Understanding The DCAA Accounting System Audit

What are the characteristics of an acceptable accounting system?

The topic of this blog is the post award accounting system audit. The post award accounting system audit is an examination of the accounting system at non-major contractors after contract award. The objective of the post award accounting system audit is to determine if the contractor’s accounting system complies with the DFARS 252.242-7006, Accounting System Administration, requirements.

A post award accounting system audit is usually performed at the request of the contracting officer when:

  1. a follow-up audit to a preaward survey (SF1408) is recommended or
  2. a preaward survey was not conducted prior to contract award, and the contracting officer determines that an audit is now required to support contract requirements.

What are the characteristics of an acceptable accounting system?

Acceptable accounting system means a system that complies with the system criteria below to provide reasonable assurance that:

  • Applicable laws and regulations are complied with;
  • The accounting system and cost data are reliable;
  • Risk of misallocations and mischarges are minimized; and
  • Contract allocations and charges are consistent with billing procedures.

What is DCAA Looking for in the Accounting System Audit?

This list of criteria below is very similar to the SF1408 Preaward Survey.

  1. A sound internal control environment, accounting framework, and organizational structure
  2. Segregation of direct and indirect costs
  3. Identification and accumulation of direct costs by contract
  4. Consistent allocation method for of indirect costs to intermediate and final cost objectives
  5. Accumulation of cost under the general ledger control
  6. Reconciliation of subsidiary cost ledgers and cost objectives to general ledger
  7. Approval and documentation of adjusting entries
  8. Management reviews or internal audits of the system to ensure compliance with the Contractor's established policies, procedures, and accounting practices
  9. A time keeping system that identifies employee’s labor by intermediate or final cost objectives
  10. A labor distribution system that charges direct and indirect labor to the final cost objectives
  11. Interim determination of costs charged to a contract through routine posting of books of account
  12. Exclusion from costs charged to the government contracts of amounts that are not allowable per FAR 31, Contract Cost Principals and Procedures, or other contract provisions
  13. Identification of cost by contract line item (CLIN) and by units if required by the proposed contract
  14. Segregation of preproduction costs from production costs
  15. Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms
  16. Cost accounting information, as required:
    • By contract clauses concerning limitation of cost (FAR 52.232-20), limitation of funds (FAR 52.232-22), or allowable cost and payment (FAR 52.216-7); and
    • To readily calculate indirect cost rates from the books of accounts;
  17. Adequate, reliable data for use in pricing follow-on acquisitions
  18. Accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles.

A common question is what are some of the typical pitfalls contractors have when completing this audit. Our answer is that all of requirements are important and non-compliance could leave you with a non-adequate system. If the Contracting Officer makes a final determination to disapprove the Contractor's accounting system, and the contract includes the clause at 252.242-7005, Contractor Business Systems, the Contracting Officer will withhold payments in accordance with that clause. No one wants to not get paid!!

A tried and trusted tool like Unanet can help you meet the requirements above. If you are not comfortable with taking this on yourself please do reach out to Unanet as we have a partner network that can assist you every step of the way. It will be worth every penny you spend. Good luck on your audit and hope that there are many contract awards coming your way.

For more information, download A GovCon's Essential Guide to DCAA Compliance.