Preaward Accounting System Survey Checklist

FAR 16.301-3 states that a cost-reimbursement type contract may be used only when the contractor’s accounting system is adequate for determining costs applicable to the contract. Contracting officers must make this determination prior to the award of a contract. If the contracting officer has insufficient information to make this determination, it will request DCAA or another audit organization to perform a Preaward Survey of Prospective Contractor’s Accounting System (SF Form 1408).

DCAA has been instructing contracting officers to send out a preaward survey checklist to prospective contractors to complete prior to requesting a preaward survey of the accounting system. This checklist will help ensure that the contractors understand the requirements of the SF Form 1408 and to ensure that they are ready for DCAA to come in a perform an audit.

This checklist essentially mirrors the requirements of the SF Form 1408 however there are a few additional items that require contractor response. These are:

• Are you planning on bidding on cost type contracts?
• Are you ready for a DCAA audit?
• Have you read the requirements in the SF Form 1408?
• Have you read the "Information for Contractors" pamphlet?
• Please identify the DCAA office cognizant of your company.
• Please identify your company's point of contact.
• If an outside CPA/Consultant/Non DoD agency has reviewed your Accounting System, please provide a copy of the report.

This last bullet requires some clarification. The "review" that is referred to here is an attestation engagement performed in accordance with Generally Accepted Government Auditing Standards (GAGAS) a.k.a. a "Yellow Book" audit. It would not include the results of, say, an outside firm (like PNWC) performing a review to identify potential weaknesses in a contractor's accounting system and making recommendations, as appropriate, on improving the system to meet Government contracting requirements. Those are not "reviews"  conducted in accordance with GAGAS.

Companies looking to enter the Government contracting arena or existing contractors looking to bid on cost-reimbursable contracts, will find this checklist useful.

New Audit Restrictions on Preaward Accounting System Surveys

A preaward survey of a prospective contractor's accounting system is an examination of the accounting system before contract award. The audit scope is limited to obtaining an understanding of the design of the prospective accounting system so as to appropriately complete Standard Form 1408, "Preaward Survey of Prospective Contractor Accounting System" and those procedures essential to reach an informed opinion on whether or not the design of the prospective contractor's accounting system is acceptable for accumulating costs under a Government contract.

DCAA recently revised its guidance by limiting audits of prospective contractor accounting systems to only those that are in operation or set up but not in operation. Previously, DCAA would also assess accounting system that were "anticipated" or "nonexistent" (e.g. the prospective contractor does not currently have an accounting system but, if awarded the contract, will implement this or that).

DCAA explains that it is not possible to perform an examination level engagement under circumstances where an accounting system is anticipated or nonexistent (despite what the SF 1408 states). And DCAA is correct. If requested to perform an audit for an accounting system that is either anticipated or nonexistent, the auditor will notify the requester that DCAA will be unable to provide an audit report or SF 1408, but will be available to once the system is set up or in operation.

This change is audit guidance will have ramifications for prospective contractors that do not currently have accounting systems but would be more than willing to implement one, if and when they get a Government contract. Those companies do not want to incur the time and expense necessary to implement a complaint system if the prospective contract is awarded to another firm. Under the previous guidance, DCAA could complete the SF 1408 based on "inquiry" with (sometimes) a recommendation that a follow-up audit be requested after contract award. Under DCAA's new policy, the Agency will refuse to perform an audit or complete the SF 1408 which means that more prospective/potential contractors may be disqualified from competition for lack of an adequate accounting system.

Generally Accepted Accounting Principles (GAAP)

The Standard Form 1408 (Preaward Survey of Prospective Contractor Accounting System) is used to document the Government's assessment of whether a contractor's accounting system is acceptable for the award of the prospective contract. The conclusion on whether a system is adequate or not will depend on the type of contract (or subcontract) contemplated. There are differing requirements for fixed price, cost type and T&M (time and materials). The Government organization in charge of assessing the adequacy of an accounting system will tailor the review for the contract type contemplated. If you have not been through an accounting system review, it would be useful to download the form (just search on the term "SF Form 1408") to see how close your accounting system comes to meeting the Government's expectations. Alternatively you can hire an outside firm (such as Pacific Northwest Consultants) to come in and perform a "mock audit". A "mock audit" should identify any weaknesses in your accounting system and provide an opportunity to take corrective actions before the official audit begins.

The first attribute addressed by the form is whether the system is maintaine in accordance with Generally Accepted Accounting Standards (GAAP). If your company has had an outside audit, reivew, or compilation by an independent accounting firm (a CPA firm), this is easy to answer - just refer to the auditor's opinion. However, for companies that have not had outside assessments of their financial position (and that's most small businesses), it is a little more difficult to make that assessment.

In June 2009, the FASB (Financial Accounting Standards Board) issued FAS (Financial Accounting Standard) No. 168 which approved the ASC (Accounting Standards Codification) as the single source of authoritative non-governmental U.S. GAAP for financial statements. At that time, all existing GAAP pronouncements were superseded. The objective of the ASC project was to integrate and combine existing GAAP pronouncements into one authoritative GAAP. In determining whether your accounting system is compliant with GAAP, you need to consult the ASC. You can access GAAP free of charge under the "basic view" on the FASB website. 

The SF Form 1408 is sometimes completed by non-accountants as a "desk review". Sometimes the scope of the review might be as simple as asking a contractor if they have an accrual basis accounting system. If the contractor (or prospective contractor) answers in the affirmative, the non-accountant will most likely check "yes" to that accounting system attribute. If a Government Audit Organization (such as DCAA) is performing the accounting system review, they will not rely solely on contractor assertions and representations but will also perform substantive testing to ensure that the system is maintained on an accrual basis and compliant with applicable GAAP. The problem with a faulty pre-award review manifests itself when it comes time to get paid. The Government might perform a Post-award accounting system review or a billing system review, or a provisional billing rate review prior to approving any payment requests. Any deficiencies at this juncture will need to be fixed before payment is approved.

The best advise is to ensure you bring your accounting system into compliance before pursuing Government contracts. It will facilitate all aspects of contracting including estimating, accounting, and billing.