Being a contractor with the Federal government can involve granting the DCAA authority to conduct audits on your accounting system. These audits may occur at any time during the contract, whether prior to the award of the contract or after you have entered into a contract. In both cases, you need to ensure your accounting system follows DCAA compliant accounting policies and procedures.
Preparing for a DCAA audit can be extremely uncomfortable, especially the first time. But if you are aware of what a DCAA audit focuses on and already have your “house in order,” then there is nothing to worry about.
What Does the DCAA Do?
The DCAA handles contract auditing for contractors working with various federal agencies. And while the DCAA has no direct role in choosing which companies are awarded defense contracts, the DCAA has considerable influence through recommendations during the preliminary stages of securing and negotiating contracts. Specifically, the DCAA makes recommendations to government officials who select contractors for government-funded projects and subsequently negotiate prices for products and services.
Types of Audits
To assess the compliance and capability of contract performance, the DCAA performs various audits that can occur at any time throughout the duration of a contract. The most common types of audits include forward pricing, incurred cost, special audits and pre-award surveys.
Forward pricing audits usually occur prior to a contract being awarded to a contractor. The purpose of this audit is to analyze the contractor’s cost estimate of providing the government with goods and services.
The accuracy of a contractor’s allowable cost calculations is the focus of an incurred cost audit. These audits examine cases in which the contract price is not fixed. The DCAA conducts an incurred cost audit following the contract being awarded to assess the accuracy of the cost representations of the contractor.
A special audit may happen before or after a contract is awarded. Predominantly, however, audits in this category occur by the request of contracting officers. In such a case, an independent financial opinion is needed on specific areas of a contract or on a contractor’s accounting details in order to proceed with the contract work.
The DCAA Standard Form (SF) 1408 pre-award survey commonly affects small businesses applying for government contracts and focuses on DCAA accounting policies and procedures. The main purposes of this audit include:
- Examining the accounting system used by the contractor
- Completing the SF 1408 form, the Pre-award Survey of Prospective Contractor Accounting System
- Determining whether the contractor’s accounting system is adequate for awarding a government contract
Contractors that are subject to an audit must demonstrate their accounting system during the audit and implement the system prior to incurring costs for a contract.
The SF 1408 focuses on key areas that include:
- Generally accepted accounting principles
- Timekeeping systems
- Labor distribution
- Cost allocations, and indirect and unallowable costs
Given that timekeeping systems are often challenging areas for DCAA compliance, we will detail the key considerations below.
This aspect is one of the most challenging DCAA accounting policies and procedures for contractors. But the reality is that timekeeping audits are among the most common DCAA audits every year. And these audits are the only ones performed by the DCAA without any advanced notice. It is extremely important to follow standard procedures at all times.
But modern-day provides many conveniences for government contractors. Electronic timekeeping systems allow for accurate monitoring of projects and provides a convenient platform for assigning the project number, charge number and task.
The main purpose of the audit is to keep contractors vigilant and honest regarding the accuracy and consistency of employee time records, to confirm that employees are indeed working and that contractors are charging costs to the proper line item.
There are a number of responsibilities of contractors that include:
- Correctly allocating time to cost objectives
- Signing timecards at the end of every work period
- Documenting their time on a daily basis
Careless or improper timecard management is accompanied by penalties and disciplinary ramifications. These include penalties resulting from failure to comply with company policies as well as federal statutes.
Consequences of Noncompliance
It is the responsibility of each contractor to remain compliant with all government regulations that apply to their operations. Failure to do so may be exposed by an audit, investigation or whistleblower action.
And the consequences of noncompliance or of otherwise illegal or unethical conduct can result in debarment, suspension, terminated or voided contracts, being listed in the Excluded Parties List System (EPLS), or civil and criminal penalties.
Civil and Criminal Penalties
The civil penalties resulting from noncompliance depend on the specifics of the violation and invoice. A contractor may be forced to pay up to three times the damage caused.
And while the civil penalties can be harsh, criminal penalties are generally much more severe. Contractors can face imprisonment, with responsibility falling on the person who signed the certificate of cost and pricing data.
One of the most serious forms of punishment that the federal government can issue on a contractor is debarment. Debarment can be issued as a result of a contractor violating antitrust laws, a contractor committing fraud in obtaining or performing a contract, or other serious offenses.
Being debarred from one agency has effects on all government agencies. Solicitation bids and proposals from a contractor that has been disbarred cannot be considered, except for exceptional circumstances.
Terminated or Voided Contracts
The authority of federal agencies to rescind or void contracts is provided by the Federal Acquisition Regulation (FAR). The FAR explicitly outlines areas in which federal agencies may void or rescind contracts that include:
- There has occurred a final conviction for conflict of interest, bribery or the disclosure of contractor bid or proposal information
- A final conviction has occurred concerning the source selection information in exchange for either something of value or otherwise providing a competitive advantage
- There has been agency head determination of something listed above
Audits Promote DCAA Compliance
Consider DCAA audits as important steps in achieving DCAA compliance. This process involves many steps, and DCAA audits are merely assessments of your progress toward compliance of DCAA accounting policies and procedures.
If your accounting system requires assistance in meeting DCAA regulations, do not feel alone. Our team of experts at Warren Averett can help you with your needs. Call us today for more information on how we can meet your challenges together.