When you contract with the federal government, you will likely encounter the Defense Contract Audit Agency, but your experience doesn't have to be stressful. With preparation and planning, your company can turn the challenge of a DCAA audit into an opportunity to refine your systems and processes.
Audits come in varying levels of complexity, with certain types being less involved than others. However complex an audit is, not being properly prepared for it can be potentially harmful to your company.
Enlist the help of a knowledgeable advisor
Perhaps the best thing you can do to prepare for a visit from the DCAA is to have a knowledgeable advisor by your side. Interacting with DCAA auditors can be confusing to accountants and non-accountants alike if you are unfamiliar with government audits. Government accounting rules are centered around the Federal Acquisition Regulations (FAR) and Cost Accounting Standards (CAS) that are not used in conducting purely commercial business, so an experienced government accounting professional can help you navigate the terrain.
Understand the audit's scope and what is expected of you
Next, you need to be sure you understand what information the DCAA auditors will expect you to provide, as well as the scope of the audit being performed. These expectations will vary according to the type of audit you are undergoing. For example, the Accounting Systems Adequacy Audit, or Pre-award Survey, is a common type of DCAA audit for a contractor to undergo when in pursuit of flexibly priced contracts. For this particular type of audit, DCAA will be examining your processes and systems to determine whether your accounting software along with written policies and procedures are compliant for cost tracking and billing. Understanding what the auditors will be looking for will help you to anticipate their questions and have the required information ready.
Not only should you be prepared to provide information that is required, but you should also be able to distinguish between information requests and information requirements. This is where your advisor can help you to be compliant with requirements without having to hand over every piece of data your firm owns.
Become familiar with common types of audits
Understanding the type of audit you are facing will help you prepare more quickly. The two of the most common types of audits you will likely face include:
Pre-Award Audit: As mentioned above, this type of audit examines your accounting systems, policies, and procedures. You can be sure you are equipped to handle this audit by ensuring that your cost accounting system complies with the SF1408. You can also ask yourself some questions, using your answers to gauge how prepared you are for the audit. For example, ask yourself whether your books follow GAAP and whether your indirect costs are segregated from your direct costs. Determine whether your timesheets, labor distribution detail and billing vouchers numbers all agree and reconcile. Never hand the auditor data that has not been reconciled. These types of self-inquiries performed now can help you prepare for similar questions from DCAA.
Incurred Cost Audit: This type of audit examines a contractor's costs in either final or interim form and expresses an opinion as to their validity. The auditors will be determining if these costs are reasonable, allocated properly to the contract, and were not prohibited (unallowable). DCAA has been looking even harder for unallowable costs and over-billings. Indirect rates that are used prior to establishing a final rate are generally referred to as provisional billing rates. Contractors may find it difficult to ascertain what their projected indirect rates will look like a year in advance, so new provisional rates and a retroactive rate agreement can be established with the auditors.
Learning about the process and its expectations can greatly help you prepare. Seeking out such an advisor before the audit letter arrives, and equipping yourself with knowledge about the requirements for the audit you face are smart ways to prepare for the challenges of a DCAA audit.