DCAA receives it overdue external peer review from DOD OIG. Unfortunately, it is not the stellar report we hoped for.
DCAA receives it overdue external peer review from DOD OIG. Unfortunately, it is not the stellar report we hoped for.
In the current crisis surrounding DCAA, it is possible to receive a cost type contract requiring an approved accounting system without actually having anyone from the government look at your accounting system.
This may sound like a gift from heaven but it is not. All it does is transfer the risk off the government’s back and onto yours. Under this increasingly common scenario the contractor assumes the following risks:
|The government can come in at any time and evaluate your accounting system with disastrous results to include: suspension of full payments and even contract termination (the latter is extremely rare).|
The government can suddenly withhold all or part of your payments until they now decide your accounting system is adequate. They may even expect you to continue working while the mess is sorted out.
This withhold is now actually part of the Department of Defense regulations and the subject of a recent DOD OIG audit. This audit criticized DCMA for not withholding 5% of total payments after an accounting system was found inadequate.
This is not the 15% of your fee or profit you may have heard about. This is up to 5% of your total billing. Remember, profits on cost type contracts usually average 5% to 7% of costs billed. If the government refuses to pay 5% of your total billing they just eliminated the vast majority of your profits.
Oh, and it can get worse. Applied Physical Sciences, a small contractor, went to the Armed Services Board of Contract Appeals (ASBCA) claiming the government failed to reimburse over a million dollars. The government simply refused to pay them based on an inadequate accounting system, arguing that the inadequacy made it impossible to determine if any of the costs claimed were actually associated with government work. Applied Physical Sciences actually raised the inadequate accounting system as a defense, asserting the government should not have awarded them a cost contract. Alas (or not), the government won.
|The lesson is ‘crystal clear’. The government awarded the contract in complete disregard of the government’s own standards and the contractor paid for it.|
The lesson is ‘crystal clear’. The government awarded the contract in complete disregard of the government’s own standards and the contractor paid for it. The contractor paid for it not because of the government’s failure to approve the accounting system, but because there was no adequate accounting system to support the contractor’s claimed costs.
They can also hold up any future contracts awaiting the now necessary approval.
|Even as the government has lost in way in how to enforce compliance, contractors need to understand the importance of excellent accounting systems to the government.|
Time and time again I am surprised by contractors who believe that accounting for government dollars on their part is unnecessary and a waste of time. A few years ago, I declined to work with a government contractor who bragged about getting DCAA to approve his accounting system without a general ledger system and his refusal to comply with the standards (or as he put it: “ridiculous demands”).
He wished to engage me to prepare and submit the billing on a cost type contract based on what he told me to bill. When I declined the ‘opportunity’, he accused me of being scared. When I told a friend about his comments; she teased me, stating that I was ex 82nd Airborne and not scared of anything. “No,” I replied, “I am scared, not of the government, but him”.
Your accounting system is important because the government says so, even if they come back after three years to punish you.
Each year the government spends billions of dollars with contractors providing vital services for our country. All of this money, to include classified work, is ultimately accountable to taxpayers (we all remember the stories about $400 hammers purchased by the Defense Department). The good contractors reading this book have no desire to make the front page of the papers (or worse the bench in front of a federal judge) because of their lack of accountability.
Almost immediately after publishing the new regulations about contractor business systems, DCMA hit Lockheed Martin with a reduction of 5% in payments for the F-35 fighter. Last time I checked the total withholding was over 47 million dollars. If five percent does not seem like a lot, it represents almost all of the profit Lockheed planned on the F-35. Until they get their business systems approved they are working for free.
It is not only the Defense Department that is tightening down on contractor accountability, look at a recent Department of Energy regulation:
Contractor business systems and its internal controls are the first line of defense against waste, fraud, and abuse. Weak control systems increase the risk of unallowable and unreasonable cost on Government contracts. When a contract includes these business systems clauses, it will require the contractor to meet business system criteria for its estimating system, accounting system, earned value management system, purchasing management system, and property management system. When the contractor has acceptable business systems that comply with the terms and conditions of the contract, this will improve contract performance. Under certain conditions, if the business system has significant deficiencies, the contracting officer will be able to withhold a percentage of payments until the significant deficiencies are corrected.
Taxpayers demand accountability and the government will demand accountability from you, not stories, not promises.
 Evaluation of Defense Contract Management Agency Actions on Reported DoD Contractor Business System Deficiencies (Project No. D2013-DAPOCF-0201.002) DODIG-2016-001
 Lockheed Martin just finished three years of fee withholding for a noncompliant estimating system.
