1 Mysteries of a Compliant Accounting System Breakout Session # WC10-707 Melanie Burgess, CPA Sr. Consultant, Cherry, Bekaert & Holland, L.L.P. [email protected] Monday, July 19, 2010 2:00-3:15 pm 1 2 Objectives • • • • • • Requirement for adequate systems General data requested Preparing for audit Real world stories Proposed rule Closing remarks 3 The Myth • “Approved” Accounting Systems 4 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 5 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 6 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 7 Accounting System Defined • • • • Software People Processes Policies 8 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 9 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 10 Requested Data • Chart of Accounts • Trial Balance – in accrual; ties to all subsidiary reports – May also request G/L • • • • Financial Statements Project Report(s) Organization Chart List of government contracts 11 Requested Data, contd. • Policies and Procedures – Timekeeping – Billing – Indirect Rates – Budgeting – Segregating costs (emphasis on unallowable) • Survey of Contractor’s Organization 12 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 13 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 14 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) 15 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 16 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 17 Real World Examples • • • • • • Was adequate, now it’s inadequate Special requests Written policies Timekeeping Fully utilizing accounting system New business 18 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 – System deemed inadequate • Significant issues: – – – – – 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) 19 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 20 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 21 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 22 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 23 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 24 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 – DCAA not to return for 6 months to have sufficient data to test • Contractor lost two contracts as a result of report 25 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) 26 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 27 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) 28 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 – Explained why some items were not applicable • Adequate system and promise that there will be a followup audit to ensure system working 29 DFARS Case 2009-D038 • Acceptable business system rule • Mandatory - Withhold payments – up to 50% – Interim payments • • • • Cost reimbursement Incentive type T&M Labor Hour – Progress payments – Performance-based payments – No exception for commercial contracts 30 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 31 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) 32 QUESTIONS?