Accounting System Compliance; Hot Topics and Requirements Not to Overlook

1. Keeping Your Accounting System Compliant: Hot Issues & Requirements Not to Overlook October 11, 2011 1

2. First in a series that will discuss selective topics relating to each business system Topics selected fall within Hot issues for DCAA Overlooked requirements that often create deficiencies MLA is preparing a comprehensive business systems compliance guide Introduction 2

3. Interim Business Systems Rule(76 Fed. Reg. 28,856-01, May 18, 2011) Adopts “existing” evaluation criteria for various systems Revised DFARS Subpart 242.75 and § 252.242-7006 Govern accounting systems for contractors performing flexibly-priced or progress payment eligible work Define “acceptable accounting system” Establish 18 evaluation criteria Accounting System Overview 3

4. “Accounting system” is the methods, procedures and controls established to gather, record, classify, analyze, summarize, interpret and present accurate and timely financial data, including subsystems for: Indirect costs Compensation Billing Labor Information technology Accounting System Overview (cont.) 4

5. “Acceptable accounting system” means a system that provides “reasonable assurance” that – Applicable laws and regulations are complied with The cost accounting system and data are reliable Risk of misallocations and mischarges are minimized; and Contract allocations and charges are consistent with billing procedures Accounting System Overview (cont.) 5

6. “Significant deficiency” means a shortcoming in the system that materially affects the ability of DoD officials to rely upon information produced Must establish and maintain an “acceptable accounting system” Contracting officer disapproval and/or contract withholdings – “in consultation with auditor or functional specialist” Accounting System Overview (cont.) 6

7. CO retains ability in connection with field pricing audits to require contractor correction of perceived deficiencies, adjust contract type, segregate certain costs, reduce fee or profit objective and/or insert contract reopener clause to mitigate government risk FAR § 16.301-3(a)(1) precludes cost-type contract unless contractor’s accounting system is “adequate for determining costs applicable to the contract” CO “shall promptly approve a previously disapproved accounting system . . . when . . . there are no remaining significant deficiencies” Accounting System Overview (cont.) 7

8. Compliance with CAS FAR/DFARS/Agency Supplements Contract requirements Cost accounting system and data reliability Internal controls Billings Accounting System Priorities 8

9. CAS-compliance of contract element cost allocations (among CLINs, Sub-CLINS or Units, etc.) Indirect cost allocations Consistent practices Reflective of beneficial/causal relationship Cost allowability, including costs of subcontracts, bid and proposal, professional and legal services, insurance, etc. Compliance - Hot Topics 9

10. Flexibly-priced contracts subject to modified coverage (CAS 401, 402, 405 and 406) also must comply with CAS 412 and 413 (pensions) (FAR § 31.205-6(j)) CAS 415 (deferred compensation) (FAR § 31.205-6(k)) CAS 414 and 417 (cost of money) (FAR § 31.205-10)) CAS 420 (IR&D and B&P) (FAR § 31.205-18) CAS 416 (insurance) (FAR § 31.205-19) Compliance – Do Not Overlook 10

11. Proper allocation of business generation costs Selling IR&D B&P Proper allocations generally Overhead pools Service centers Compliance – Do Not Overlook (cont.) 11

12. Impact of business decisions Organizational changes, creating accounting practice changes Pricing decisions for an individual contract, creating CAS 401 issues Training for personnel outside of accounting functions Acceptance of contract terms for reporting and billing that are more detailed than CAS Disclosure Statement Compliance – Do Not Overlook (cont.) 12

13. Support for adjusting entries to accounts under general ledger control Systems Are not integrated Cannot be (immediately) reconciled Must have job order accounting Not correct But must establish ability to develop contract costs using process costing or standard costs System/Data Reliability – Hot Topics 13

14. Compensation/labor recording system Consistent uncompensated overtime practice Consistent compensatory time practice Disciplined timekeeping compliance Error corrections/management review Unallowable cost screening Disciplined compliance at point of entry Disciplined compliance at home offices System/Data Reliability – Do Not Overlook 14

15. Ability to produce Source documentation Audit trail System/Data Reliability – Do Not Overlook (cont.) 15

16. Automated and integrated systems with built-in segregation of employee responsibilities Internal audit activity Functionally and organizationally independent Maintain requisite specialized knowledge to review government contract compliance Periodically performed Internal Controls – Hot Topics 16

17. Error correction Timely Accurate Ethics practices timely investigation of issues documented resolution and corrective action appropriate disclosures and follow-up Internal Controls – Do Not Overlook 17

18. Adequate contract “briefings” Periodic reconciliation of billings to incurred costs Invoices and supporting information conform to contract billing requirements Job order accounting by CLIN, Sub-CLIN, Unit and/or lower-level cost element, if contract requires Timely adjustments, including resolution of items in suspense Billing Systems – Hot Topics 18

19. Subcontractor billing compliance and supporting documentation Periodic estimates to complete for “Limitation of Costs” and/or “Limitation of Funds” provisions Progress payment limitation and/or liquidation requirements FPI “Quarterly Limitation of Payment” requirements Billing Systems – Do Not Overlook 19

20. Investments in integrated and automated systems Conduct periodic accounting system evaluations, review results, implement corrective actions Continuous employee training on key compliance areas Timekeeping Cost allowability Best Practices 20

21. Thomas A. Lemmer303-634-4350tlemmer@mckennalong.com Steven M. Masiello303-634-4355smasiello@mckennalong.com Presenters 21 DN 32216384