Wednesday, April 17, 2013

What You Might Expect When Your Incurred Cost Audit Begins

You've submitted your annual incurred cost proposals and finally passed DCAA's grueling "adequacy review". Now it's time for DCAA to conduct its audit. What might you expect:? As much as you might think that the audit process is standardized, there is a lot of variability in audit approach and the scope of information and data requested among DCAA's Regions, Offices, and auditors. Fundamentally, they're all trying to do the same thing - assessing the propriety of costs charged to cost-type contracts. However, the means for accomplishing that vary greatly.

The other day, a company received an email notification from DCAA that the Agency was about to begin its audit of the 2006 and 2007 incurred cost submission. The notification included the following comments and request for data:

1. "I would like to meet with you to conduct a walk-through of the proposals. During the walk through, I go over (company's) internal control as well. This meeting should not take more than 3 hours."
There's no explanation of a "walk-through". There's no further description of what internal controls the auditor wants to review.

2. "FY 06 & 07 company-wide trial balance and G/L. Please make sure that the G/L is in Excel format."
Some companies limit trial balances and general ledger listings to just those accounts that affect or impact incurred costs. There is no requirement that contractors disclose "profit" information to the Government or provide data from which profit percentages can be derived.
3. "Invoice submitted in December 2007 ..."
4. FY 06 & 07 listings for G&A and (specific contract) employees. The listings should identify employees by name and labor category."
5. "A copy of the proposal that (Contractor) submitted to the prime contractor.
This request is unusual. We don't know how an initial pricing proposal is relevant to an incurred cost audit.
6. "Please identify the rate (Company) used to escalate labor rates in FYs 06 & 07"
We don't know the relevance of this request to an incurred cost audit. Compensation should be evaluated on the basis of reasonableness and the rate increases by year are irrelevant to that determination.
7. "A copy of all subcontract modifications."
Why just the modification? Why not the basic subcontract as well?
8. "FY 06 & 07 labor distribution reports (Excel) for (contract) and G&A employees."
9."FYs 06 & 07 Board of Director's minutes."
DCAA loves to ask for minutes. Most companies don't have any. We do not know of any cases where information contained in minutes were in any way relevant to the determination of incurred costs though conceivably, there could be some.
10. "Description of changes in any changes in accounting practices (ie charging direct and indirect costs, unallowable costs, indirect rates or etc)."
This information, if applicable, is already shown in Schedule M of the incurred cost submission.
11. A copy of the health care plan(s) that (Contractor) provided to (contract) and G&A employees in FYs 06&07."
Presumably to look for payments made to ineligible dependents.
12. "Did (Contractor) submit any delay or termination claims in FYs06 & 07?"
Unsure why this is relevant to an incurred cost audit.
13. "Was (Contractor) involved in any lawsuit or legal proceeding in FYs 2006 & 2007?"
Unsure why this is relevant to an incurred cost audit.
14. "A copy of the rental agreement in effect in FYs 2006 & 2007."
Presumably to look for related party transaction.
15. A copy of the insurance agreement for the Officers & Directors."

This potpourri of data requests will take some time and effort for the contractor to find, compile, and review. It will also take the audit a fair amount of time to review, organize, incorporate into working papers, and draw conclusions from.

All of this for a contract that is 90 percent labor/fringe and 10 percent indirect costs!

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