Column: Expectations for DCAA Audits in 2015

by Michael Smigocki, senior managing director, Federal Strategies Group LLC

While the Defense Contract Audit Agency (DCAA) has yet to issue its 2014 year-in-review report that details its accomplishments for the year and priorities of the upcoming year, based on our firm’s interactions with DCAA and its audits of our clients, we believe the direction and emphasis of DCAA for 2015 is quite clear.

The agency is still attempting to overcome the heavy criticism it received several years ago from Congress and the Government Accountability Office(GAO). A distinctive shift in audit focus has occurred from audit “quantity” to audit “quality.”

In addition, the various types of audits that DCAA performs (proposal and other pre-awards, incurred cost, termination, labor floor-checks, etc.) have been prioritized--which means the low priority work will not get completed until the higher-priority audits are completed and the opportunity presents itself.

With DCAA audit staffing not expected to increase, there are several issues that may impact many set-aside contractors during 2015.

1. Incurred cost audits will continue to be low priority.

Of all the ramifications to the GAO criticisms of several years ago, the placing of incurred cost audits as low priority has been most significant to set-aside contractors. Companies that perform under cost reimbursable or other flexibly-priced contracts are required to prepare an annual incurred cost submission detailing the actual costs incurred for the year. This report becomes the basis for DCAA’s incurred cost audits that enable a contractor to make final its billings under cost reimbursable contracts for the year.

Contractors often can have substantial amounts of unbilled costs awaiting such audits. This can have a tremendous negative impact on the cash flows of small and even mid-sized contractors who have very little (if any) equity to fund these amounts.

Since placing these audits as low priority, the backlog of unaudited years has been steadily growing. It is not unheard of to have contractors with up to five years of unaudited incurred cost rates. Despite DCAA being way behind on these audits, this does not relieve the contractor from submitting incurred cost submissions within the required six months after the end of the year (unless an extension is granted).

2. You may encounter your incurred cost audit being outsourced to a CPA firm.

DCAA has begun a program where incurred cost audits are being outsourced to CPA firms. An audit procurement was let by the government for such services and several CPA firms won the multiple-award contract.

I am not sure that having a CPA firm perform the audit is a good thing for contractors. In any type of multiple-award situation, the awardees all attempt to differentiate themselves with the hope of winning more future task orders. Unfortunately, in this type of procurement, one of the ways the firms will attempt to do this is based on the “findings” or disallowed costs they uncover. This may translate into a more detailed incurred cost audit than DCAA may have provided in the first place.

3. Pre-award accounting system audits will occur for those contractors that have yet to receive one.

The government has been placing more and more reliance upon the contractor’s accounting system to provide the necessary financial and operating data before, during, and after contract performance. As such, the government has certain requirements that must be in place in order for an accounting system to pass an audit.

Many accounting system packages make the claim that they are “DCAA approved”. Do not fall for such hype. DCAA does not approve any software package. It is the accounting processes and procedures that the company follows and how the system is configured is what is being audited. Even the best accounting packages out there will not pass audit if the processes and configuration are not proper.

4. Priorities will continue to be on proposal and termination audits.

Proposal and termination audits will continue to have the highest priority. This is due to the fact that the government does not want delays in the award of contracts or the close-out of terminated contracts. This is a positive for contractors as it means quicker contract awards and quicker pay-out on terminated efforts.

5. Expect labor qualifications audits on Time & Materials contracts.

Many contractors are finding that DCAA has recently been questioning whether employees are being classified in the proper labor category under Time & Materials contracts. Despite the government’s acceptance of the employees work effort, DCAA has been reviewing the qualifications for employees and comparing them to the minimum level required for the various labor categories. Failure to meet the minimum qualifications (per DCAA’s judgment) can result in having those employees reclassified into lower labor categories with lower billing rates while the government seeks reimbursement for the differential.

Government audits are a necessary evil in the government contracting industry. However, proper planning and understanding can greatly improve the overall process.

Michael Smigocki, CPA, CVA, ABV is the senior managing director of Federal Strategies Group LLC. He provides contract and management consulting, M&A advisory, forensic accounting and expert testimony services to the government contracting and technology industries. He can be reached at MikeS@FedStrat.com .

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Column: Expectations for DCAA Audits in 2015

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