Don’t Let
Accounting
Pitfalls
Jeopardize Your
Patricia J. Mensch
8(a)
Contract
Partner, Government Contract Consulting
June 18, 2014
Agenda.
•
Introduction to accounting requirements
•
Understand your contracts
•
Accounting system requirements
•
Monitor your subcontractors
•
Potential audits
2
Know Your Accounting
Requirements.
Your 8(a) status does not exempt you from accounting requirements in
the Federal Acquisition Regulation.
Federal auditors will not “give you a break” because you are an 8(a).
There are lots of rules and regulations, but today our goal is to discuss
the practical application of these rules to your business.
3
Not All Contractors
Have the Same
Accounting Requirements.
Company size is not the primary driver
• Large companies may have little or no special requirements
• Small 8A companies may have detailed compliance requirements
Company size may influence the complexity of the accounting system
• Policies and procedures will likely be influenced by the companies
size so be cautious about borrowing policies from other companies
• The indirect rate structure may be impacted by the company’s size
but not the basic requirement to properly allocate indirect costs in a
reasonable manner
4
The Amount of
Regulation and
Compliance Required
is Determined by
Contract Award Type.
Basic Types of Awards
• Commercial
• Competitive Bid
• Negotiated Procurement
o Sole Source
o Price is not the determining factor
5
Type of Award is the
Starting Point for
Determining Accounting
Requirements.
• Firm fixed price (FFP)
o How will you be paid?
• Time and Material/Labor Hour
o Must have an adequate accounting system
o Will you have materials or ODC‘s?
• Cost reimbursable – CPFF, CPAF, CPIF
o Must be able to track contract costs
o At what level will you need to track costs?
6
Don’t Be Surprised!
Be sure that you understand
your contract terms
•
•
•
•
At what level must costs be accumulated?
Is the contract type really T&M, or does the customer just
require that billing format?
Do your vouchers reconcile to your books?
Don’t assume that the contract is closed just because the
period of performance has ended.
7
Subcontractors - Be
Very Careful and Gain a
Complete Understanding
of Your Contract!
Be aware of flow down requirements
and contract clauses
• Termination for convenience of prime
• Blanket flow down of all prime contract clauses
• Inconsistencies among documents – which will take
precedence?
• What is the close out process?
8
Having an Approved
Accounting System is
the Gateway to Award
of a Cost Type
Contract.
• Failure to demonstrate adequacy will stand in the way
of award
o Reversing the auditor’s opinion is very difficult
o Your customer will not be happy
•
Don’t wait for DCAA to arrive to tell you what an adequate accounting
system is
o It’s not their job
o It’s pass or fail
9
Basic Accounting
Requirements.
• In accordance with GAAP
o Not cash basis
o Not tax basis
o 8(a) exception for companies with revenue under $2,000,000, with
no flexibly priced contracts
• Common audit findings
o Tax depreciation not GAAP
o Proper accruals missing
– Vacation , bonus, pension, salary
o Prepaids improperly expensed
o Appropriate cutoffs
10
Additional Accounting
Requirements.
• Segregate Costs by Contract
o Adequate timekeeping system
o Training
• Segregate FAR unallowable costs
• Common audit findings
o Related party rent
o Travel, business meals
o Bonus
o Consulting costs
11
Monitor Your Rates.
• Provisional billing rates are just that – provisional
• FAR requires that you bill based on your expected final rates and
adjust your provisional rates if they are no longer valid
• Calculate your year to date rates monthly
• Don’t wait to the end of the year or the end of the contract to
adjust your rates
o Government may determine that your accounting system is
inadequate
o You may have to pay back money that you could have used
12
Even Small
Companies Need
Basic Policies and
Procedures.
• DCAA will expect large businesses to have many established
policies and procedures
• Small companies need the basics
o
o
o
o
o
Accounting system description
Treatment of unallowable costs
Segregation of direct and indirect costs
Government billing
Timekeeping
• Test your policies and procedures against what you are actually
doing – DCAA will!
