1

Surviving a Government audit

Presented by

Jerrold Rosenberg, CPA, CFP

Gelman, Rosenberg &Freedman, CPAs4550 Montgomery AvenueSuite 650 NorthBethesda, MD 20814301-951-9090www.grfcpa.com

2

Types of audits

Incurred cost audits – primary focus May cover multiple years Based on incurred cost submission May be most time-consuming Sample incurred cost submission is on

DCAA web site

3

Types of audits

Proposal audits Organization is key Provide “scientific” support for projected

amounts Direct costs – history and projection Indirect cost rates GSA schedule – conflict between GSA and

DCAA

4

Types of audits

System Survey System must be in place Auditors expect a lot from small contractors

o Job costingo Purchase order system

Financial Capability Company assets Bank commitments

o Mobilizationo Receivable financing

Owner’s assets Debt vs. equity

5

Types of audits

Other Termination Billing system Floor checks

6

Dealing with the auditor

Company contact One or two key employees Make sure that other employees are aware

that they are not to communicate with auditor

Inconsistency between auditors Level of experience – DCAA now losing

auditors to retirement Levels of knowledge

7

Dealing with the auditor

Opening conference Why are auditors there Lay out policies for dealing with company employees Assure auditor that you will cooperate

Closing conference Get opportunity to provide additional information

before the auditor has prepared their report Face to face meeting is preferred Required Access to audit reports

8

Dealing with the auditor

Monitoring access to records Pull information for the auditor Copy any information requested by the

auditor Maintain a list of information provided Document when the auditor requested the

information

9

Biggest problems

Timekeeping General requirements

o Signed by employee and supervisoro Prepared in inko Changes crossed out

Field employees Electronic Training

10

Biggest problems

Billing doesn’t reconcile to booksDifferent classification on books from invoice

to AID Timing differences

11

Biggest problems

Unallowable costs not identified Reasonable – “Does not exceed that which

would be incurred by a prudent person in the conduct of a competitive business”

Allocable – assignable or chargeable FAR 31 / Cost Accounting Standards Contract terms Accounting system should segregate Directly associated cost - materiality

12

Biggest problems

Similar costs treated differently Telephone Travel Home office expenses

13

Biggest problems

Improper accounting system set up Poor chart of accounts Job costing Audit trail Timekeeping Systems available

o Quickbookso Delteko Peachtree

14

Steps to avoid audit issues

Policies and procedures Establish and follow

o Formal or informalo Employee handbook

Don’t get caught not following one of your own procedures

15

Steps to avoid audit issues

Pre-audit Focus on high dollar items

o Laboro Travelo Subcontracts

Internal staff Outside parties DCAA auditor access to pre-audit findings

16

Steps to avoid audit issues

Employee training Expense coding Consistency between employees

Consistency in contracts Huge problem Costs treated differently between contracts

o Home office expenseso Rent

Customer doesn’t understand problem Contract terms can impact on cost recovery

17

Steps to avoid audit issues

Monitoring of indirect rates and contract ceilings Avoid making large adjustments at year end Indirect rates can also serve as a budget Balance costs to avoid ceilings Allocation of shared services

18

Steps to avoid audit issues

Reputation Auditors talk to each other You are better off with a reputation for

being cooperative

19

Steps to avoid audit issues

DCAA Contract Audit Manual Available from Superintendent of Documents

for $60 each year Contains audit procedures for several types of

audits and selected areas of cost Includes FAR 31.205 selected costs

Information for Contractors Available from DCAA web site, www.dcaa.mil

20

Determining exposure

Ceiling Rates

Cost type contracts

21

Surviving a Government AuditDetermining Exposure

Surviving A Government AuditDetermining Exposure

Basic FactsContract Type DL Fringe Subtotal Overhead ODC Subtotal G&A Total Cost

XXXA CPFF 250,000$ 81,250$ 331,250$ 85,131$ 25,000$ 441,381$ 48,993$ 490,375$

BBBD CPFF 350,000 113,750 463,750 119,184 15,000 597,934 66,371 664,304

CCCA T&M 500,000 162,500 662,500 170,263 400,000 1,232,763 136,837 1,369,599

ABCD FIXED PRICE 450,000 146,250 596,250 153,236 100,000 849,486 94,293 943,779

Total 1,550,000$ 503,750$ 2,053,750$ 527,814$ 540,000$ 3,121,564$ 346,494$ 3,468,057$

Indirect Rates Prior To Audit 32.500% 25.700% 11.100%

Auditor Disallowance 35,000$ 15,000$

Audited Indirect Rates 23.996% 10.619%

22

Contract Costs After Disallowances

Contract Costs After DisallowancesContract Type DL Fringe Subtotal Overhead ODC Subtotal G&A Total Cost

XXXA CPFF 250,000$ $81,250 331,250$ $79,486 25,000$ 435,736$ $46,273 482,009$

BBBD CPFF 350,000 113,750 463,750 111,281 15,000 590,031 62,658 652,689

CCCA T&M 500,000 162,500 662,500 170,263 400,000 1,232,763 136,837 1,369,600

ABCD FIXED PRICE 450,000 146,250 596,250 153,236 100,000 849,486 94,293 943,779

Total 1,550,000$ 503,750$ 2,053,750$ 514,266$ 540,000$ 3,108,016$ 340,061$ 3,448,077$

Actual Cost of Disallowances $13,548 $6,433

23

Surviving a Government AuditDetermining Exposure

Surviving A Government AuditDetermining Exposure

Contract Costs With CeilingsContract Type DL Fringe Subtotal Overhead ODC Subtotal G&A Total Cost

XXXA CPFF 250,000$ 81,250$ 331,250$ 85,131$ 25,000$ 441,381$ 48,993$ 490,375$

BBBD CPFF 350,000 113,750 463,750 119,184 15,000 597,934 66,371 664,304

CCCA T&M 500,000 162,500 662,500 170,263 400,000 1,232,763 136,837 1,369,599

ABCD FIXED PRICE 450,000 146,250 596,250 153,236 100,000 849,486 94,293 943,779

Total 1,550,000$ 503,750$ 2,053,750$ 527,814$ 540,000$ 3,121,564$ 346,494$ 3,468,057$

Indirect Rates Prior To Audit 32.500% 25.700% 11.100%

Contract Ceiling Rates on CPFF Contracts 35.000% 23.500% 10.800%

Costs Over Ceilings 17,490$ $1,876

Actual Cost of Audit Disallowance -$ $4,557