Mastering the Pre-Award Accounting System Review

Mastering The Pre-Award Accounting System Review
Aisha Mian and La-Tasha Patel | April 28, 2016
http://blogs.aronsonllc.com/fedpoint/

2© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs |
Agenda
• What is a Pre-Award Accounting System Survey Audit?
• When is a Pre-Award Accounting System Survey Audit necessary?
• Who is Responsible for Monitoring the Accounting System?
• Details of the Standard Form 1408 Review Process
• Standard Form 1408 Criteria
• Policies & Procedures
• What do the Results of a Pre-Award Accounting System Review
Mean?

Pre-Award Accounting System Review –
The Basics

The Basics
What is a Pre-Award Survey of Prospective Contractor Accounting
System Audit?
• An examination of the accounting system at either a large or small
contractor before contract award to determine the acceptability of a
contractor’s accounting system for accumulating costs under a prospective
Government contract.
• Generally recommended for flexibly priced contracts including:
– Cost-reimbursement contracts
– Cost-sharing
– Cost-plus-incentive –fee
– Cost-plus-award–fee
– Cost-plus-fixed –fee
– Fixed Price or Time & Materials contracts with cost-reimbursable line
items

The Basics
The Pre-Award Accounting System review determines the adequacy of
a contractor’s cost accounting system -- not the Financial Accounting
System!
• Financial Accounting System: reports total amounts incurred for
each cost element (labor, materials, etc.) at a company wide level
• Cost Accounting System: distributes and allocates costs among
specific contracts, jobs or other cost objectives in a causal/beneficial
relationship

The Basics
A Pre-Award Accounting System Review (DCAA Activity Code
17740) involves:
• Evaluation of the design effectiveness, not the operating
effectiveness of the system
• A mix of inquiry of appropriate personnel, observation of the entity’s
operations, and inspection of relevant documentation
• Walkthroughs of the accounting system that include a combination
of the above procedures
Detailed testing of transactions, and re-performance of the
controls are not necessary when testing the design effectiveness.

The Basics
A Pre-Award is different from a Post Award Accounting System
Review!
• A Post Award Accounting system review is usually performed at the
request of the Contracting Officer (CO) when:
– A follow-up audit to a pre-award survey is recommended or
– A pre-award survey was not conducted prior to contract award,
and the contracting officer determines that an audit is now
required to support contract requirements
• The post award accounting system audit program includes detailed
testing of transactions through the accounting system such as
tracing costs billed to source documentation.

When is a Pre-Award Accounting System
Audit Necessary?

When is Pre-Award Necessary?
• Preparing to bid on a proposal which requires an adequate
accounting system per FAR 16.301-3(a)(3)
FAR 16.301-3 (a)(3)–
A cost reimbursement contract may be used only when the
contractor’s accounting system is adequate for determining
costs applicable to the contract or order
• Performed by the DCAA or other Cognizant Federal Agency at the
request of a CO or Administrative Contracting Officer (ACO)
Common misconception is that contractors can request the audit
when they need it. Contractors cannot simply request the
audit!

When is Pre-Award Necessary?
What if you already have an adequacy letter from a cognizant
federal agency?
• The adequacy determination is valid typically for three years or until
a material change in the system occurs.
– Material Change: Change in software
– Immaterial Change: Addition of a new overhead pool for
additional contract work, minor revision to the policies and
procedures
Keep in mind the new DCAA MRD released on DCAA’s Audit
Support to Non-Defense Agencies!

Responsible Parties

Responsible Parties
If you’re a prime contractor:
• The CO or ACO is responsible for approving or disapproving the
accounting system
• The auditor serves as the technical advisor to the CO or ACO on the
accounting system review through performance of the pre-award
accounting system audit

Responsible Parties
If you’re a subcontractor:
• The Prime contractor is responsible for managing its subcontracts
per FAR 42.202(e)(2). The prime contractor should “flow down” the
requirement for an accounting system if awarding a contract based
on cost.
• The prime contractor’s internal control system over subcontracts
should provide for appropriate flow down clauses into the
subcontract that require:
– Government or contractor access to the sub’s books and records
– For billings to only include allowable costs
– The subcontractor to submit annual incurred cost proposals

Responsible Parties
Third Party Certifications:
• Third party reviews are accepted by prime contractors as evidence
of an adequate accounting system (if subcontractor passes)
• Some Prime Federal RFPs allow for third party certifications for
accounting systems. Language included in the RFP may state the
following:
“Because of the need for contractors to respond to Cost
Reimbursement task orders, offerors must have verification from the
DCAA, DCMA, any federal audit agency, or a third-party
accounting firm of an accounting system that has been determined
adequate for determining costs applicable to this contract are in
accordance with FAR 16.301-3(a)(1).”

