There are a few internal control systems that are absolutely essential for small Government contractors. Among them are accounting, timekeeping, and billing systems. Without effective policies and procedures for these systems, contractors are going to find themselves at odds with Government auditors sooner or later. The time to ensure that these systems are operating effectively is right now. If you wait until an audit is requested, its probably too late. When an auditor tests the adequacy of a system, he/she is looking at how it operates in practice, not in theory. An auditor will make assessments based on how the system handled historical transactions. If a contractor modifies its system upon learning that an audit is imminent, there would probably be no completed accounting cycle on which to test the new system. The auditor is going to test the system that was in effect the last time a billing was submitted or the last time that timecards were collected, reviewed and approved.
We saw an example of this the other day for the umpteenth time. A contractor's billings did not tie into its formal accounting records. Upon notification that the auditors were coming to review the accounting system (which includes billings), the contractor brought its procedures into compliance with Government requirements. But it was too late to effect the audit. The auditors reviewed the most recent billing and concluded the billing system was inadequate. They did not wait for one or two accounting cycles to be completed in order to test the revised system. Now this particular contractor is going to have to deal with the ramifications of an "inadequate" report.