Friday, February 20, 2015

Consulting Costs - What to Expect from an Audit

For the past couple of days, we have been discussing professional services and consulting costs, the risks associated with those costs from the Government's standpoint, factors that the contracting officer must consider when evaluating the propriety of such costs, and questions the contract auditors try to answer as they audit the costs. Today we want to tie up a few loose ends on this subject as we complete the series.

If you missed the first two parts of this series, you can read them here and here.

What are "sensitive" consultants?

DCAA (Defense Contract Audit Agency) has compiled a listing of sensitive consultants based on overall agency audit experience. The ranking, shown in decreasing order of sensitivity include:

  • lobbyists
  • sales/marketing
  • management services (excluding CPA firms)
  • legal
  • technical/engineering
  • accounting, CPA firms, actuaries, and insurance

You can be certain, that if you claim any costs for these categories of professional service and consulting costs, the auditor and contracting officer will be asking a lot of questions.

How does the auditor develop the universe of consultants?

Contractors do not typically collect all professional service and consulting costs into one account. Such costs can be scattered among many accounts such as legal, accounting, marketing, outside services, and may also be charged direct to contracts under subcontractor or again, outside services. It would not be easy for the audit to compile an accurate listing. So, usually, the auditor will ask the contractor to provide a listing. Then after the listing has been provided, the auditor will likely ask for copies of the 1099 filings as a way of cross-checking contractors' representations.

What other audit evidence might an auditor request besides the agreement, invoice, and evidence of work performed?

Auditors have been know to request copies of consultant travel and trip reports. With these reports, auditors can determine whether there is sufficient information to establish a link to activity that benefits the business or Government contracts. Contractors might have a problem if, for example, a trip report identifies travel to a location that has nothing to do with the contract to which the costs were charged.

If after the auditor is satisfied as to the adequacy of the supporting data, is there anything else to be concerned about?

Yes - reasonableness. The auditor will endeavor to assess whether the fees charged are reasonable. Although "reasonableness" is often subjective, there are means for bench-marking fee schedules. For example, most of the major accounting firms have their rates published on the GSA Schedule. Those are the rates that the accounting firms will charge the Government for any services provided. Auditors have been know to compare the rates charged to them with the rates the same firms charge the Government. If those comparisons are not somewhere in the same ballpark, the auditor might challenge them.

Professional service and consulting costs continue to be a high risk area for contracting officers and contract auditors. Contractors need to ensure that they have adequate systems and internal controls in place to prevent any hint of impropriety.

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