We're back for the second part of our series on the optional items to send along with your annual incurred cost submissions.These are the fifteen items listed in FAR 52.216-7(d)(2)(iv) that are not necessary to determine whether the incurred cost submission is adequate but "may be" required during the audit process. "May be required" also means "may not be required" so we are of the opinion that contractors should just wait until the information is requested during the audit and not waste time during the preparation of the claim to generate these items. There is one or two exceptions to this advice which we will discuss in due course. In this series of blogs, we're giving you a big dose of our opinions and commentary which differs from our usual Joe Friday format ("...just the facts, mam").
Identification of prime contracts under which the contractor performs as a subcontractor. Not even contracting officers nor contract auditors will agree among themselves what this encompasses. Does it mean all subcontracts or "auditable" subcontracts? If read by itself, it definitely implies all contracts. But that really makes no sense. What would the identification of prime contracts for fixed price subcontracts contribute to the audit objectives (i.e. to determine the allowability, allocability, and reasonableness of claimed costs" under flexibly priced contracts and subcontracts). What would be useful to an auditor is to find out who the prime contractors are for cost-reimbursable subcontracts so that the auditors at the subcontractor can send a copy of the audit report to the auditors at the prime contractors so that the auditors at the prime contractor has some audit evidence as to the propriety of claimed subcontract costs. That's the only thing that makes sense. However, we've seen cases where auditors have demanded that contractors identify all prime contractors because "that's what it says". Many auditors don't think, they just like to check off little boxes.
Description of accounting system (excludes contractors to submit a CAS Disclosure Statement or contractors where the description of the accounting system has not changed from previous year's submission). This is another one of those optional requirements where there's no consensus on what constitutes a description of the accounting system. If you want to determine whether an auditor or contracting officer can think fast on their feet, ask them what they mean by description or can they be more specific. If they say they want to see a listing of accounts that comprise the indirect expense pools and their allocation bases, point them to the incurred cost submission. Its all there. It is not necessary for contractors to generate something here just because an auditor asks. If there's not a contractual requirement, there is no obligation to generate something. Let the auditor ask the questions through inquiry. You can show him how the accounting system works, but its the auditors responsibility to document his understanding the the system and the associated risks.
Procedures for identifying and excluding unallowable costs from the costs claimed and billed. If the contractor has a contract, there's a high probability that someone from the Government has come in and assessed the adequacy of its accounting system. Inherent in an accounting system for Government contracts is the ability to identify and exclude costs that are unallowable under FAR Part 31 cost principles and contract terms. Therefore, the contractor has already demonstrated to the Government's satisfaction that it can identify and exclude unallowable costs. A contractor's first response to this question should be to tell the auditor to go back and check his perm files. Or, its always satisfying to pull out an accounting system audit report that an auditor performed previously and announce that they've already got that information.
Continue on to Part 3 - Financial Statements, Management Letters, and Corrective Actions