The Pre-Award Accounting System Review
Process

The Process
• Prior to the CO or ACO requesting an audit of a contractor’s
accounting system, they will ask the contractor to complete the Pre-
Award Survey of Prospective Accounting System Checklist
– Located on the DCAA’s website (www.dcaa.mil  Checklists
and Tools  Pre-Award Accounting System Adequacy Checklist)
• CO/ACO provides the completed checklist to the auditor of your
Cognizant Federal Agency (e.g. DCAA, USAID)
• Checklist provides documentation to the auditor on how and if your
accounting system meets the criteria in the Standard Form (SF)
1408, Pre-Award Survey of Prospective Accounting System

The Process
• Onsite visit by the auditor generally for one to two days to complete
the SF 1408 (DCAAActivity Code17740):
– Audit scope is limited to obtaining an understanding of the
design of the prospective accounting system
– Not heavy on transaction testing!
– Auditor will determine if the system is one of the following:
(1) In operation
(2) Set up, but not in operation
(3) Anticipated
(4) Nonexistent

Standard Form 1408 Criteria

SF 1408 Criteria
 Proper segregation of costs
 Identification & accumulation of direct costs by contract
 Logical & consistent method for the allocation of indirect costs
 Accumulation of costs under general ledger control
 Timekeeping system that identifies employees’ labor by intermediate
or final cost objectives
 Labor distribution system

SF 1408 Criteria
 Interim determination of costs charged to a contract through routine
posting to books of account
 Exclusion of unallowable costs
 Identification of costs by contract line item
 Accounting System provides financial information required by
contract clauses concerning limitation of cost and limitation of funds
 Required to support requests for progress payments

SF 1408 Criteria - Policies & Procedures
Review all Policies & Procedures including:
 Direct Versus Indirect Costs
 Allocation of Indirect Expenses
 Accounting for Unallowable Costs
 Time and Expense Reporting Policy
 Invoicing Subcontractor Costs Policy

The Results of the Standard Form 1408

The Results
• Compliant with Criteria in SF 1408:
– The DCAA will submit the audit report with the SF 1408
completed to the CO or ACO
– In most cases, the ACO will make the report available for future
use of adequacy determination and will provide an adequacy
letter
– If the award is pending, the ACO may not release the report
until the selection team has finalized
Remember - You can ask the ACO if you can have a copy of the
results!

The Results
• Non-Compliant with Criteria in SF 1408:
– Auditor will notify both the contractor and the procurement
official of the deficiencies
– Auditor will identify recommendations for correcting the
deficiencies
– Once the required corrective actions have been taken by the
contractor to correct the deficiencies, if requested by the CO,
the auditor will perform a follow-up audit of the revised system
and/or corrected deficiencies

The Results
• Compliant with a recommendation that a follow-on accounting
system audit be performed after contract award:
– An accounting system audit may be performed after contract
award and is usually performed at the request of the CO when a
follow-up pre-award survey is recommended
– Auditors may self initiate a post contract award accounting
system audit based on audit risk at a contractor location!

In Conclusion…
• If you have prime contracts, try to have the PCO or ACO trigger a
DCAA/ other cognizant audit agency to conduct a review
• If performing work only as a subcontractor, attempt to work through
the prime contractors to trigger the review
• If you have prime work and no system determination/review, you can
try to claim that the government has already determined you are
suitable for award by means of previous contracts awarded (which
may work if the prior awards are cost or T&M)
• Engage a third party to conduct a review
• Self-certify the system

About Aronson LLC
Aronson LLC provides a comprehensive platform of assurance, tax,
and consulting solutions to today’s most active industry sectors and
successful individuals. For more than 50 years, we have purposefully
expanded our service offerings and deepened our industry specialties
to better serve the needs of our clients, people, and community. From
startup to exit, we help our clients maximize opportunity, minimize risk,
and unlock their full potential.

