Installment Payments - Part 2

Yesterday we alerted you to a program within the DoD finance office to allow contractors to refund amounts owed the Government on an installment payment basis. If you missed that, read it here. The only problem with this installment payment program is that it requires contractors to open up the financial records to Government auditors and to have a good story as to why they didn't just repay the amount overpaid right away. If a contractor maintains that it didn't know that it had been overpaid, it sort of implies that their billing system is not up to par. That would open another can of worms. But, if the installment payment approach is the best way to pay down this liability, DoD will first send in its auditors to determine whether the contractor has the "ability to repay" the debt. This is called a financial capability audit. Before the auditors begin the review, here is a likely list of documents that they will request.

• financial statements for the last three years
• a 12 month cash flow forecast reflecting the proposed installment amounts
• written confirmation that the financial statements disclose all off-balance sheet arrangements and related party transactions.
• any inquiries from their IPA (independent public accounting) firm related to off-balance sheet arrangements and related party transactions and their responses.
• the results and reports of any internal audits, reviews or other analyses of off-balance sheet arrangements and related party transactions.
• any analyses it has performed to assess its current and future financial conditions.
• details on prior, current, and forecasted events that have had or are forecasted to have a favorable or unfavorable impact on its financial condition
• written policies and procedures that require
• evaluation of current financial conditions in order to anticipate and avoid unfavorable or adverse conditions
• periodic assessments of accounts payable and accounts receivable, including analysis of accounts payable aging and the collectability of accounts receivable
• periodic assessments to ensure compliance with any loan covenants and debt payment schedules
• preparation of cash flow forecasts, including reasonable and supported assumptions
• monitoring, analyzing and managing its cash flow
• periodic assessments of contract cost performance.

This listing is only the beginning. The auditor will likely spend at least a couple of days analyzing the data and reaching conclusion about the contractors financial viability.