The Defense Contract Audit Agency (DCAA) was formed to provide audit and financial advisory services for the Department of Defense (DOD) and other federal agencies. This is to achieve heightened oversight to instill transparency and accountability in government spending.
The DCAA mainly oversees contract costs. The agency has the mandate to audit any contract exceeding $2,000,000 and provide advisory services for contracts with lesser amounts.
Firms doing business with the government must adhere to all DCAA requirements to maintain eligibility for the existing and future contracts. Contractors who fall short of the DCAA requirements usually end up facing penalties, losing contracts, or legal action.
An accounting system with measures that reflect DCAA compliance should include:
- Accurate identification and segregation of direct and indirect costs
- Accurate and consistent cost allocation methods
- Accurate timekeeping records
- Accuracy and completeness in record-keeping
- Timeliness in recording costs and submitting reports
- Ease of audit and retrieval of necessary information
- Compliance with Generally Accepted Accounting Principles (GAAP)
DCAA Audits
A DCAA audit evaluates a contractor’s financial systems and records against applicable regulations such as the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS). The audit, which can be unannounced, checks several areas, including:
- Allowable costs for reasonableness, allocability, and consistency with the contract terms
- Direct costs supporting invoice amounts
- Indirect cost allocation methods
- Accounting system review, including the adequacy of internal controls, chart of accounts, and cost-tracking procedures
- Cost proposal audit when submitting a proposal for a new contract or modification of an existing one
- Pre-award survey to assess the contractor’s ability to handle a specific contract
Types of DCAA Audits
The types of audits conducted by the DCAA range from pre-award surveys to special and incurred cost audits. Among the most important are:
Pre-Award Audits
DCAA has a standard SF 1408 form, which is essentially a checklist of the contractor’s operational and accounting systems.
The SF 1408 criteria assesses the prospective contractor’s financial and accounting systems, time tracking and labor distribution systems, and internal controls to verify the contractor’s ability to fulfill contract requirements before awarding a contract. Small businesses are the most common subjects and the most vulnerable to these audits.
Forward Pricing Audits
These audits may be completed before a contract is awarded to review the cost proposals submitted by contractors. Government auditors will also examine cost proposals for modifications of existing contracts. Forward pricing audits assess the reasonableness and allocability of the proposed costs.
Incurred Costs Audits
Incurred cost audits verify a contractor’s incurred cost claims. The DCAA checks the supporting documentation to ascertain whether claimed costs have been correctly allocated and are fully allowable under FAR, CAS, and other applicable regulations.
Cost Allowability Audits
The DCAA performs cost allowability audits when there is reason to believe that a claimed cost may not be allowable under the FAR.
Special Audits
The DCAA conducts special audits based on unique circumstances or requirements, such as when requested by other government agencies or in response to allegations of fraud or conflict.
Closeout Audits
Another type of DCAA audit is the closeout audit. This occurs after the completion of a contract to ensure that the government receives benefits proportionate to the contract payment. Meanwhile, a progress payment audit reviews interim payments made to contractors.
How Government Contractors Can Prepare for DCAA Audits
The DCAA has an audit manual with a complete guide of what government contractors must do to be compliant. Also, the DCAA presents contractors with a list of areas or systems for assessment during an audit, as well as the data and documents required.
Contractors can take additional proactive measures, including:
- Using an accounting system that accurately identifies, segregates, and allocates costs
- Ensuring that all records are accurate, complete, and accessible for audit purposes
- Following GAAP principles in all financial transactions
- Documenting all policies and procedures
- Conducting internal audits periodically to identify and correct compliance issues
- Staying informed on all updates to FAR, CAS, and other applicable regulations
Turn to the Trusted DCAA Audit Experts at Diener & Associates
The best way to prepare for a DCAA audit is to learn the provisions of the applicable regulations based on the DCAA audit manual, FAR, and CAS. However, these regulations are vast and complex, overwhelming contractors without financial or legal background.
The best approach is to partner with a reputable government contract accounting firm. With a team of seasoned government contracting accounting expert CPAs, Diener & Associates offers reliable DCAA compliance advice and services.
We can help with accounting system design, internal audits, and audit support. Contact Diener & Associates today for comprehensive government contracting accounting services.