13
Monitor Your
Subcontractors.
Pre Award
• Be careful as to the type of subcontract
award you make
• If cost type, you must
o Verify that they have an adequate accounting system
• Appropriate flow downs are critical
o Termination clauses
o Don’t automatically flow down all of your prime contract clauses
• Obtain ACO approval to subcontract when required
14
Monitor Your
Subcontractors.
Post Award
• As the Prime, you are responsible for your
subcontractors
o If the subcontractor overbills or bills for unallowable costs, you are
responsible
• Prime is responsible for monitoring subcontractor
awards, rates, subcontract performance
• If cost type subcontract, you must
o Verify that they submit an ICP
o Verify that they monitor their rates and adjust in accordance with FAR
15
Finalize Allowable
Contract Costs
Annually.
Incurred Cost Proposals
• Determine if you have a submission requirement
o CPFF, T&M
o Prime Contracts
o Subcontracts
• Complete the DCAA Adequacy Checklist
• Common Problems
o
o
o
o
o
o
o
Subcontractors – who/where to submit
Providing FFP contract details
Reconciling T&M labor hours billed to books
Reporting incorrect cumulative contract cost
Reporting costs at the incorrect level
Missing/incomplete required schedules
Failure to include all pools in required schedules
16
Audit Interfaces.
• Manage the audit
• Understand the regulations
• Understand the long term impact of audit findings
o Does the issue impact the cost recovery, or are you in an overrun
position?
o Does the issue impact your ability to win new work?
o Does the issue impact your relationship with your customer?
17
Accounting
System Audits.
• Pre Award Audits
o
o
o
o
Demonstration of accounting system
Detailed testing not required
Policies and Procedures
Prepare a walk through
• Post Award Audits
o
o
o
o
o
Test that the system is operational
Trace timecards
Test transactions
Test cutoffs
Test accruals/prepaids
18
Be Prepared for Your
Accounting System
Audit.
• Understand DCAA’s audit access rights - what
they can or cannot request
• Be prepared and organized to support the audit
– first impressions count!
• Understand the lingo so that you respond
correctly to questions – don’t volunteer
information
• DCAA Auditor quote – “If you prep for the
pre-award audits, they go pretty quickly.”
19
Accounting Audits.
• Voucher Audits – Cost type contracts
o Test billed costs to accounting books and records
o Test for timely vendor payments
o Test for correct indirect billing rates
• Voucher Audits – T&M contracts
o Test billed hours to timecards and books
o Review for employee qualifications
o Test for correct billing rates compared to contract
20
Voucher Audits Are
Critical to Your Cash
Flow!
• Failed Voucher Audit Contributes to
Unfavorable Auditor Risk
Assessment
o Increased voucher audits
o Increased scrutiny of incurred cost proposals
o Delays in payment
21
ICP Audits.
• DCAA performs a risk assessment
• DCAA tests reconciliation of ICP to books
• DCAA performs detailed testing
o Labor – Timecards
o Expense Accounts – FAR Part 31 Unallowable Costs
o Bases and Pools
22
Accounting Audits.
• Progress Payment Audits – Firm Fixed Price
Contracts with payments based on costs
o Require an adequate accounting system
o Test the mathematical formulas used in the voucher
o If the auditor finds significant errors, the progress payment is rejected
and audit effort is suspended
o Apply a loss ratio if the contract is in a loss position
o Verify costs billed to accounting books and records
o Verify indirect costs billed are based on approved billing rates
o Verify vendors paid in accordance with vendor terms
o Require a verifiable ETC/EAC
23
Questions.
24
Presenters
Contact Information.
•
Patricia J. Mensch
– Email: pmensch@mgocpa.com
– Phone: (858) 792-2210
•
MGO Mensch
– http://www.mgomensch.com/
25