non-commercial w/Adeq Competition
 FAR 52.216-30 Non-commercial w/o Adeq Competition
 FAR 52.216-31 Commercial
 DFARS effectively recognizes FAR -30 and -31 only
Major Changes:
 Eliminates “blended “T” rates”(prime, intercompany and
subcontractor labor separate and distinct)
 But…Commercial may be blended
 Commercial provides expansive “audit access”
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New or “In-process” Regulations
T&M (Time and Material Contracts)
Major Changes (cont):
 Requires specific definition of labor qualifications for any given
“T” rate category
 Clarifies reimbursement of prime indirect costs and profit (e.g.
if normally allocated, prime indirect costs are reimbursable +
prime profit allowed on subcontract & interdivisional costs, but
interdivisional costs w/o profit)
Most likely issue involving “interpretation” of FAR/DFARS:
 DCAA guidance that contracts prior to February 12, 2007
should be audited in accordance with contract terms and
conditions (DCAA will likely challenge most “blended rates”).
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Strategies for the Auditee
 Maintain a professional working relationship with DCAA & the ACO
 Ask for the “audit program” & an entrance conference
 Know what (data) you are providing the auditor
• Do not give the auditor free rein
• You can ask why auditor is requesting specific data; he/she may
or may not tell you why
• Request interim results (provides more time to rebut)
 Keep emails from the auditor
• Overly aggressive auditors rarely temper that aggression
• Don’t respond “in kind”
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Strategies for the Auditee (cont)
 Potential problems:
• Requests for information with a due date assuming no one has any other
responsibilities
• Requests for “concurrence” on audit exceptions with a due date which
allows very little time
• Requests for “concurrence” on an audit exception previously unidentified
(no hint that there were issues)
 Potential Solutions:
• Groundrules at the outset of the audit “quid quo pro”
• Identify a point of contact other than the field auditor (a supervisor)
• Pay attention to audit follow-up questions (additional inquiry with
implications of an issue?)
• If you have good working relationships, work to keep them…
• Document, Document, Document!
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Contact Information
K. D. “Ken” Bricker
(703) 970-0405 (office) or (703) 855-1815 (cell)
[email protected]
http://www.goodmanco.com
© Copyright 2009 Goodman & Company, LLP