Independent Audits of Contractor Business Systems - Part 5

For the past few days, we've been discussing DoD's proposed rule that would require contractors to perform their own self-assessments of compliance with DoD's business system criteria and a further requirement that contractors commission an audit every three years by an independent CPA to test the contractors compliance with those system criteria. The proposed rule affects three of the six business systems covered in the DFARS (DoD FAR Supplement); estimating, accounting, and material management and accounting systems. It applies primarily to larger contractors, small businesses being exempt. If you're just joining this series, you may want to start at the beginning and read forward.
     Part 1
     Part 2
     Part 3
     Part 4

As discussed, the new rule would require contractors to provide the CPA's audit strategy, risk assessment, and audit plan to the Government auditor for review. Presumably, the Government auditor render his assessment, saying it is adequate or it needs refinement. Once the CPA's audit is finished, the contractor must maintain and make the CPA's working papers available to the Government auditor for review. This will be interesting to watch - it seems to us that a lot of CPA firms will be reluctant to expose their working papers to Government review and oversight (second-guessing). In any event, the way that this new rule works, is that the Government auditor will review the CPA's audit report and working papers and advise the contracting officer on what it thinks.

The contracting officer then must make a decision as to the acceptability of the estimating, accounting, and/or MMAS systems for Government contracting purposes. In evaluating the acceptability of these systems, the contracting officer, in consultation with the Government auditor or functional specialist, shall determine whether the contractor's system complies with the DFARS system criteria. In making that determination , the contracting officer shall consider;

• the contractor's annual report and the CPA audit.
• any other findings and recommendations reported by the Government auditor including the assessment of the contractor's CPA audit report and related documentation.

To summarize, the contractor's documentation requirements include:

1. Documentation to provide reasonable support for its annual assessment. 
2. Information considered in the selection of a CPA
3. Arrange for Government access to the working papers supporting the CPA audit reports

Click here to read Part 6 in this series where we discuss a few miscellaneous items included in the proposed regulation.