About Aronson LLC
• Thinking ahead for clients for more than 50 years
• 225+ professionals located in Rockville, MD
• 80+ professionals dedicated to supporting government contractors
• Aronson helps clients rethink the way they approach their business
through innovative, industry-specific services and advice:
– Audit, Assurance and Tax
– Deltek Systems and Outsourcing
– Financial and Contract Compliance
– GSA Schedules
• www.aronsonllc.com/blogs/fedpoint/ – News and trends and insight
for today’s savvy government contractor

Awards / Accolades / Affiliations
The Gazette of Politics & Business Exceptional 53 Business Award
In 2012, Aronson received the PB53 award for the third year in a row. The program
acknowledges the top businesses and organizations in Maryland based on criteria that
includes the company’s annual revenue, employee growth, noteworthy product or service
innovations, community service efforts and more.
Accounting Today Top Firm
In 2013, Aronson was once again named to Accounting Today’s list of the top 100 firms in
the country. Accounting Today is a leading provider of online business news for the tax and
accounting community.
Washington Business Journal Top 25
Aronson is ranked #12 on the Washington Business Journal’s Top 25 Accounting Firms in
the DC Metropolitan area.
INSIDE Public Accounting Top 100
Once again, Aronson has earned a spot in the top 100 of this prestigious list, released by
INSIDE Public Accounting. This is the longest running, most comprehensive and accurate
independent analysis focusing on management and operations of America’s large local,
regional and national firms.
Washington Business Journal Best Places to Work
Aronson has been recognized five times as one of the Metro area’s “Best Places to Work.”
The award recognizes a company’s achievements in creating a positive work environment
that attracts and retains employees through a combination of employee satisfaction, working
conditions and company culture.
Montgomery County Chamber Corporate Social Responsibility Award
In 2010, Aronson was honored to receive the MCCC’s Corporate Social Responsibility Award
based on the depth and breadth of the company’s energetic commitment to support young people,
in the areas of education, housing and health.

Aisha N. Mian is a managing consultant in Aronson LLC’s
Government Contract Services Group. She has more than eight
years of experience in the government contracting industry, with
expertise in both project control and financial compliance. Her
professional skills include contract/project financial analysis and
various areas of financial compliance, including preparation of
incurred cost submissions; support in evaluating, preparing and
advising appropriate indirect rate structures; preparation of disclosure
statements; and analysis and impact of cost accounting standards
(CAS). She has also worked alongside in-house DCAA auditors
supporting audits for incurred cost submissions during her time in the
industry.
Aisha has been a guest speaker on financial and government
contracting topics at the GWSCPA Government Contracting
Conference and has hosted Aronson LLC webinars related to
government contracting topics. She earned her bachelor’s degree in
finance from George Mason University and her MBA from the Robert
H. Smith School at the University of Maryland College Park.
Managing Consultant, Government Contract Services Group
240.364.2614
amian@aronsonllc.com
Aisha N. Mian

La-Tasha S.R. Patel, CPA is a managing consultant in Aronson LLC’s
Government Contract Services Group. With more than eight years of
experience in the government contracting industry, she focuses on cost
accounting standards (CAS), business systems, federal acquisition regulation
(FAR), and audit support.
Throughout her career, La-Tasha has served the government contracting
community in several capacities, using her in-depth knowledge of accounting
areas related to business combinations, revenue recognition, consolidations,
GAAP, internal control systems, financial reporting and analysis, financial risk,
indirect rates and account reconciliation. This diverse knowledge gives her the
ability to perform an analysis with an understanding of the motivation of the
stakeholder from each sector. As a result, La-Tasha is adept at providing
practical solutions that achieve positive results for her clients.
La-Tasha is a motivated mentor and teacher, committed to sharing her
knowledge with peers and helping her clients rethink their business strategies
to achieve their goals. La-Tasha earned her bachelor’s degree in accounting
from the University of South Florida. La-Tasha is a licensed CPA in the state of
Maryland and is a member of the AICPA.
Managing Consultant, Government Contract Services Group
301.231.6260
lpatel@aronsonllc.com
La-Tasha Patel, CPA

240.364.2614
Contact Aisha Mian/Aronson LLC
amian@aronsonllc.com
https://www.linkedin.com/in/aishamian
https://twitter.com/Aronsonllc

301.231.6260
Contact La-Tasha Patel/Aronson LLC
lpatel@aronsonllc.com
https://www.linkedin.com/in/la-
tasha-patel-cpa-aba8a122
https://twitter.com/Aronsonllc

Mastering the Pre-Award Accounting System Review

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