Before the Government can award a contract, it requires some level of assurance that contractors' accounting systems are capable of accumulating and reporting costs under Government contracts. Having software that keeps track of income and expenses is only the start. The Government has many other requirements that a system must meet in order for it to be acceptable. Many of these requirements involve related internal control systems. A requirement for employees to complete their time cards on a daily basis would be one of those.
For companies with no previous Government contracts, auditors will perform a preaward accounting system survey. This type of review focuses on whether a system has the capability to account for costs under the particular type of contract being contemplated (cost type contracts require more accounting system functionality than fixed price contracts). Essentially, the audit is limited to obtaining an understanding of the design of the accounting system so as to appropriately complete Standard Form 1408, Preaward Survey of Prospective Contractor Accounting System. In a preaward survey, the auditor is not performing much in the way of transaction testing.
After contract award, the Government may need another audit of a contractor's accounting system. This can arise when deficiencies were identified in the preaward survey because the Government needs assurance that those deficiencies were corrected. Also, the Government may have identified one or more risk factors that suggest the accounting system is not operating as it should. The audit program for a post-award accounting system audit looks at pretty much the same attributes as a preaward audit but the focus is not on whether the system has the capability to accumulate and bill costs under Government contract but is actually doing so - is actually functioning as intended. In this type of audit, there is a significant amount of transaction testing. For example, in a preaward survey, the auditor might look at policies and procedures. In a post award audit, the auditor will test those procedures to see if they are operational and are accomplishing their purposes.
Prospective contractors who fail a preaward audit may well lose out on contracting opportunities. Failure could jeopardize the award of potential contracts. Contractors who fail a post-award audit are at risk of having direct billing authority suspended, of having some of their billings withheld (until the deficiencies are corrected) and significantly more oversight in general. Audit reports on post award accounting system reviews are sent to all Government customers. If there are deficiencies, that's not a good thing.
Contractors should periodically perform a self assessment of their accounting system. Download the SF Form 1408 and see if your accounting system can meet the criteria listed on that form. If the auditors have previously performed an audit and found deficiencies, don't procrastinate in correcting those deficiencies. Even if you have not heard from them in some time, those audits are being tracked and there will be a followup review at some point. If you have committed to a specific corrective action plan, make sure you follow through and do what you said you were going to do. From an auditor perspective, there is nothing worse than a contractor failing to follow through on its promises.