Mysteries of a Compliant Accounting System by f3Sh3H5


									                        Mysteries of a Compliant
                          Accounting System

                                 Susan Moser, CPA
                      Partner, Cherry, Bekaert & Holland, L.L.P.

                                September 23, 2010

The Firm of Choice.                                      
                     Requirement for adequate systems
                     General data requested
                     Preparing for audit
                     Real world stories
                     Proposed rule
                     Closing remarks

The Firm of Choice.                         1  
                         The Myth

               “Approved” Accounting Systems

The Firm of Choice.         2   
                                      The Truth
           “Adequate” Accounting Systems
                o Based on contract type and requirements
                o FAR 16.301-3 – adequate to determine costs applicable to
                  cost reimbursement contracts (no FAR requirement for T&M
                  or FFP contracts)
                o FAR 9.103 – KO must determine responsibility IAW FAR
                       May request a pre-award survey (FAR 9.106)
           No longer adequate in part – either adequate or

The Firm of Choice.                         3              
                      When are Audits Conducted?

         Prior to award of cost or T&M type contract
         After award of contract to verify system functioning
         If accounting software changes
         Mergers and Acquisitions

The Firm of Choice.                  4             
                          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

The Firm of Choice.                        5           
                      Accounting System Defined

                            Software
                            People
                            Processes
                            Policies

The Firm of Choice.                     6
                              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

The Firm of Choice.                           7            
                             Size Matters

          Compliant system varies by company size
          1 man shop requires little controls or written
          1000 person company needs segregation of
              duties, employee training, written policies

The Firm of Choice.                 8             
                            Requested Data
           Chart of Accounts
           Trial Balance – in accrual; ties to all subsidiary reports
                o May also request G/L
           Financial Statements
           Project Report(s)
           Organization Chart
           List of government contracts

The Firm of Choice.                      9            
                        Requested Data, contd.
           Policies and Procedures
                o Timekeeping
                o Billing
                o Indirect Rates
                o Budgeting
                o Segregating costs (emphasis on unallowable)
           Survey of Contractor’s Organization

The Firm of Choice.                   10              
                        Preparing for Audit
           Always be audit ready
                o Expected to provide info quickly (see MRD from 12/19/08)
           Request audit number & name
           Review audit program to understand scope
                o Pre-award Survey of Prospective Contractor Accounting
                  System – Activity Code 17740
                o Standard Form 1408

The Firm of Choice.                        11                
                       Preparing for Audit, contd.

           Written description of basic account structure
                 o System used (Deltek, QuickBooks)
                 o Identify pools and bases for indirect rates and how to identify
                   within the chart of accounts
                 o Define company’s allocation methods and indirect cost pools
                 o Overview only – may only be a few pages

The Firm of Choice.                          12                   
                      Preparing for Audit, contd.

           Reconcile all reports and correct variances or have a
               thorough explanation available prior to audit
           Select a variety of timesheets
                o 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%

The Firm of Choice.                        13                 
           Post Award Accounting System Audits
           Pre-award Survey – conducted again?
                o But everything was fine in the last audit
           Proposed change to DFARS
                o Potential for withholding if systems are inadequate

The Firm of Choice.                          14               
            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

The Firm of Choice.                  15           
                              Real World Examples
                       Was adequate, now it’s inadequate
                       Special requests
                       Written policies
                       Timekeeping
                       Fully utilizing accounting system
                       New business

The Firm of Choice.                         16    
                          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
                o System deemed inadequate
           Significant issues:
                o Lack of billing policies and procedures
                o Lack of training on proper billing procedures
                o Billings not based on current accounting information
                o Not reconciling booked to billed costs
                o Not excluding unallowable costs (travel)

The Firm of Choice.                            17              
                      Adequate to Inadequate, contd.
           Contractor Response:
                o Develop policies and procedures to exceed DCAA’s
                o Hire additional accounting staff
                o Develop training plan
                o Revise method to calculate invoices
                o Revise expense reimbursement policy
                o Hired consultant to assist with project reconciliations and P&P

