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Business Systems and Federal Audit Compliance

When it comes to your business systems and related audits, you may be surprised to know that such systems extend beyond your accounting/financial system. In fact, there are six categories of business systems that include Accounting, Estimating, Material Management, Purchasing, Earned Value Management, and Property Management per DFARS 252.242-7005. Some of these audits are performed by the DCAA, and others are performed by the DCMA. In this post, we'll review each type and what you can expect if you are subject to any of the business system audits. 

According to the Defense Federal Acquisition Regulation Supplement (DFARS) Business Systems Rule, “Contractor business systems and internal controls are the first line of defense against waste, fraud, and abuse.” This means that the DCAA and DCMA will be reviewing your business system in its entirety and not just the capabilities of your information technology which, of course, includes software applications. They also evaluate your policies and procedures along with your staff's adherence to internal controls which comprise the entirety of your business systems. Chapter 5 of the DCAA's Contract Audit Manual covers business systems and states, "The objective of each business system audit is to gather sufficient appropriate evidence to express an opinion on the contractor's compliance with the applicable business system criteria (e.g. DFARS, FAR, applicable laws and regulations, and contract terms) and to support the contracting officer’s compliance determination." Furthermore, contractor business systems audit guidelines also address, "While the discovery of fraud or other unlawful/improper activity is not the primary objective of any audit, the auditor should be attentive to any condition which suggests that such a situation may exist."

Accounting System Audit

DCAA has primary audit responsibility for your accounting system, including Pre-Award Surveys based on the SF1408 criteria.
Acceptable accounting system means a system that complies with the system criteria to provide reasonable assurance that -

  1. Applicable laws and regulations are complied with;
  2. The accounting system and cost data are reliable;
  3. Risk of misallocations and mischarges are minimized; and
  4. Contract allocations and charges are consistent with billing procedures.

Estimating System Audit

DCAA has primary audit responsibility for your estimating system. These audits generally apply to large contractors that received a DoD prime contract or subcontract in the preceding fiscal year totaling $50M or more and cost or pricing data is required. Your cost estimating system includes “Budgeting, planning, estimating methods, techniques, accumulation of historical costs, and other analyses used to generate cost estimates.”​  

DFARS 252.215-7002 Cost Estimating Requirements

  1. Is maintained, reliable, and consistently applied;
  2. Produces verifiable, supportable, documented, and timely cost estimates that are an acceptable basis for negotiation of fair and reasonable prices;
  3. Is consistent with and integrated with the Contractor’s related management systems; and
  4. Is subject to applicable financial control systems. 

Materials Management and Accounting System (MMAS) Audit

DCAA has primary audit responsibility for your MMAS. These audits apply to a contractor's system or subsystems for planning, controlling, and accounting for the acquisition, use, issuing, and disposition of material. Areas of scrutiny include:

  1. Accounting-related data for acquisition, use, and disposition of materials
  2. Bill of materials by project
  3. Inventory control & costing methodology
  4. Allocations of materials where applicable

Earned Value Management System (EVMS) Audit

DCMA has primary audit responsibility for your EVMS. These audits apply to major acquisitions and compliance takes effect for awards of $20,000,000 or more. Per DFARs 234.201 "For cost or incentive contracts and subcontracts valued at $50,000,000 or more, the contractor shall have an earned value management system that has been determined by the cognizant Federal agency to be in compliance with the guidelines in ANSI/EIA-748."

There are 32 EVMS guidelines contained in ANSI/EIA-748 that a contractor must follow.

Purchasing System Audit

DCMA has primary audit responsibility for your Purchasing System.  CPSR audits are particularly focused on your policies and procedures with respect to procuring goods for performance on a Federal contract. For example, do you have procedures in place to avoid doing business with debarred or suspended contractors? Do you have a written policy to comply with Buy American Laws? More information can be found in FAR 44.3.

Property Management System Audit

DCMA has primary audit responsibility for your Property Management System. The primary focus is on internal controls surrounding Government property (i.e., GFE) under the possession and control of contractors. Guidance can be found in FAR Part 45 and FAR 52.245-1

To conclude, federal agency business systems extend beyond accounting software compliance reviews, and business system audits encompass your policies and procedures, human elements, and last but not least - software















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