Wednesday, December 28, 2016

Defense Cost Accounting Standards - Part 3

This week, we've been covering various provisions of Sec 820 of the 2017 NDAA (National Defense Authorization Act). Monday we covered how the new law is designed to get the CAS (Cost Accounting Standards) Board moving once again. Yesterday we discussed the formation and duties of a new Defense CAS Board (DCASB). Today we another aspect of Sec 820 that moves to privatize some of the contract auditing function by moving certain audits from DCAA (Defense Contract Audit Agency) to commercial firms.

Under the new provisions, DoD contractors may present and the Defense Contract Audit Agency shall accept without performing additional audits, a summary of audit findings prepared by a commercial auditor if

  1. the auditor previously performed an audit of the allowability, measurement, assignment to accounting periods, and allocation of indirect costs of the contractor; and
  2. such audit was performed using relevant commercial accounting standards (such as Generally Accepted Accounting Principles) and relevant commercial auditing standards established by the commercial auditing industry for the relevant accounting period (presumably this means audits conducted according to GAAS (Generally Accepted Auditing Standards) and not according to GAGAS (Generally Accepted Government Auditing Standards) or "Yellow Book" audits).
Further, Sec 820 states that DCAA may audit direct costs of DoD cost contracts and shall rely on commercial audits of indirect costs without performing additional audits, except that in the case of companies or business units that have a predominance of cost-type contracts as a percentage of sales, DCAA may audit both direct and indirect costs.

These provisions will have a major impact on DCAA's workload. In recent years, DCAA has concentrated a significant portion of its manpower on performing incurred cost audits. Take that responsibility away and DCAA may not need its current staffing level. Contractors will have to go out and find their own independent auditors to perform the indirect cost effort at additional cost to them. However, to the extent they can charge this to Government contracts, the cost will be reimbursed. A lot depends upon the contract mix and the indirect rate structure as to how much will be reimbursed. Contractors who choose the privatization approach to indirect cost auditing will probably be able to close out contracts much quicker than they do currently.

Tomorrow we will conclude this series on Sec 820 with a few miscellaneous provisions and comments.

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