DCAA Audit Changes: More Scrutiny of Contractors By Glenda Tysinger Congressional and GAO criticism of the Defense Contract Audit Agency has prompted significant changes in the audits it is currently performing. In response to two negative Government Accountability Office audit reports of the agency, DCAA has amended and expanded the audit programs it is performing for both major and non-major government contractors. The most recent changes will impact the concurrent audits, post year-end incurred cost audits, contract overpayments, labor floor checks, and cost element reviews. During an audit of a contractor’s accounting system controls, auditors will perform procedures that address the new mandatory disclosure requirements in FAR 52.203-13, as well as the Contractor Code of Business Ethics and FAR 52.204-14, Display of Hotline Poster. The impact of these changes will place significant pressure on all contractors to prepare for government scrutiny of records and practices. The emphasis is likely to be accessing records and employees; incurred cost submissions; preaward audits; and policies and procedures related to contractor code of business ethics and conduct. DCAA can initiate a Labor Floor Check at any time without prior notification. The focus of the audit is to ascertain contractor’s compliance with internal timekeeping controls and procedures, the reliability of employee time records. Are employees actually at work, are they performing in assigned job classifications, and is time charged to the proper cost objective? Are you ready for an unannounced floor check? A key element of the Obama administration’s acquisition reform initiative is to shift to fixed price contract types. This would indicate that an emphasis would be placed on progress payments, percentage of completion and defective pricing audits. The current FAR 32.101 and 32.102 provisions require that payments are commensurate with work completed that meet the standards under the contract, and payments may not exceed 80% of the eligible costs of worked completed on undefinitized contract actions. Could this lead to Incurred Cost Submissions for contractors who have no cost-plus type contracts? In recent months, the emphasis of preaward audits has shifted to include all contract types and to include both existing and new contractors. The objective of a preaward audit is to opine as to whether the design of the contractor’s system is acceptable for an award of a prospective government contract as well as whether the contractor has adequate financial resources to perform under the contract. The audit would include verification that the system meets Generally Accepted Accounting Principles (GAAP); a proper segregation of costs; direct costs are by contract; the accumulation of costs are under general ledger control; a timekeeping system where labor is charged to intermediate and final cost objectives based on a document and is certified by the employee and approved by a supervisor; identification and exclusion of unallowable cost; interim indirect rates can be readily calculated; produce billings; produces reliable data; and is the accounting system in operation. Is your accounting system ready for an audit? The new FAR provisions include policies and procedures related to contractor code of business ethics and conduct. The provisions require government contractors to conduct themselves with the highest degree of integrity and honesty. In addition, contractors should have a written code of business ethics and conduct, an employee business ethics and compliance training program, and internal control systems that: •are suitable to the size of the company and extent of involvement in government contracting; •facilitate timely discovery and disclosure of improper conduct with government contracts; and •ensure corrective measures are promptly instituted and carried out. Do you have a written code of business ethics and conduct? This tidal wave of new audits and expanded procedures carries a high likelihood of reported deficiencies and disallowance of costs for your company. Are you ready for deluge? Have you reviewed your Accounting Policies and Procedures for aspects of your company? Glenda Tysinger is a senior manager with Federal Strategies Group, LLC. She performs management and regulatory consulting, accounting support as well as government contract consulting to her clients. She can be reached at GlendaT@Fedstrat.com.