Two Kinds of Accounting System Audits

There are two types of accounting system reviews conducted by the Government. The first is a pre-award survey that essentially follows the SF 1408, Preaward Survey of Prospective Contractor - Accounting System. We've discussed this one several times and have alluded to it several more times. Its used primarily as a tool to assess whether a prospective contractor has an accounting system capable of meeting contractual requirements. These surveys are conducted by a contracting officer, a contract specialist, by DCMA (Defense Contract Management Agency) or by DCAA (Defense Contract Audit Agency). DCAA, hands down, does the best and most thorough review of anyone in assessing accounting system adequacy.

The other type of review is often referred to as a postaward accounting system review and is largely confined to Defense contractors. The policy is laid out in the DoD FAR Supplement (DFARS) at 242.7502.

Contractors receiving cost-reimbursement, incentive type, time-and-materials, or labor-hour contracts, or contracts which provide for progress payments based on costs or on a percentage or stage of completion, shall maintain an accounting system.

In evaluating the acceptability of a contractor's accounting system, the contracting officer, in consultation with the auditor or functional specialist, shall determine whether the contractor's accounting system complies with the system criteria for an acceptable accounting system as prescribed in ... (DFARS) 252.242-7006, Accounting System Administration.

Many of the same criteria found in the SF 1408 are contained in the DoD criteria, but the DoD criteria has about 5 or 6 additional criteria not contained in the SF 1408. The 18 DoD criteria includes the following. Not every criteria will apply to every contractor.

1. A sound internal control environment, accounting framework, and organizational structure.
2. Proper segregation of direct costs from indirect costs
3. Identification and accumulation of direct costs by contract
4. A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives
5. Accumulation of costs under general ledger control
6. Reconciliation of subsidiary cost ledgers and cost objectives to general ledger
7. Approval and documentation of adjusting journal entries
8. Management reviews of internal audits of the system to ensure compliance with the Contractor's established policies, procedures, and accounting practices
9. A timekeeping system that identifies employees' labor by intermediate or final cost objectives
10. A labor distribution system that charges direct and indirect labor to the appropriate cost objectives
11. Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account
12. Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of FAR Part 31 cost principles and other contract provisions
13. Identification of costs by contract line item and by units (as if each unit or line item were a separate contract), if required by the contract
14. Segregation of pre-production costs from production costs, as applicable
15. Cost accounting information, as required by contract clauses for limitation of cost, limitation of funds, allowable cost and payment, and to readily calculate indirect cost rates from the books of accounts
16. Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms
17. Adequate, reliable data for use in pricing follow-on acquisitions
18. Accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, GAAP (Generally Accepted Accounting Principles).

There are several of these criteria that seem to be problematic to a lot of contractors. We will highlight those in tomorrow's post.