© Copyright 2009. Goodman & Company, LLP. Surviving a DCAA Audit January 28, 2009 Presented By: K. D. “Ken” Bricker, CPA, DABFA Senior Partner, Government.

© Copyright 2009. Goodman & Company, LLP.

Surviving a DCAA AuditJanuary 28, 2009Presented By: K. D. “Ken” Bricker, CPA, DABFASenior Partner, Government Contracting Service Group

© Copyright 2009 Goodman & Company, LLP

Founded 1932 w/ offices in throughout VA and MD Focused on offering full project lifecycle consulting to government

contractors Diverse staff with extensive government contracting backgrounds,

in government, industry and consulting Service Offerings:

Accounting System Support Indirect Cost Structure & Cost Proposal Development Training - CAS, FAR, Contracts Administration FAR, CAS, & TINA Compliance & Noncompliance Support Disclosure Statements and Accounting Practice Changes DCAA Audit Management Business Process & Best Practice Reviews Interim Controller/CFO Support


DCAA: Who They Are, A Quick Overview

Provide audit and other financial advisory services to Contracting Officers

Potential for an audit before, during and after contract award/performance; Auditor should share audit program & findings- conclusions (BEWARE OF INTERIM AUDITOR FEEDBACK)

DCAA auditors must be independent and unbiased. Cannot ask about employment, nor should he/she refer to contractor as “dishonest”, “ a crook”, etc.

DCAA is audited by DOD-IG and/or GAO


General DCAA Auditing Concepts & Philosophies

Audit guidance used by auditors in planning and performing audits is found in DCAA’s Contract Audit Manual (DCAAM 7640.1)

Represents guidance only, but contains information that contractors should be familiar with in understanding audit positions and procedures

Does not represent authoritative/regulatory guidelines As such, DCAAM is not used as reference in audit reports as

basis for audit conclusions Only regulatory guidance (FAR, contract terms, etc.) are used as

basis for audit findings DCAA Policy “fills in the blanks” where regulations are silent or

very general (e.g. specific control objectives for internal controls)


General DCAA Auditing Concepts & Philosophies

Other important guidance documentation used by auditors in performing audits (other than regulations)

Various guidance pamphlets including “Information for Contractors”

FAR cost principles guide

DCAA guidance memorandums

DCAA ICES manual

DCAA training manuals and modules


Using DCAA Charter & Info to Defend Clients

DCAA is charged with: Producing findings based on sufficient evidential data and

performing enough testing and review?• Did auditors have all facts when evaluating and formulating

position (questioned costs)? Is there more data available to refute audit challenge?

• Are findings adequately stated in report? • To what extent was reasonableness criteria used—highly

judgmental• Did auditors accurately calculate questioned costs?


Using DCAA Charter & Info to Defend Clients

DCAA is charged with: Being independent, objective and competent:

• Did auditor insert personal preference into findings? What was basis for finding? “I’ve never seen it done that way before”? “At DCAA, we aren’t allowed to do that”

• Is auditor knowledgeable of area audited?• Do auditor calculations demonstrate objectivity and

competence—ex. Question only amt of air fare above regular coach, instead of throwing whole amt out and then letting contractor call attention to this stupid act

• Did auditor allow adequate time to review auditor findings and respond?

© Copyright 2009 Goodman & Company, LLO

DCAA

Supv & Mgr IG or GAO


GAO Report July 2008

“Allegations that Certain Audits at Three Locations Did Not Meet Professional Standards Were Substantiated”

DCAA Policy states that audits are performed in accordance with GAGAS (Government Auditing Standards), GAO found numerous examples where DCAA failed to comply

• Independence issue: contractor and DoD contracting community improperly influenced scope, conclusions and opinions.

• Audit findings were changed (dropped)• Audit findings were not supported by sufficient audit

work DCAA Management intimidated auditors i) to drop audit

findings and ii) to avoid talking to the GAO


GAO Report July 2008: Repercussions-Formal

DCAA will not participate in any “teaming” process

DCAA (with help) is performing an internal assessment of i)audit quality ii) metrics (such as audit budgets and due dates) and iii) management intimidation

DCAA revised and reissued its policy when an auditor and supervisor disagree on audit findings conclusions


GAO Report July 2008: Repercussions-Informal

DCAA will distance itself from Management Councils and various contractor actions which are pre-implementation (e.g. DCAA will not informally advise a contractor on alternative cost accounting practices in the context of a revised CAS Disclosure Statement)

DCAA auditors will minimize “audit scope” discussions before or during the audit

DCAA auditors will not communicate potentially minor issues during the audit (it will all roll into the draft report)


GAO Report July 2008: Repercussions-Informal(cont)

DCAA Supervisors will not eliminate “weak” audit findings, but will defer to the contractor to resolve in the rebuttal process

