Deltek Insight 2010: Surviving a Defense Contract Audit Agency Audit

XT-215: Surviving a Defense Contract Audit Agency Audit

Presented By: Bill Keating, Baker Tilly/Beers + Cutler

Noah Leiden, Baker Tilly/Beers + Cutler

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Agenda

• Understanding the DCAA

• Typical DCAA Audits

• DCAA Current Initiatives and Focus Areas

• Preparing and Conducting the Audit

• Resolving Audit Disputes

• Special Issues Related to Disallowed Costs

• Best Practices – Key Takeaways

Copyright © 2010 Deltek, Inc. 2

Understanding the DCAA

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• The Defense Contract Audit Agency (DCAA) is a Procurement Advisory

Agency which Audits Both Defense and Non-Defense Contractors

• It Plays a Critical Role in Helping Officials Formulate Government Policy

by Providing Insights on the Impact that Government Decisions Will

Have on Contractors

• DCAA's Audit Practices Will Ultimately Have a Significant Impact on the

Day-to day Operations and Profitability of Your Company

• It is Critical to Understand the DCAA Audit Objectives and Actively

Manage Your Relationship with the Cognizant Audit Office



• Purpose (Mission)– Perform all necessary contract audits for Department of Defense (DOD) and

provide accounting and financial advisory services

– Provide contract audit services to other Government agencies as appropriate

• Key Data Points– DCAA consists of approximately 4,000 people

– Headquarters in Fort Belvoir, VA

– 300 Field Audit Offices located throughout the

United States, Europe and the Pacific

• Internal Changes/New Leadership– Issues in 2008 and 2009, including Government Accountability Office (GAO)

investigation and Inspector General (IG) report

– Patrick Fitzgerald replaced April Stephenson as the new DCAA director



DCAA Regional Boundaries


CENTRAL REGION(DALLAS)

WESTERN REGION(LOS ANGELES)

EASTERN REGION(ATLANTA)

MID-ATLANTICREGION

(PHILADELPHIA)

NORTHEASTERN REGION(BOSTON)

= REGIONAL OFFICE

Typical DCAA Audits

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Typical DCAA Audits

• Preaward Contract Audit Services– Price Proposals

– Preaward Surveys

– Forward Pricing Labor and Overhead Rates

• Post Award Contract Audit Services– Incurred Costs/Annual Overhead Rates

– Truth in Negotiation Act (TINA) Compliance

– Cost Accounting Standards (CAS) Compliance and Adequacy

– Claims

– Financial Capability


Typical DCAA Audits

• Internal Control Audit Planning Summary (ICAPS)– Accounting

– Estimating

– Electronic Data Processing (EDP)

– Compensation

– Billing

– Budgeting

– Material Management

– Labor

– Purchasing

– Indirect and Other Direct Cost

• Negotiation Assistance– Fact-finding and analysis of contractor information after audit

– Procurement liaison assistanceCopyright © 2010 Deltek, Inc. 10

DCAA Current Initiatives and Focus Areas

DCAA Initiatives and Focus Areas

Today’s Internal Control Environment


2007: Requirement for Ethics Programand System of

Internal Controls

March 2008: DCAA Re-Defines

Materiality

Dec 2008: “Close the Fraud Loophole”

Final Ethics, Compliance,

Internal Controls and Disclosure Rule

Dec. 2008: DCAA Policy Revisions ICS Audit

Opinions/ Denial of Access

DCAA Revises ICAPS

Approach

July 2008: GAO Report - Allegations that Certain Audits at Three Locations Did

Not Meet Professional Standards were Substantiated

March 2009: DCAA Policy Revisions IG Referral

DCAA Initiatives and Focus Areas

• Audit Guidance on the Status of Contractor Systems of Internal Controls as Documented in the Contractor Organization and Systems and Scope of Audit Sections of Audit Reports (MRD 09-PAS-021(R))

• Audit Guidance on Federal Acquisition Regulation (FAR) Revisions Related to Contractor Code of Business Ethics Conduct (MRD 09-PAS-014(R))

• Audit Guidance on Performing Audits of Subcontract Forward Pricing Proposals (MRD 09-PSP-011(R))

• Audit Guidance on Approving and Rescinding Contractor’s Authorization to Participate in the Direct Bill Program for Major Contractors (MRD 09-PPD-006(R))

