Tuesday, August 27, 2013

"Real-Time" Testing of Labor

When it comes to auditing incurred costs, DCAA has devised a series of what they term "MAARs" or Mandatory Annual Audit Requirements. One of those MAARs, MAAR No. 6, requires that the auditor perform some sort of testing of labor costs in the year that the labor was incurred; not wait until they get around to auditing incurred costs which could be years and years after the fact. This is what DCAA is doing when the Agency performs "floorchecks" or, to use another term, "real-time testing of labor". When performing floorchecks, DCAA is testing to see if the employee exists, is charging the correct job number, and is completing his/her timecard in a timely manner. The difference between auditing, say material costs and labor costs is that in the case of material costs, you have some third party verification in the form of invoices. You also have purchase orders, shipping/receiving documentation, etc. and you can verify that those parts ended up in the final product. With labor, you have none of that. That's why auditors need to test the propriety of labor charges as they are incurred.

Sometimes, auditors don't get around to performing a real-time labor floorcheck. This can happen for a number of reasons; an oversight and higher priority assignments are but two.When this happens, the auditors need to employ alternate procedures to test for the existence and allcoability of labor costs. DCAA recently published a number of alternate procedures including:

  1. For employees still employed, physically observe employee and inquire as to start date with contract to ensure the employee worked for the contractor in the year under audit.
  2. For employees not longer employed, review employee personnel records (e.g. copies of driver license, passport, contractor badge, etc).
  3. Validate payment of sampled employees to contractor bank statement, electronic funds transfer, or third party payroll processor records.
  4. Review other documents the employee may have created, processed, or approved during the period under audit (e.g. travel records/employee expense reports, W-4s, leave requests).
  5. Determine if Contracting Officer has other evidence corroborating employee existence.
Those procedures were just to test the existence of the employees charging Government contracts. To test whether those charges were proper, DCAA suggests the following procedures:
  1. Review contract requirements (i.e. key employee, job title, or labor category).
  2. Review statement of work and work orders/authorizations to ensure labor type (i.e. scientist) is required to perform the work.
  3. Determine if Contracting Officer has other evidence corroborating employee's labor is allocable to the contract.

If you thought that DCAA's floorcheck questionnaire was onerous and invasive, these alternate procedures are that on steroids.

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