DCAA Field Audit Managers (who sign the audit report) will include “weak” audit findings unless contractor rebuttal clearly and absolutely refutes & provides the DOCUMENTATION

ACOs will be left to decide additional “weakly” supported audit findings


GAO Report July 2008: Parting Comments

Biased GAO reporting (credibility given to allegations unless DCAA management could disprove through existing documentation)

GAO discounted the DCAA internal peer review process because “questionnaire design can bias study results”

GAO stated that if DCAA reports internal control deficiencies, the contractor is required to take corrective action (This is incorrect)

GAO stated that DCAA failed to report estimating deficiencies and the contract price has grown from $967MM to $1.2B

DCAA’s “bad news” is your bad news (if you are audited by DCAA)


Additional Updates

•Annual Incurred Cost Submissions & the Allowable Cost & Payment Clause•Select Areas of Unallowable Costs•Time & Material Contract Updates•Strategies for the Auditee (Yes that’s YOU!)


•Adequate final indirect cost rate proposal within 6 months following expiration of fiscal year

•In accordance with FAR 42.7

•42.703-2 Certificate of indirect costs• Failure to certify (unilateral rates set low enough to

ensure that unallowable costs will not be reimbursed)

•42.704 Billing rates• (e) Contractor and Government may mutually agree to

revise to reflect proposed indirect rates (certified)

•42.709 Penalties

52.216-7 Allowable Cost and Payment Clause


•42.705-1 (b) Procedures (final indirect rate determination)• Final indirect rate proposal, “required content and

supporting data will vary depending upon business type, size, accounting system capabilities”

• Guidance on what generally constitutes an adequate final indirect cost proposal and supporting data, refer to the Model Incurred Cost Proposal in DCAA Pamphlet 7641.90

52.216-7 Allowable Cost and Payment Clause


•Solutions:• Contractor incurred cost proposal should be consistent with

accounting system capabilities• Supplemental data readily available if not provided with incurred

cost proposal• Must have reconciliations which minimize inefficient or non-

productive use of auditor’s resources• Post-audit conference to discuss “sufficiency issues” or lack

thereof and document (to mitigate chances for next year’s auditor insisting on more)

52.216-7 Allowable Cost and Payment Clause…In application


New or “In-process” Regulations T&M (Time and Material Contracts)FAR and DFAR Changes February 12, 2007Three types of T&M Contracts and Contract Regs.: FAR 52.216-29 Non-commercial w/Adeq Competition FAR 52.216-30 Non-commercial w/o Adeq Competition FAR 52.216-31 Commercial DFARS effectively recognizes FAR -30 and -31 only

Major Changes: Eliminates “blended “T” rates”(prime, intercompany and

subcontractor labor separate and distinct) But…Commercial may be blended Commercial provides expansive “audit access”


New or “In-process” Regulations T&M (Time and Material Contracts)Major Changes (cont): Requires specific definition of labor qualifications for any given

“T” rate category Clarifies reimbursement of prime indirect costs and profit (e.g.

if normally allocated, prime indirect costs are reimbursable + prime profit allowed on subcontract & interdivisional costs, but interdivisional costs w/o profit)

Most likely issue involving “interpretation” of FAR/DFARS: DCAA guidance that contracts prior to February 12, 2007

should be audited in accordance with contract terms and conditions (DCAA will likely challenge most “blended rates”).


Maintain a professional working relationship with DCAA & the ACO Ask for the “audit program” & an entrance conference Know what (data) you are providing the auditor

• Do not give the auditor free rein• You can ask why auditor is requesting specific data; he/she may

or may not tell you why• Request interim results (provides more time to rebut)

Keep emails from the auditor• Overly aggressive auditors rarely temper that aggression• Don’t respond “in kind”

Strategies for the Auditee


Potential problems:

• Requests for information with a due date assuming no one has any other responsibilities

• Requests for “concurrence” on audit exceptions with a due date which allows very little time

• Requests for “concurrence” on an audit exception previously unidentified (no hint that there were issues)

Potential Solutions:

• Groundrules at the outset of the audit “quid quo pro”

• Identify a point of contact other than the field auditor (a supervisor)

• Pay attention to audit follow-up questions (additional inquiry with implications of an issue?)

• If you have good working relationships, work to keep them…

• Document, Document, Document!

Strategies for the Auditee (cont)


Contact Information

K. D. “Ken” Bricker

(703) 970-0405 (office) or (703) 855-1815 (cell)

[email protected]

http://www.goodmanco.com

© Copyright 2009. Goodman & Company, LLP. Surviving a DCAA Audit January 28, 2009 Presented By: K. D. “Ken” Bricker, CPA, DABFA Senior Partner, Government.

Documents

llp dcaa

clients dcaa

audit findings dcaa

goodman company

audit conclusions

dcaa charter info

audit reports

audit challenge