 Armed Services Board of Contract Appeals (ASBCA) 56581 and 58038
 We will discuss the regulations later in the chapter.
Excerpt from Surviving a DCAA Audit, available on Amazon
Arthur Andersen & Co., which helps set up internal controls for companies to prevent employee theft and fraud, itself was victimized by a longtime employee who embezzled $2.3 million over five years, authorities alleged Thursday.
During 21 years with the Chicago-based firm, Raymond R. Parcon, 42, of Naperville, rose to become a tax manager in the firm’s U.S. Tax Group, from which position he engineered the clever scheme, according to charges filed in federal court.
Among his duties, Parcon had authority to issue checks to federal and state tax authorities to pay Andersen’s employee tax obligations, prosecutors said.
On repeated occasions between mid-1989 and early 1994, he falsified paperwork to make it appear sizable checks had been sent to the Internal Revenue Service and Illinois tax officials to cover the company’s withholding obligations, prosecutors said.
In reality, Parcon submitted those checks, sometimes for hundreds of thousands of dollars at a time as payments on his personal tax debt, and then claimed huge refunds from the IRS and the Illinois Department of Revenue, the charges alleged.
When the money was refunded to him, Parcon deposited the funds in his personal bank accounts, the government said.
We do not
Often, small business government contractors require all of these services. The written tax code numbers in the thousands of pages as do the laws and regulations relevant to government contracting compliance. Few accountants make the attempt to keep up with both areas and even within larger accounting firms the specialties (tax and government contracting compliance) are split among different practitioners.
One of the many pleasures in our practice is working with the contractor’s tax accountant or bookkeeper. The contractor benefits by having access to two professionals with a bit of crossover for the same price. Two opinions in harmony, most of the time.
I flew in to support a contractor on an accounting system audit in conjunction with his tax accountant. DCAA showed up and we began one of the strangest audits in the almost thirty years of work in this area. If I told all of the story, DCAA would attempt to send my old unit from the 82nd Airborne after me, but I will tell part of it.
Toward the end of the rather strange audit, the DCAA auditor went on a rampage about small business contractors keeping their books on a cash basis.
This is not an unusual complaint made by some DCAA auditors, but I had never heard contractors referred to as idiots for the practices, especially in front of one of these “idiot” contractors.
I went on my usual contractor defense, explaining to the auditor the history of accrued accounting and the very classical utilization of the GAAP accounting cycle which allowed you to keep the books on a cash basis during the period and make the accruals as part of the closing process.
In this case, as in too many others, my purpose was to remind and educate the auditor not to rush to judgement and to expand their knowledge of the accounting world beyond the limited field of DCAA auditing. I sought to gently argue that the DCAA auditor’s strong comments were not only wrong but displayed a lack of knowledge on how accounting is actually practiced in the trenches.
The client’s tax accountant took a different approach, and I loved it.
He turned to the auditor and told him in no uncertain terms that the contractor kept his books on a cash basis because he, the tax accountant, recommend the contractor do so and that any small business owner that did not do so was an idiot and paying thousands of dollars in unnecessary taxes.
The room fell silent and I managed to keep a straight face as I backed the tax accountant up and said that not only was he correct, it was common sense, and allowed under GAAP as I previously outlined (cash converted to accrual during period close).
The DCAA auditor quickly packed up and left. I held my breath for a couple of days until DCAA approved the contractor’s accounting system, even though I knew that both the tax accountant and I made strong arguments in defense of the contractor’s practices.
This is simply one of the countless examples of where we worked hand in hand with the contractor’s tax accountant and/or bookkeeper to move the contractor’s business forward.
Indeed, many of our referrals actually come from the contractor’s outside accountant and I am happy to return the favor when one of my clients is seeking tax or audit work.
I will direct the reader to a previous article about cash v accrual accounting for the specific accounting arguments at https://dcaacompliance.wordpress.com/2016/08/15/all-the-fuss-over-accrued-accounting/.
You know who you are. Yes, you, the one trying to figure out just when DCAA is going to enter your life, or worse, a non DCAA auditor or government official is assessing your operations and accounting system. Perhaps, just perhaps, you already had the pleasure and are reading this simply to improve the experience (read: “recover from disaster”).
Federal regulations require an approved accounting system before the government can award a cost type contract.
Two Presidents, Regan and Obama, started out their presidencies trying to reduce or even forbid government cost type contracts. In both cases, the number of cost type contracts actually grew.
