Defense Contract Audit Agency (DCAA) audits are the most rigorous oversight processes for government contractors. These are triggered by a number of factors, including the agency’s routine oversight, a whistleblower complaint, or in response to a government investigation.
DCAA audits scrutinize a contractor’s accounting systems and practices against regulatory compliance standards that include the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS).
As a government contractor, preparing adequately for these audits is crucial, as an adverse finding could affect the credibility of the present and future contracting opportunities.
The most efficient way to do this is by establishing proper accounting systems and facilitating comprehensive bookkeeping to support the accuracy and legitimacy of the contractor’s costs.
DCAA Audit Requirements
During an audit, the DCAA will evaluate whether a contractor’s accounting systems comply with FAR and CAS requirements. The agency will review the documentation of financial records such as:
- General ledgers and subsidiary accounts that segregate direct costs from indirect costs
- Timekeeping records for all employees to accurately track labor costs
- Documentation supporting the allowability of costs charged to government contracts, such as invoices, receipts, or vendor agreements
- Cost proposals and pricing data for any contract negotiations
- Records of indirect cost pools and allocation methods, as well as supporting documentation for the calculation of indirect rates
- Subcontract and consultant agreements, including documentation of any cost negotiations
Importance of Timely and Accurate Documentation in DCAA Audits
Proper documentation supports claimed costs and also helps identify discrepancies or errors prior to a DCAA audit. Without adequate documentation, the legitimacy of a contractor’s costs may come into question, causing delays in cost recovery or disallowance of costs altogether.
Proper documentation also demonstrates compliance with regulations and leads to a smoother audit process. Additionally, well-documented financial records can act as evidence in disputes.
Elements of Effective Documentation for DCAA Audits
To ensure success in a DCAA audit, contractors should maintain records that are:
Accurate and complete: All records should accurately reflect costs incurred and have adequate details supporting the allowability of said costs.- Timely and up-to-date: Records should be updated regularly to reflect accurate financial information.
- Organized and easily accessible: Documentation should be properly organized for easy retrieval.
- Consistency: Documents should be consistent with the contractor’s established accounting policies and procedures, and adhere to the requirements set by the FAR and CAS.
- Properly retained: Financial records should be retained for a minimum of three years after contract closeout.
Best Practices for Maintaining Documentation
To ensure the effectiveness of documentation for DCAA audits, contractors should adhere to the following best practices:
Establish Clear Policies and Procedures for Recordkeeping
Having clearly defined and comprehensive policies and procedures for recordkeeping ensures consistency in documentation practices. These policies should be well-communicated to all employees involved in the documentation.
Regularly Review and Update Accounting Systems
Contractors should consistently review their accounting systems to identify any discrepancies or errors. This allows for timely corrections, thus preventing issues during a DCAA audit.
Train Employees on Proper Documentation Practices
Proper training of employees involved in bookkeeping is vital for maintaining accurate and compliant records. Employees need to have training on proper recordkeeping techniques as well as FAR and CAS compliance.
Utilize Technology for Efficient Recordkeeping
Contractors should use systems that automate processes, including timekeeping and cost allocation. This can help minimize human error as well as improve the efficiency and accessibility of financial records. A reliable electronic recordkeeping system can also help organize and categorize documents according to DCAA requirements.
Be Prepared for a DCAA Audit
Government contractors should always have their accounting systems ready should they be subjected to a DCAA audit. The segregation of direct and indirect costs, labor tracking methods, and cost allocation processes should be in strict accordance with FAR and CAS requirements.
Also, their internal controls must be adequate to prevent and detect inconsistencies or errors in financial records. These include regular reviews of documentation practices, internal audits, and employee training.
The financial records and policies making up the internal controls should be well-documented. Contractors should also keep records of previous audits to show progress in addressing issues raised during previous audits.
DCAA audits are daunting, both in preparation and during the actual audit. They require expert knowledge of government regulations and accounting practices and analysis of a contractor’s financial records and systems.
The documentation needed for a DCAA audit can be overwhelming, especially for small businesses without the resources to hire full-time accounting staff.
As such, contractors should seek assistance from accounting experts with experience handling government contracts and DCAA audits.
Seek Professional Assistance From DCAA Compliance Experts
The DCAA compliance experts at Diener & Associates can assist government contractors in establishing compliant accounting systems and ensuring timely and accurate documentation in preparation for DCAA audits.
They can also help contractors during the audit by acting as a contractor’s liaison with the DCAA. Contact Diener & Associates today to learn more about DCAA audits and preparation.