Wednesday, January 19, 2011

Generally Accepted Accounting Principles (GAAP)

The Standard Form 1408 (Preaward Survey of Prospective Contractor Accounting System) is used to document the Government's assessment of whether a contractor's accounting system is acceptable for the award of the prospective contract. The conclusion on whether a system is adequate or not will depend on the type of contract (or subcontract) contemplated. There are differing requirements for fixed price, cost type and T&M (time and materials). The Government organization in charge of assessing the adequacy of an accounting system will tailor the review for the contract type contemplated. If you have not been through an accounting system review, it would be useful to download the form (just search on the term "SF Form 1408") to see how close your accounting system comes to meeting the Government's expectations. Alternatively you can hire an outside firm (such as Pacific Northwest Consultants) to come in and perform a "mock audit". A "mock audit" should identify any weaknesses in your accounting system and provide an opportunity to take corrective actions before the official audit begins.

The first attribute addressed by the form is whether the system is maintaine in accordance with Generally Accepted Accounting Standards (GAAP). If your company has had an outside audit, reivew, or compilation by an independent accounting firm (a CPA firm), this is easy to answer - just refer to the auditor's opinion. However, for companies that have not had outside assessments of their financial position (and that's most small businesses), it is a little more difficult to make that assessment.

In June 2009, the FASB (Financial Accounting Standards Board) issued FAS (Financial Accounting Standard) No. 168 which approved the ASC (Accounting Standards Codification) as the single source of authoritative non-governmental U.S. GAAP for financial statements. At that time, all existing GAAP pronouncements were superseded. The objective of the ASC project was to integrate and combine existing GAAP pronouncements into one authoritative GAAP. In determining whether your accounting system is compliant with GAAP, you need to consult the ASC. You can access GAAP free of charge under the "basic view" on the FASB website

The SF Form 1408 is sometimes completed by non-accountants as a "desk review". Sometimes the scope of the review might be as simple as asking a contractor if they have an accrual basis accounting system. If the contractor (or prospective contractor) answers in the affirmative, the non-accountant will most likely check "yes" to that accounting system attribute. If a Government Audit Organization (such as DCAA) is performing the accounting system review, they will not rely solely on contractor assertions and representations but will also perform substantive testing to ensure that the system is maintained on an accrual basis and compliant with applicable GAAP. The problem with a faulty pre-award review manifests itself when it comes time to get paid. The Government might perform a Post-award accounting system review or a billing system review, or a provisional billing rate review prior to approving any payment requests. Any deficiencies at this juncture will need to be fixed before payment is approved.

The best advise is to ensure you bring your accounting system into compliance before pursuing Government contracts. It will facilitate all aspects of contracting including estimating, accounting, and billing.

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