Are you ready for a DCAA Post Award Accounting System Audit?

I recently met virtually with a client the other day who received a notification from the DCAA of the upcoming commencement of a "Post Award Accounting System Audit" that included a request for an entrance conference for a "walkthrough". The criteria set forth are similar to those contained in the pre-award SF1408 with several twists. Specifically, since their contract is a Department of Defense Time and Materials award, it is subject to the DFARS 252.242-7006 "Accounting System Administration" regulation. This type of audit is performed to ensure that the contractor who previously passed their pre-award survey and was awarded a flexibly-priced contract is actually using the accounting system that was deemed to be "adequate" or "acceptable". This is also why DCAA does not "approve" accounting software because there is no guarantee that a contractor will actually utilize a given accounting system and get it fully operational. 

The first item on the list of requirements to be demonstrated is a "schedule of total dollars processed through the accounting system for the 12 months ended September 30, 2023 summarized by total dollars and dollars by Government flexibly priced contracts (cost type, T&M/LH), DoD commercial T&M/LH, and fixed price contracts." In other words, the ICE Schedule H where a contractor must provide dollar amounts by contract revenue type including all direct costs and allocable indirect  burdens (e.g. G&A). With only Firm Fixed Price and Time and Materials contracts in their mix and no commercial business, this requirement is rather easy to accommodate. 

Next up on the list is a CAS disclosure statement, if applicable. In this case the T&M contract award is not CAS covered, and therefore nothing is required to meet that particular criterion. 

The third item on the list calls for a current chart of accounts and the hierarchy (e.g., fringe, overhead, G&A) of your indirect rate structure. "The demonstration should include a walkthrough of the chart of accounts and provide an explanation of how changes to the chart of accounts are made." Since many of the requirements set forth on the SF1408 are directly related to the design of a contractors chart of accounts, this is where you must demonstrate how your system accumulates costs under general ledger control. 

Among the biggest tripwires when it comes to post-award audits is when a contractor's internal controls and policies and procedures are not up to snuff. In criterion number four, the auditors want to see documentation including: 

• organizational chart (or flowchart) of the operations,
• policies and procedures related to delegation of authority and delineation of duties and responsibilities,
• description of how the organizational structure provides for segregation of duties and responsibilities of accounting and billing functions,
• if segregation of duties is impractical, explain how management mitigates the risk associated with lack of segregation of duties.

You might think that the above is only for large entities and not for your one or two person accounting department, but you would be wrong. The regulations and guidance aren't written with consideration about company size at the forefront, but with compliance at the core. 

The similarities to the SF1408 show up in the DFARS System Criteria with a few extras. On the SF1408, there are three sections with section two criteria 2a through 2j and section three criteria 3a and 3b, whereas the DFARS 252.242.7706 has the following differences:

• A sound internal control environment, accounting framework, and organizational structure;  For example, with respect to internal control environment:
      "How has management created and maintained a culture of honesty and ethical behavior to comply with FARs 52.203-13 and/or 52.203-14, if applicable?
      How does management communicate code of ethics and conduct to employees?"
• Reconciliation of subsidiary cost ledgers and cost objectives to general ledger, 
• Approval and documentation of adjusting entries
• Management reviews or internal audits of the system to ensure compliance with the Contractor’s established policies, procedures, and accounting practices. For example, describe management monitoring activities related to ensuring compliance with established policies and accounting practices, accounting adjustments, labor corrections/transfers, compliance with contract provisions, provisional interim indirect cost billing rates,
• Cost accounting information, as required to readily calculate indirect cost rates from the books of accounts, 
• Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms.

You will notice that two of the criteria that are not included on the SF1408 deal with reconciling your job cost ledger and billing amounts to your general ledger. If you want to fail a post-award audit, then don't bother with account reconciliation and hand the auditors unreconciled schedules and you will fail; not because of inadequate software, but because you didn't perform basic accounting functions. You will also notice that these additional criteria deal mainly with internal controls and not software features, with the exception of indirect rate calculations from your books of record. Yes, this is a software feature that is absent from the pre-award survey criteria for reasons unknown. 

To conclude, if you receive notice about a pending DCAA post-award audit, you will need to demonstrate the same accounting system capabilities that greenlighted the award to be given to your company in the first place and more. Make certain that you have your employee handbook (it should contain a code of ethics) and your accounting policies up to date, and be prepared to demonstrate your accounting system procedures and any related documentation. I have often heard throughout the years about companies investing in expensive DCAA-compliant accounting software but not getting it up and running. You definitely don't want to be one of those companies when this particular audit takes place. With respect to our client, I spent about forty-five minutes going over each criteria on the Accounting System Administration checklist, and without exception the SYMPAQ software feature set can easily address the desired capabilities in the upcoming walkthrough demonstration.