When acquiring contracts, federal contractors agree to adhere to strict government regulations. To ensure that government funds are appropriately used, the Defense Contract Audit Agency (DCAA) performs audits that gauge a contractor’s compliance with all requirements.
These audits often present challenges, particularly for new contractors, as DCAA rules and reporting requirements are not always clear, leading to costly mistakes. Businesses must follow government contract accounting principles, including maintaining strict internal controls and training managers to be prepared for the DCAA audit process.
This blog reviews some common compliance mistakes new government contractors often make prior to their first DCAA audit. With the right guidance and preparation, contractors can avoid the costly consequences of failing government audits and being deemed non-compliant.
Accounting System Deficiencies
Government contract accounting must be aligned with FAR standards, including the GAAP (Generally Accepted Accounting Principles), to pass DCAA compliance audits.
Compliant accounting systems help new contractors avoid many of the most common mistakes including:
- Allocating indirect and direct costs together, which works for commercial contracts but goes against government contract regulations
- Letting cost accruals lapse in the general ledger – government contractors must keep costs up-to-date
- Using an outdated labor distribution system
- Combining pre-contract expenditures and contract costs in the accounting records – contractors must keep these costs separate
- Accruing costs for the accounting period instead of per project
- Failing to use a contract line item (CLIN) to record expenses
DCAA audits focus on the contractor’s accounting systems to ensure that government funds are accounted for accurately, allocated responsibly, and are compliant with the pre-award audit survey and FAR guidelines.
Insufficient Internal Controls
Government contractors should regularly monitor compliance to get ahead of potential problems before the audit. This includes:
- Preventing employees from committing fraud, incorrectly entering accounting information, or failing to comply with government regulations
- Conducting internal audits to spot gaps in compliance before the DCAA audit
- Improving operational efficiency by outsourcing financial reporting to certified CPAs and investing in digital accounting infrastructure
- Continuously training and educating department leaders to make sure their teams maintain compliant, accountable, and transparent financial workflows
By improving internal controls, companies can refine their government contract accounting processes to abide by federal accounting standards. They can also spot deficiencies in their team communication workflows, accounting processes, and more to keep team leaders audit-ready.
Lack of Internal Testing
The DCAA defines control risk as the likelihood that a compliance issue will be detected and corrected by internal controls, which becomes more difficult as workflows become more extensive.
As contractors adapt and expand their operations to meet the needs of their contracts, they may commit material misstatements in accounting records or fail to detect and correct non compliant timekeeping practices.
New contractors, often with the help of experienced CPAs, can mitigate control risk by frequently testing the effectiveness of their internal controls against DFARS standards to detect compliance issues before the auditor finds them.
Relying On Spreadsheets
Spreadsheets represent an antiquated compliance process that overlooks key performance data and leads to costly human error. Outdated accounting and reporting processes can cause contractors to miss milestones and default on obligations.
Automated contract management systems centralize accounting information in an accessible dashboard complete with milestones, automated updates, scheduled reminders, and document retrieval systems.
This increased accounting visibility helps contractors improve their reporting workflow while leaving a transparent paper trail for DCAA auditors to follow.
Using Outdated Databases
Contract databases, which store past contracts, shared drives, spreadsheets, emails, and more can become outdated. Without clear organization, accessible search functions, and appropriate data security, contractors risk being deemed non-compliant for their data management practices.
Additionally, outdated databases may pose security risks. Sensitive data repositories often contain payment information, routing numbers, SSNs, and other employee data entries. When contractors sacrifice visibility to maintain outdated databasing workflows, they risk security breakdowns, non-compliance, and even legal repercussions.
Contract repositories that are well-regulated and up-to-date feature advanced local searches for relevant contract information, including documents, field data, and more. Modern systems are able to correct spelling errors in search terms and offer transparent search histories for auditors to easily find relevant data and provide required system security levels.
Relying On Manual Approval Processes
Tracking approval statuses and work orders by using phone calls and spreadsheets can lead contractors to experience communication delays or mistakes when relaying milestones to their teams. Document approval management must be timely, seamless, and accountable to reduce risk and improve visibility.
Automated document storage and approval processes help contractors deliver time-sensitive documents to the right parties with security and efficiency. Management systems also help the DCAA track relevant paper trails, verify approvals, and confirm labor accounting.
Partner With Diener & Associates for Expert Contract Compliance Management Services
As a new contractor, these compliance mistakes can lead to costly repercussions as the DCAA reviews your workflows and determines whether you should retain your contract.
The expert team at Diener & Associates knows how to avoid these mistakes. For the last 30 years, Diener & Associates have been partnering with government contractors, helping them build compliant government accounting systems.
Contact Diener & Associates today to schedule a consultation and learn more about how expert CPAs can make a difference in your productivity, accounting, and employee education processes in government contracting.