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Mysteries of a Compliant
Accounting System
Breakout Session # WC10-707
Melanie Burgess, CPA
Sr. Consultant, Cherry, Bekaert & Holland, L.L.P.
mburgess@cbh.com
Monday, July 19, 2010
2:00-3:15 pm
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Objectives
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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
– 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
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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
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Software
People
Processes
Policies
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Basic Requirements
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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
– May also request G/L
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Financial Statements
Project Report(s)
Organization Chart
List of government contracts
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Requested Data, contd.
• Policies and Procedures
– Timekeeping
– Billing
– Indirect Rates
– Budgeting
– Segregating costs (emphasis on
unallowable)
• Survey of Contractor’s Organization
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Preparing for Audit
• Always be audit ready
– Expected to provide info quickly (see MRD from
12/19/08)
• Request audit number & name
• Review audit program to understand scope
– Pre-award Survey of Prospective Contractor
Accounting System – Activity Code 17740
– Standard Form 1408
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Preparing for Audit, contd
• Written description of basic account
structure
– System used (Deltek, QuickBooks)
– Identify pools and bases for indirect rates
and how to identify within the chart of
accounts
– Define company’s allocation methods and
indirect cost pools
– 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
– 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?
– But everything was fine in the last audit
• Proposed change to DFARS
– 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
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Was adequate, now it’s inadequate
Special requests
Written policies
Timekeeping
Fully utilizing accounting system
New business
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Adequate to Inadequate
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Accounting System: Deltek FMS
Revenue > $20 million
Original pre-award audit deemed system adequate
Several years later, updating with a post award audit
– System deemed inadequate
• Significant issues:
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Lack of billing policies and procedures
Lack of training on proper billing procedures
Billings not based on current accounting information
Not reconciling booked to billed costs
Not excluding unallowable costs (travel)
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Adequate to Inadequate, contd
• Contractor Response:
– Develop policies and procedures to
exceed DCAA’s recommendations
– Hire additional accounting staff
– Develop training plan
– Revise method to calculate invoices
– Revise expense reimbursement policy
– Hired consultant to assist with project
reconciliations and P&P development
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Adequate to Inadequate, contd
• Results
– Regular visits with DCAA to track
progress
– Meetings with customers to assure of
contractor’s capabilities/responsibility
– High cost in labor and time to correct
– Follow-up audit conducted
– 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
– KO read article on IG investigation and asked DCAA to
perform accounting system survey
– System found inadequate
– 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
– Inconsistent treatment of fringe benefits as direct or indirect
cost
• Mistake in presentation on the ICS
– Non-segregation of costs by contract type within a contract
• Accounting system is capable of this
• Setup corrected
– Indirect costs not billed using provisional billing rates
• Misunderstanding on ability to revise provisional rates
– 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
– Incurred cost submissions amended and
accepted by DCAA
– Negotiations with customers to award FFP
contracts or extend current contracts
– Large expense in time and money to resolve
– 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
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Accounting System: Solomon
Pre-award survey conducted
Contractor activities were adequate
Lacked written policies & procedures –
inadequate system
• Contractor put everything in writing within
weeks
– 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
– Not segregating unallowable G&A travel
– Not maintaining adequate contract briefs
• Contractor Response
– Hired a consultant to review segregation of unallowable
travel after adjusting system
– Prepared contract briefs in Word format following Schedule
S
– Hired a consultant to review briefs against contracts
– Consultant wrote report on procedures and results
• Letter provided to KO
– DCAA returned and deemed system adequate (took 6-8
months)
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New Business
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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
– Explained why some items were not applicable
• Adequate system and promise that there will be a followup audit to ensure system working
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DFARS Case 2009-D038
• Acceptable business system rule
• Mandatory - Withhold payments – up to
50%
– Interim payments
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Cost reimbursement
Incentive type
T&M
Labor Hour
– Progress payments
– Performance-based payments
– No exception for commercial contracts
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DFARS Case 2009-D038,
contd
• Systems involved
– Accounting
– Estimating
– Material Management & Accounting
– Purchasing
– Earned Value Management
– 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
– Before audit
– During audit
– Upon receipt of draft report
• Mock audit(s)
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QUESTIONS?