The Firm of Choice.                         18                  
                      Adequate to Inadequate, contd.
           Results
                o Regular visits with DCAA to track progress
                o Meetings with customers to assure of contractor’s
                o High cost in labor and time to correct
                o Follow-up audit conducted
                o Received notice of adequate system 1 year after initial audit

The Firm of Choice.                         19                  
                          Prime & KO Request
           Accounting System: Peachtree
           Revenue > $10 million
           Prime contractor questioned propriety of subcontractor cost
           IG investigated subcontractor and found no improprieties
           Subcontractor awarded large prime contract - cost reimbursable
                o KO read article on IG investigation and asked DCAA to perform
                  accounting system survey
                o System found inadequate
                o Different KO received report and stated no renewal of cost contract

The Firm of Choice.                            20                    
                       Prime & KO Request, contd.
           Negotiated with KO to receive FFP contract
           Significant issues
                o Inconsistent treatment of fringe benefits as direct or indirect cost
                       Mistake in presentation on the ICS
                o Non-segregation of costs by contract type within a contract
                       Accounting system is capable of this
                       Setup corrected
                o Indirect costs not billed using provisional billing rates
                       Misunderstanding on ability to revise provisional rates
                o Indirect rates not adjusted to actual year end rates
                       Creating policy to make interim billing adjustments

The Firm of Choice.                              21                      
                       Prime & KO Request, contd.
           Results
                o Incurred cost submissions amended and accepted by DCAA
                o Negotiations with customers to award FFP contracts or extend
                  current contracts
                o Large expense in time and money to resolve
                o 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
The Firm of Choice.                          22                
                          Policies & Procedures
           Accounting System: Solomon
           Pre-award survey conducted
           Contractor activities were adequate
           Lacked written policies & procedures – inadequate
           Contractor put everything in writing within weeks
                o DCAA not to return for 6 months to have sufficient data to test
           Contractor lost two contracts as a result of report

The Firm of Choice.                         23                  
                      Policies and Procedures, contd.

           DCAA returned and found directly
               associated unallowable costs that were not
           Maintained system was inadequate
           As of March 2010, system still inadequate (9
               months after initial report)

The Firm of Choice.                  24       
           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

The Firm of Choice.                25          
                      Accounting System Features
           Accounting System: Deltek Costpoint
           Significant Issues
                o Not segregating unallowable G&A travel
                o Not maintaining adequate contract briefs
           Contractor Response
                o Hired a consultant to review segregation of unallowable travel after
                  adjusting system
                o Prepared contract briefs in Word format following Schedule S
                o Hired a consultant to review briefs against contracts
                o Consultant wrote report on procedures and results
                       Letter provided to KO
                o DCAA returned and deemed system adequate (took 6-8 months)

The Firm of Choice.                             26                     
                                 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
                o Explained why some items were not applicable
           Adequate system and promise that there will be a follow-up audit
               to ensure system working

The Firm of Choice.                          27             
                           DFARS Case 2009-D038
           Acceptable business system rule
           Mandatory - Withhold payments – up to 50%
                o Interim payments
                       Cost reimbursement
                       Incentive type
                       T&M
                       Labor Hour
                o Progress payments
                o Performance-based payments
                o No exception for commercial contracts
The Firm of Choice.                          28 
                      DFARS Case 2009-D038, contd.
           Systems involved
                o Accounting
                o Estimating
                o Material Management & Accounting
                o Purchasing
                o Earned Value Management
                o Property Management
           Public Comments closed; committee report due
               July 28

The Firm of Choice.                      29      
                                 Final Remarks
           Don’t assume system is adequate
           Continuous improvement
           Consider expert advice
                o Before audit
                o During audit
                o Upon receipt of draft report
           Mock audit(s)

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The Firm of Choice.       31

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