There is a wealth of government created documents justifying the use of cost type contracts. Most of them center on the necessity of the government to assume the risks associated with the contract. Since cost type contracts are a reality, let me just make two observations and move on:
One of the bizarre results of the crisis government contracting entered into in the year 2008, is the increased award of cost type contracts to small contractors without an approved accounting system despite the requirements forbidding this. It started out by contracting officers just ignoring the regulations in order to get the critical contracts issued, but now some of them are actually ‘approving’ the accounting systems after the contractor fills out a form.
Of course contractors may pay for this action by the contracting officers. Recent Armed Services Board of Contract Appeals (ASBCA) decisions that asserted that a lack of an approved accounting system was no defense for the contractor and contractors with cost contracts and an unapproved accounting system appear to be holding all of the risks.
I am not telling contractors to turn down contracts, I am just pointing out issues for consideration.
Your solution may be as simple as taking the contract and making sure your accounting system is fully compliant in anticipation of the day DCAA or another auditor working for the government shows up.
The process of adopting and implementing an accounting system that would win government approval reduces the contractor’s risk and provides critical information to help them identify and manage costs.
 FAR (16-301-3(a)(3)) “(3) The contractor’s accounting system is adequate for determining costs applicable to the contract or order…”
 ASBCA 56581 and 52593
Tom Price, Secretary of Health and Human Services, seems to hold a limited understanding of cost accounting and the necessity of indirect costs. I guess he is one of those guys who believes that organizations can exist without administrative costs.
Both the House and the Senate rejected the change this week.
“Tom Price, the secretary of health and human services, said the government
could achieve huge savings next year without harming lifesaving research by paring
back payments to universities for overhead — the “indirect costs” of research
financed by the health institutes.
These include the cost of utilities, internet service, data storage, the construction
and upkeep of laboratories, disposal of hazardous waste and compliance with federal
rules protecting human subjects of clinical research.
“About 30 percent of the grant money that goes out is used for indirect
expenses, which, as you know, means that that money goes for something other than
the research that’s being done,” Mr. Price said.”
New York Times April 3, 12017
If you are uncomfortable with the press reporting on this issue, feel free to watch the testimony on the House’s site. If you think that is fake new, I cannot help you.
Return on Investment (ROI) always proved a concept of limited value and extreme abstraction in government. How does one measure the ROI associated with a paratrooper sitting on the ground at the green ramp waiting to deploy in harm’s way? How is the ROI measured on a nuclear missile resting in its silo?
Several years ago, DCAA adopted ROI as one of its main arguments to defend (or excuse) the quantity and quality of their work to taxpayers. ROI was an alternative to other measurements such as audit productivity, down to 1.06 audits per year per auditor from 1.5 in 2012. Additionally, form your own opinion about the fact that DCAA wins only half of the fights that get past the auditors and are made by someone outside DCAA.
Let us not forget that one of DCAA’s critical missions, and long neglected by their own admission, is to prevent or reduce costs associated with cost findings by auditing by approving or disapproving contractor’s business systems. I argue that developing and subsequent auditing of a compliant accounting system is a major return on investment for both the contractor and government. I will point out that DCAA recently developed and launched new tools that make major strides in this area with preliminary checklist forms and new audit programs that I believe will greatly enhance DCAA’s future efforts in this area.
I question how DCAA measures ROI as they include forward pricing ‘savings’ in the calculation. This is a classic example of counting your chickens before the eggs hatch. If a contractor proposes $100,000 in fringe benefit costs and DCAA only approves $80,000, DCAA counts the $20,000 toward ROI. Unfortunately, when the year ends the contractor may discover the fringe costs proved $110,000 and bill the government for the $30,000 in difference. To further complicate the issue, the incurred cost submission may propose a different number and the subsequent audit even a fourth number.
The irony of all of this is the development of the ROI model contributed to DCAA’s current crisis, the continued replacement of DCAA as incurred cost proposal auditors by outside accounting firms. ROI is now a dangerous temptation in evaluating ‘independent” accounting firms’ “success” in auditing incurred cost proposals.
In recent testimony before Congress, Industry complained that DCAA acted more like a collection agency than auditors. Imagine our response if this becomes formalized as commercial contractors are awarded contracts on their promises regarding return on investment.
 There is no indication that DCAA follows the potential saving through the entire chain. First, they do not report how they calculated the ‘savings’ and given the incurred cost proposal backlog of years, one would wonder about the practicality of going beyond the simplest and first number.