CAS Disclosure Statements - Audits for Adequacy

Contractors that contemplate bidding on $50 million or higher contracts must submit a CAS Disclosure Statement prior to award. Yesterday we described the Government's "administrative" processes related to Disclosure Statements that have been submitted. First there is the "adequacy" determination and secondly, the "compliance" determination. If you missed that post, click here to read. Today we want to focus on the specific factors that the Government uses to determine whether a Disclosure Statement is adequate. It is important to note that the ACO (Administrative Contracting Officer) is the one that actually makes the determination but it is the contract auditor that provides the basis and report for that determination.

The purpose of an "adequacy" determination is to ascertain whether the Disclosure Statement adequately describes the cost accounting practices to be used by a contractor for estimating, accumulating, and reporting contract costs. Although the Disclosure Statement form itself appears ominous at first, its purpose is fairly straight-forward. It provides a structure for

• Establishing a clear understanding of the cost accounting practices the contractor intends to follow
• Defining costs charged directly to contracts and disclosing the methods used to make such charges, and
• Delineating the contractors methods of distinguishing direct costs from indirect costs and the basis for allocating indirect costs to contracts.

Contractors are required to complete separate Disclosure Statements for each "segment" allocating costs to Government contracts. So, for example, if a contractor has a corporate office or a home or intermediate office that allocates costs to that segment, additional Disclosure Statements are required. If a contractor tries to combine segments/home offices into a single Disclosure Statement, the auditor will reject it.

Contractors are required to use the most current Disclosure Statement form. The auditors will reject any Disclosure Statement using outdated forms. The most current forms are available on OMB's website (click here). Note here that there are two Disclosure Statement forms, one for commercial companies and the other for universities.

To be considered adequate, a Disclosure Statement must be current, accurate, and complete. A Disclosure Statement is current if it describes the cost accounting practices which the contractor intends to follow for estimating, accumulating, and reporting costs. A Disclosure Statement is accurate if it correctly, clearly, and distinctly describes the actual method of accounting the contractor intends to use. 

A Disclosure Statement is complete if it includes all significant cost accounting practices the contractor intends to use and provides enough information for the Government to fully understand the accounting system being described. Auditors will specifically be looking for vague, incomplete, or ambiguous answers which could lead to alternative accounting interpretations. This is where many disputes arise between the contractor and the auditors. If an auditor cannot determine how a particular cost will flow though the accounting system and end up on a contract, either directly or indirectly, he/she will flag it as needing further description. The auditor is usually correct here - contractors sometimes "assumes" a level of knowledge by the reader that is not warranted.

Preparing current, complete, and accurate Disclosure Statements can be a daunting task for contractors preparing them for the first time. It is often cost-effective to commission outside expertise to help in the process.