Mysteries of a Compliant Accounting System

1. Mysteries of a Compliant Accounting System Susan Moser, CPA Partner, Cherry, Bekaert & Holland, L.L.P. smoser@cbh.com September 23, 2010 The Firm of Choice. www.cbh.com

2. Objectives Requirement for adequate systems General data requested Preparing for audit Real world stories Proposed rule Closing remarks

3. The Myth “Approved” Accounting Systems

4. The Truth “Adequate” Accounting Systems Based on contract type and requirements FAR 16.301-3 – adequate to determine costs applicable to cost reimbursement contracts (no FAR requirement for T&M or FFP contracts) FAR 9.103 – KO must determine responsibility IAW FAR 9.104-1 May request a pre-award survey (FAR 9.106) No longer adequate in part – either adequate or inadequate

5. When are Audits Conducted? Prior to award of cost or T&M type contract After award of contract to verify system functioning properly If accounting software changes Mergers and Acquisitions

6. Why We Should Care Contracting Officers use audit report to help determine contractor responsibility Negative report may result in not winning cost type or T&M work Both Government and Prime contractors are asking contractors to certify whether or not system(s) are adequate

7. Accounting System Defined Software People Processes Policies

8. Basic Requirements Segregation of Duties Written policies and procedures Method to consistently allocate costs Identify costs by project Software is a tool to accomplish this

9. Size Matters Compliant system varies by company size 1 man shop requires little controls or written policies 1000 person company needs segregation of duties, employee training, written policies

10. Requested Data Chart of Accounts Trial Balance – in accrual; ties to all subsidiary reports May also request G/L Financial Statements Project Report(s) Organization Chart List of government contracts

11. Requested Data, contd. Policies and Procedures Timekeeping Billing Indirect Rates Budgeting Segregating costs (emphasis on unallowable) Survey of Contractor’s Organization

12. Preparing for Audit Always be audit ready Expected to provide info quickly (see MRD from 12/19/08) Request audit number & name Review audit program to understand scope Pre-award Survey of Prospective Contractor Accounting System – Activity Code 17740 Standard Form 1408

13. Preparing for Audit, contd. Written description of basic account structure System used (Deltek, QuickBooks) Identify pools and bases for indirect rates and how to identify within the chart of accounts Define company’s allocation methods and indirect cost pools Overview only – may only be a few pages

14. Preparing for Audit, contd. Reconcile all reports and correct variances or have a thorough explanation available prior to audit Select a variety of timesheets self-audit that timekeeping procedure was followed and time properly recorded in accounting system Identify contracts with special accounting/billing requirements and verify contract terms followed (75% notice)

15. Surprises Post Award Accounting System Audits Pre-award Survey – conducted again? But everything was fine in the last audit Proposed change to DFARS Potential for withholding if systems are inadequate

16. Post Award Accounting System Audit Scope: adequate system to segregate and bill costs IAW contract requirements Not designed for overall accounting system review Not testing internal controls May be requested by Contracting Officer or follow-up to pre-award

17. Real World Examples Was adequate, now it’s inadequate Special requests Written policies Timekeeping Fully utilizing accounting system New business

18. Adequate to Inadequate Accounting System: Deltek FMS Revenue > $20 million Original pre-award audit deemed system adequate Several years later, updating with a post award audit System deemed inadequate Significant issues: Lack of billing policies and procedures Lack of training on proper billing procedures Billings not based on current accounting information Not reconciling booked to billed costs Not excluding unallowable costs (travel)

19. Adequate to Inadequate, contd. Contractor Response: Develop policies and procedures to exceed DCAA’s recommendations Hire additional accounting staff Develop training plan Revise method to calculate invoices Revise expense reimbursement policy Hired consultant to assist with project reconciliations and P&P development

20. Adequate to Inadequate, contd. Results Regular visits with DCAA to track progress Meetings with customers to assure of contractor’s capabilities/responsibility High cost in labor and time to correct Follow-up audit conducted Received notice of adequate system 1 year after initial audit began

21. Prime & KO Request Accounting System: Peachtree Revenue > $10 million Prime contractor questioned propriety of subcontractor cost allocations IG investigated subcontractor and found no improprieties Subcontractor awarded large prime contract - cost reimbursable KO read article on IG investigation and asked DCAA to perform accounting system survey System found inadequate Different KO received report and stated no renewal of cost contract

22. Prime & KO Request, contd. Negotiated with KO to receive FFP contract Significant issues Inconsistent treatment of fringe benefits as direct or indirect cost Mistake in presentation on the ICS Non-segregation of costs by contract type within a contract Accounting system is capable of this Setup corrected Indirect costs not billed using provisional billing rates Misunderstanding on ability to revise provisional rates Indirect rates not adjusted to actual year end rates Creating policy to make interim billing adjustments

23. Prime & KO Request, contd. Results Incurred cost submissions amended and accepted by DCAA Negotiations with customers to award FFP contracts or extend current contracts Large expense in time and money to resolve DCAA returned to review accounting system KO requested specific invoices be reviewed Debate on accuracy of invoices Adequacy of accounting system withheld pending result of billing system Not resolved after 15 months

24. Policies & Procedures Accounting System: Solomon Pre-award survey conducted Contractor activities were adequate Lacked written policies & procedures – inadequate system Contractor put everything in writing within weeks DCAA not to return for 6 months to have sufficient data to test Contractor lost two contracts as a result of report

25. Policies and Procedures, contd. DCAA returned and found directly associated unallowable costs that were not segregated Maintained system was inadequate As of March 2010, system still inadequate (9 months after initial report)

26. Timekeeping Accounting System: Deltek Costpoint System found inadequate for not recording time in and out No requirement to record this information Until contractor can overturn this decision, remains on record and can affect future awards

27. Accounting System Features Accounting System: Deltek Costpoint Significant Issues Not segregating unallowable G&A travel Not maintaining adequate contract briefs Contractor Response Hired a consultant to review segregation of unallowable travel after adjusting system Prepared contract briefs in Word format following Schedule S Hired a consultant to review briefs against contracts Consultant wrote report on procedures and results Letter provided to KO DCAA returned and deemed system adequate (took 6-8 months)

28. New Business Accounting System: QuickBooks Pre-award survey prior to award of SBIR contract Revenue size < $1 million Redesigned chart of accounts prior to audit Improved policies to be more clear on timekeeping and payroll Improved company handbook Developed a policy on segregating unallowable costs Provided DCAA with organized package of info requested Explained why some items were not applicable Adequate system and promise that there will be a follow-up audit to ensure system working

29. DFARS Case 2009-D038 Acceptable business system rule Mandatory - Withhold payments – up to 50% Interim payments Cost reimbursement Incentive type T&M Labor Hour Progress payments Performance-based payments No exception for commercial contracts

30. DFARS Case 2009-D038, contd. Systems involved Accounting Estimating Material Management & Accounting Purchasing Earned Value Management Property Management Public Comments closed; committee report due July 28

31. Final Remarks Don’t assume system is adequate Continuous improvement Consider expert advice Before audit During audit Upon receipt of draft report Mock audit(s)

32. QUESTIONS?