Pricing Matters – Preparing for a Government Audit of Your Accounting System

By Ronald Marta, University of Houston PTAC

Government contracts do not necessarily trigger an audit of a company’s accounting system. But they can.

The “when” and “why” for an accounting system audit are to be found in the Federal Acquisition Regulation (FAR) Part 9 – Contractor Qualifications. Government contracts are to be awarded to responsible contractors. To be responsible, contractors must have “the necessary organization, experience, accounting and operational controls, and technical skills” to perform on a government contract. It is the responsibility of the contracting officer of the government agency to make certain that the contractor meets the applicable standards. Consequently, an accounting system audit will normally be initiated by the contracting officer, who will send a request to an audit agency, usually the Defense Contract Audit Agency (DCAA). DCAA will respond with a written acceptance of the request.

How then can you prepare for a government audit of your accounting system? The first thing to do is to make certain that the system is compliant with the requirements set forth in GSA Form 1408 Preaward Survey of Prospective Contractor Accounting System. These requirements were the subject of a recent “Pricing Matters” article, Making Your Accounting System Compliant With Government Requirements. 

The compliance of the accounting system starts with the chart of accounts. The chart of accounts should be in the government format. This means that the chart of accounts should, among other things, break out direct and indirect costs, as well as unallowable costs. This can be accomplished quite easily by assigning separate numerical sequences to the different groups of costs.

A key requirement for a compliant accounting system is the calculation of indirect rates, which you can learn more about in my post “Pricing Matters – Indirect Cost Calculations“.  As was noted in that article, indirect rates can and should be calculated from the contractor’s actual historical costs, plus any adjustments that may be appropriate. Moreover, the indirect rates should be monitored and updated on a regular basis.

Since government audits of accounting systems are usually assigned to DCAA, we should look at the programs that DCAA uses for its audits. These programs can be downloaded from the DCAA website at www.dcaa.mil.

DCAA has three audit programs for accounting system audits:

  1. Preaward Survey of Prospective Contractor Accounting System
  2. Post Award Accounting System Audit at Nonmajor Contractors
  3. Post Award Accounting System Audit at Contractors with DoD Commercial Time-and-Materials (T&M) or Labor-Hour (LH) Contracts.

It is to be noted that an accounting system audit can precede or follow a government contract award. It is also to be noted that that the audit steps in DCAA’s audit programs mirror the requirements set forth in GSA Form 1408. The Preaward and Post Award audits are very similar. However, there is one significant difference: the Post Award audit program includes audit steps for reviewing the contractor’s billing system. The purpose of the billing system review is to determine that the contractor’s billing system procedures for preparing cost-reimbursement claims are adequate. The Time-and-Materials accounting system audit includes transaction testing for material, other direct costs and/or subcontract costs.

An excellent way to prepare for a DCAA audit is to download the program for the audit that the PTAC client is anticipating. All of the audit steps that the DCAA auditor is supposed to follow will be listed there. Reviewing the audit program will provide valuable information. The review may also relieve some of the anxiety that is frequently associated with an upcoming audit.

Small business owners may contact your PTAC to inquire about a review of their accounting system for acceptability for government procurements. Not all PTAC offices may offer this service; however, some do, as we are able to do at the University of Houston PTAC.

One thing that can facilitate immensely the accounting system audit is written accounting policies and procedures. It will be the subject of the next “Pricing Matters” article.

Here is a Checklist for preparing for a government audit of the accounting system.

  1. Is the accounting system in accord with Generally Accepted Accounting Principles?
  2. Does the accounting system segregate direct and indirect costs?
  3. Does the accounting system identify and accumulate direct costs by contract?
  4. Does the contractor calculate and monitor the company’s indirect rates?
  5. Are costs accumulated under general ledger control?
  6. Is there an adequate timekeeping system in place – one that tracks labor costs from time cards to charges to a particular job or contract?
  7. Are contract costs determined at least monthly and posted to books of account?
  8. Does the accounting system exclude unallowable costs per FAR 31?
  9. Are contract costs identified by line item and by units, if required by the contract?
  10. If there are preproduction and production costs, are they separated in the company’s accounting records?
  11. Does the accounting system provide financial information required by contract clauses concerning limitation of costs (FAR 52.232-20 and 21) or limitation on payments (FAR 52.216-16)?
  12. Can the accounting system support requests for progress payments?
  13. Can the accounting system support pricing for follow-on acquisitions?
  14. Is the accounting system in full operation?

 

Pricing Matters is a regular feature by Ronald Marta.  Watch for future posts on a wide range of pricing issues.


More about Procurement Technical Assistance Centers (PTACs)

Ninety-eight PTACs – with over 300 local offices – form a nationwide network of procurement professionals dedicated procurement professionals working to help local businesses compete successfully in the government marketplace. Funded under the Defense Logistics Agency’s Procurement Technical Assistance Program through cooperative agreements with state and local governments and non-profit organizations, PTACs are the bridge between buyer and supplier, bringing to bear their knowledge of both government contracting and the capabilities of contractors to maximize fast, reliable service to our government with better quality and at lower costs.

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Ron Marta Headshot
Ronald S. Marta has been a Senior Procurement Counselor with the University of Houston PTAC since 2008.  Prior to that, he served as an auditor for 15 years with the Defense Contract Audit Agency (DCAA) and 7 years with the NASA Office of Inspector General at Johnson Space Center. His special areas of interest include accounting systems, proposal preparation, cost analysis, and audit preparation.  Ron is a Certified Public Accountant and holds Master’s degrees in Business Administration and in Professional Accounting.

The UH PTAC is a specialty center of the University of Houston Small Business Development Center Network.  UH PTAC provides government procurement consulting and training to 43 counties in Southeast Texas.


PTACs provide a wide range of government contracting help – most free of charge!

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