Accounting Systems - Problematic Standards - Part 5

We're continuing our series on discussions of accounting system standards that many contractors have some difficulty meeting - or, at least meeting to the satisfaction of a Government auditor. As we began this series, we mentioned that there were two kinds of accounting system audits. There is the pre-award accounting system survey which is basically the SF 1408 (Preaward Survey of Prospective Contractor - Accounting System) and a post-award accounting system audit following the guidelines of DFARS 252.242-7006 (Accounting System Administration). The DFARS standards contain the same criteria found in the SF 1408, and then some. Most contractors naively believe that they have adequate accounting systems. Perhaps so but most auditors can find something wrong with the systems and the DoD standards make it much easier to find deficiencies.

Today we're going to look at Accounting System Criteria No. 8, Management reviews of internal audits of the system to ensure compliance with the contractors established policies, procedures, and accounting practices. Some of you might already be thinking that you don't have an internal audit department so this standard must be "n/a" or not applicable. Not so fast. The presumption here is that in order for an accounting system to be adequate, contractors will have policies, procedures, and practices over their accounting systems and that someone in the organization - it does not have to be a formal internal audit department -is going to conduct reviews (or audits) to ensure employees are complying with those policies and procedures.

Inherent in this standard are seven distinct requirements:

1. Contractors must have written policies and procedures
2. The policies and procedures must be disseminated to affected employees
3. Employees are expected to comply with those policies and procedures
4. There must be some form of oversight to ensure that employees are complying with those policies and procedures.
5. There must be some form of oversight to ensure that the policies are procedures are accomplishing what they were designed to do.
6. Management must be informed of the results of these oversight reviews.
7. Management must take action on any forthcoming recommendations.

An accounting system that misses the mark on any one of these items, is at risk for being labeled inadequate, or deficient, or needing improvement. Larger contractors are at risk for having some of their billings withheld until corrections are made.

Contractors that do not have internal reviews of internal control system adequacy and compliance should be thinking about ways to implement such a program.