• DoD Policy Instructs Contracting Officers (COs) on Resolving Disagreements with DCAA Prior to Negotiations (Federal Contracts Report, 12-08-09)


Preparing and Conducting the Audit


• Audit Approach/Preparation– Audit Planning

– Audit Request (Written Request)

– Entrance Conference• Review audit objectives

• Respond to initial data request

• Contractor’s first opportunity to influence audit

• Audit Process– Performance of Field Work

– Condition of Statement• Auditor will establish assessment of Condition, based on Findings

• “Significant” and “Insignificant” Conditions

• “Satisfactory” and “Unsatisfactory” Conditions




• Audit Process (continued)– Interim Conference(s)

• Discussions between auditor and contractor regarding the Condition(s)

• This is the Contractor’s primary opportunity to influence the audit

– Exit Conference• Discussion of all Findings and Conditions

• There should be no surprises

– Contractor’s Response/Rebuttal

– Auditor’s Response

– Report Issued; Workpapers Sent to Permanent Files

– CO (or Requestor) Action

– The best time to challenge audit findings/conditions is before they are put into writing!



• Audit Rights

– Virtually every Government contract over $100,000 in value, except for

acquisitions of “commercial items” and utility services, contains a contract

clause granting audit access rights to the Government.

– The “Access to Records” clause is located at FAR 52.215.2

– What Can Be Examined?

• Books, Accounting Procedures/Practices, Contractor’s Records, etc.



• How to Deal with Government Auditors

– What Should You Do During a Routine Audit ...

• Strive to establish a rapport

• Keep relationship non-adversarial and professional

• Seek to have data requests and interrogatories put into writing

• Provide access in an organized and systemic manner

• Document all meetings and telephone conversations

• Maintain structured environment

• Obtain copies of audit reports

• Obtain copies of internal planning documents



• How to Deal with Government Auditors (continued)

– What NOT to Do During a Routine Audit ...

• Refuse to provide access to any requested record with relevance to the audit scope

• Create unreasonable delays in scheduling the entrance conference

• Create unreasonable delays in providing access to needed data and/or personnel

• Restrict reproduction of necessary evidential matter

• Establish a pattern of failure to comply with agreed-to dates for furnishing data

Resolving Audit Disputes



• Understand the Auditor’s Point of View

• Ensure that All Relevant Facts/Circumstances are Understood

• Build your Argument

• If DCAA is Correct, Withdraw the Cost and Concur with the Finding

Condition

• If DCAA is Incorrect, Prepare a Rebuttal

with Documentation



• Hierarchy of Resolution (DCAA)

– During field work at interim conferences

– Branch Manager

– Contracting Officer post-audit

– DCAA Regional Manager or Regional Specialist

– DCAA Regional Director

– DCAA Headquarters

– File a claim with Board of Contract Appeals or Court of Federal Claims

• Third-party Professional Support

• Government Official Support

Special Issues Related to Disallowed Costs


Special Issues Related to Disallowed Costs

• Normally DCAA “Questions” Costs; Only the Contracting Officer is

empowered to “disallow” them, using the FAR Part 42.8 procedures

• Either DCAA or a Contracting Officer May Take Issue with Costs

Included in Invoices, During Routine Invoice Reviews

• With Contracting Officer Approval, DCAA May Utilize a “Form 1” to

“Suspend” or “Disapprove” Costs

• The Contractor has the Right to Respond to the Form 1, but May have

to Utilize the Disputes Clause to Overturn the Decision

Best Practices – Key Takeaways

Best Practices – Key Takeaways

• Perform Self-Assessments

• Review DCAA Website (www.dcaa.mil)

• Conduct Mock Audits

• Know the Rules

• Pick Your Battles

• Train Your Employees

• Build Relationships With Your Auditor

• Understand Audit Notice Requirements

(except for floor-checks)

• Know your Limitations

• Get Resources to Assist in Supporting You

26Copyright © 2010 Deltek, Inc.

http://www.dcaa.mil/

Q&A


Call to Action

• For More Information, Please Visit Our Booth in the Solutions Pavilion

– Bill Keating, [email protected], 703.923.8227

– Noah Leiden, [email protected], 703.923.8321


Deltek Insight 2010: Surviving a Defense Contract Audit Agency Audit

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Transcript of Deltek Insight 2010: Surviving a Defense Contract Audit Agency Audit