DCAA Audits: Current Trends and Issues
Presented to: National Contract Management Association
October 13, 2011
Wayne Murdock, CPA/CISA
Sr. Managing Consultant
Beason & Nalley, Inc.
Copyright 2011 Beason & Nalley, Inc.
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Objectives
• Background events affecting DCAA audit priorities and
approach
• Impact of events on audits
• What audits come first
• What audits come later
• Primary audit issues:
• Cost proposals
• Accounting systems
• Incurred costs
• Predictions going into FY 2012
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Events that Changed DCAA Landscape
• GAO (2008 and 2009 reports)
• Independence
• Inadequate internal controls audits
• Insufficient transaction testing
• Audit supervisors overriding auditor findings
• Lack of auditor training
• Too much emphasis on metrics
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Events that Changed DCAA Landscape
• GAO recommendations
• More audit work to substantiate conclusions
• Emphasis on quality vs metrics
• Risk based audit approach
• More authority should be given to DCAA in access
to records
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Events that Changed DCAA Landscape
Commission on Wartime Contracting
• First interim report: lack of sufficient numbers of
competent government acquisition officials
• August 2009 Hearing pitted DCMA against DCAA
• 2010 Hearings ramped up government challenges to
prime contractor management of subcontractors
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Initial Impact on DCAA
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Increased DCAA independence
Increase substantive testing
More aggressive access to records policy
Less focus on materiality & increase in audit findings
All internal controls deficiencies significant
Increase in audit staffing
DCAA appealing decisions not consistent with audit
findings
• Lack of resources
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DCAA Audits - Highest Priority
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Cost proposals
Any other demand requests from DoD
REAs, terminations, & change order proposals
Follow-up audits
Defective pricing audits
DCMA and DCAA Joint Cost Recovery Initiative
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DCAA Audits - Secondary Priority
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Incurred Cost
Internal Controls
Accounting System audit
Civilian Agency audits
Expect stop and go audits
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Understanding Audit Process
&Working Relationships with
Auditors
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Understanding General Audit Process
• Auditor Planning
– Gain understanding of relevant internal controls
– Preliminary evaluation of data
– Perform risk assessment
– Determine scope
– Discuss with supervisor
– Audit program
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Understanding General Audit Process
• Executing Audit Plan
– Review policies/procedures if necessary
– Obtain sufficient evidential data
– Document basis of findings with adequate working
papers
– Discuss with supervisor
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Understanding General Audit Process
• Audit Report
– Include appropriate opinion or statement of issues
– Include adequate explanation of questioned costs or
deficient practices
– Obtain Contractor Comments
– DCAA Internal Review process (Technical and/or
Management)
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Contractor Preparations for Audit
• When notified of audit, discuss with auditor
– Defined purpose of audit and likely procedures
– Personnel most likely required to support audit
– Preliminary data required - ask to put in writing
– Dates/duration of audit
– Names of auditors performing audit (if “new auditor”
will they have a senior auditor helping them)
• Request entrance conference (face to face), if not
offered by auditor
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Contractor Preparations for Audit
• Preparations for entrance conference
– Gather data requested & have available
– Read applicable DCAA information/guidance
– If follow-up audit, have corrective plan ready
• During entrance conference
– Ask questions & take notes
– Designate principal point of contact
– Identify methods for delivery of data
– Discuss time frame of audit
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Coordination During Audit
• During audit
– Maintain close contact with auditor
– Address problems immediately
– Provide access to data promptly - know what data auditor
has been provided & compliance implications
– Request periodic status of audit
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Coordination During Audit
• During exit meeting
– Understand all problems or issues raised
– Ask for additional time to resolve problems or provide
added data before final report is released
– Ask for report draft, not just “findings”
– Request added audit calculations/workpapers if
necessary to clarify auditor’s position
– If General FAR Reference, ask for more specific FAR
reference (e.g. FAR 31.205-43 vs. FAR 31.205)
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General Guidelines - Audit Exceptions
Audit findings to which contractors must respond
• Questioned costs—examples:
 Incurred cost proposals
 Forward pricing proposals
 Indirect billing rates
• Business Systems (internal control) deficiencies:
 Systems issues—”risk” of overcharging gov’t
 Examples—accounting, billing, estimating, etc.
 Recommendations may include added oversight &
withholds of billed costs
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Summary of the General Audit Process
• Contractor’s obligation
– Provide all relevant evidential data requested
– Adequately support company position/policy
– Respond to audit exceptions with sufficient &
documented explanation
• Auditor’s obligation
– Provide well-supported conclusions based on
adequate evaluation of company data
– Support & disclose those conclusions in report/memo
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Responding to the Draft Audit Report
• Address each exception as there is a valid basis
• Response should be respectful
• Identify corrections implemented or provide a corrective
action plan
• Ensure written response identifies all relevant regulations
in their full context
• Do not include “case law”
• Revisit DCAA’s audit process for compliance with internal
DCAA policies and interpretation of regulations
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Issues on DCAA’s Hot Spot List
• Cost proposals
– Overall adequacy issues FAR 15.408, Table 15-2
– Forward pricing rates out years and inadequate
budgetary information
– Insufficient cost support for subcontractor proposals
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Issues on DCAA’s Hot Spot List
• Accounting systems - if requested or for follow-up
– Attribute statistical sampling of transactions
– Accounting for unallowable costs
– Insufficient documentation
– Lack of written policies & procedures
– Almost all deficiencies regardless of apparent
insignificance will be deemed significant
– Unpredictable time frame for corrective action followup
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Issues on DCAA’s Hot Spot List
• Incurred cost proposals (if initiated)
• Extensive testing (transaction analysis) - variable
sampling
• Costs questioned if documentation not sufficient higher use of “reasonableness test”
• Focus on sensitive accounts—
entertainment/recreation, advertising, exec.
compensation, prof. fees, travel, and organization
costs
• Recommendations of penalties application
(expressly unallowable indirect costs)
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Predictions
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Turnaround time not likely to improve
Internal controls & Incurred Cost audits lengthy
Auditors will report internal controls deficiencies
More pressure on contractors to provide access to
records
• Improvement in auditor communication
• Continued extensive testing
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Comments or
Questions
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Beason & Nalley, Inc.
101 Monroe Street
Huntsville, Alabama 35801
256-533-1720
Wayne Murdock, CPA/CISA
Government Compliance Sr. Managing Consultant
wmurdock@beasonnalley.com
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