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PowerPoint Presentation - National Contract Management Association

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PowerPoint Presentation - National Contract Management Association Powered By Docstoc
					   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
                      1
                                                    1
Objectives

•   Requirement for adequate systems
•   General data requested
•   Preparing for audit
•   Real world stories
•   Proposed rule
•   Closing remarks


                  2
The Myth

• “Approved” Accounting Systems




               3
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

                       4
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



                 5
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
                 6
Accounting System Defined

•   Software
•   People
•   Processes
•   Policies




                7
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


                   8
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


                 9
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
                   10
Requested Data, contd.

• Policies and Procedures
  – Timekeeping
  – Billing
  – Indirect Rates
  – Budgeting
  – Segregating costs (emphasis on
    unallowable)
• Survey of Contractor’s Organization

                 11
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



                    12
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
                   13
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)
                     14
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



                   15
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
                16
Real World Examples

•   Was adequate, now it’s inadequate
•   Special requests
•   Written policies
•   Timekeeping
•   Fully utilizing accounting system
•   New business


                  17
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)


                             18
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
                   19
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
                   20
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
                          21
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



                             22
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

                       23
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

                       24
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)


                25
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
                26
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)

                           27
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 follow-
  up audit to ensure system working

                          28
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

                        29
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
                 30
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)

                   31
QUESTIONS?




             32

				
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