Thursday, September 1, 2011

Accounting System Adequacy

A recent bid protest decision illustrates the importance of maintaining an adequate accounting system as well as the importance in resolving potential issues as they arise.

A prospective contractor lost out on a contract because it did not have an adequate cost accounting system. The contractor appealed, maintaining that DCAA's audit of the accounting system was deficient and that the Army unreasonable relied on DCAA's audit because it did not consider other information provided by the protester. The protest was denied.

FAR 9.104(e) requires that prospective contractors have the necessary organization, experience, accounting and operational controls, and technical skills, or the ability to obtain them. FAR 16.301-3(a)(1) requires contractor's accounting systems be adequate for determining costs applicable to the contract. Offeror responsibility is to be determined based on all information received by the contracting officer who has broad discretion in making an adequacy determination. That discretion, however, does not insulate the contracting officer from responsibility for error on the part of DCAA.

The contractor argued that DCAA had acted improperly in conducting the Accounting System Review because it did not limit its review to a follow-up of corrective actions taken as a result of findings in a 2009 audit but conducted a new accounting system audit from scratch. The contractor, however, provided no support to show that DCAA was limited in its scope so GAO threw out this argument. GAO added that DCAA's identification of additional concerns was consistent with that Agency's responsibility for verifying the adequacy of the accounting system.

The contractor also argued that the Army unreasonably relied on the DCAA report in concluding that the system was inadequate because the contractor "assurance" that it had addressed all deficiencies. However, there was no record that the contractor provided any substantive information to demonstrate that it had addressed those deficiencies. The only record was a letter from the contractor stating that it was in the process of addressing the deficiencies.

Bottom line, the contractor had agreed to fix five of six identified deficiencies but disagreed with the auditor's position on the sixth. With respect to the sixth deficiency however, the contractor did not say why it disagreed with DCAA or how it would otherwise address the issue. By the time the audit concluded however, the deficiencies were not corrected and DCAA recommended future monitoring of the corrective actions to ensure they would really get fixed. Based on that, the GAO saw nothing unreasonable in the Army relying on the DCAA audit report and denied the protest.

Contractors (and prospective contractors) should not leave anything to chance and need to take seriously any issues identified by auditors and/or contracting officers. Accounting systems should be reviewed periodically for compliance with FAR requirements for an adequate system. If you do not have the expertise in-house, contact a firm (like PNWC) to come in and perform a "mock" audit to identify any system deficiencies and vulnerabilities. Doing this before the auditors arrive will allow time to make any necessary changes and prevent situations such as this case to arise in the first place.

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