Audited Financial Statements Do Not Provide Assurance that Cost Accounting System is Adequate for Government Contracting

Back in 2016, the National Institute of Health (NIH) issued a solicitation for "IT (Information Technology) Solutions and Services". Bidders were advised that proposals would be evaluated in two phases. In Phase 1, the Government would evaluate the proposals based on four go/no-go requirements, one of which was a verification of an adequate accounting system. The solicitation advised that proposals found to be unacceptable in any of the four Phase I requirements would be ineligible for further consideration for award.

Shivoy Inc was one of 552 bidders for the work but NIH found the its proposal unacceptable at Phase 1 because it did not include verification that its CTA member (Contractor Team Arrangement) had an adequate accounting system. Thus, Shivoy's proposal was rendered ineligible for further consideration.

Shivoy appealed to the GAO (Government Accountability Office) arguing that NIH unreasonably found its proposal unacceptable because its CTA member had in fact, submitted documentation that complied with the solicitation's requirement for the verification of an adequate accounting system.

NIH responded by noting that the documentation submitted by the CTA member was not verification of an adequate accounting system but only a standards auditors' report for a financial audit of the CTA's parent company and subsidiaries. A standard financial statement audit report simply indicates that an accounting system utilized to prepare audited financial statements was operated in accordance with generally accepted accounting procedures. Such a report does not assert, either implicitly or explicitly that the accounting system was adequate for determining costs applicable to a cost-reimbursement contract in accordance with FAR.

The GAO sided with NIH and denied Shivoy's appeal. The GAO found that NIH's evaluation reasonable and consistent with the solicitation. The solicitation clearly required verification on an accounting system that had been audited and determining costs applicable to the contract in accordance with FAR. Audited financial statement fall far short of assuring that the (cost) accounting system has such capabilities.