Businesses with government contracts are held to strict auditing standards by the Defense Contract Audit Agency (DCAA). Maintaining DCAA compliance requires internal assessments, accurate financial records, material management systems, and more.
When preparing for their first DCAA audit, many businesses incur substantial upfront costs to ensure that their systems match the DCAA’s standards for regulatory compliance.
This DCAA compliance guide is designed to help contractors prepare for their first audit with a compliance workflow that will save resources as well as improve their performance in future government audits.
Understanding DCAA Audits
A DCAA audit reviews a contractor’s internal accounting systems, resource allocation, reporting, and compliance standards in reference to three governmental controls:
- Federal Acquisitions Regulations (FAR)
- Cost Accounting Standards (CAS)
- Truth in Negotiations Act (TINA)
Some types of audits that contractors may expect throughout the lifecycle of a contract could include:
- Pre-award audit
- Post-award audit
- Progress payment audit
- Cost allowability audit
- Closeout audit
- Incurred cost audit
- Forward pricing rate proposals review
The type and frequency of audits a contractor may experience will depend on a variety of factors such as the agency with whom they are contracting, the amount of the contract, previous findings, and others.
Overall, the primary objectives of a DCAA audit encompass ensuring government contractors accurately report expenditures, efficiently allocate government resources, and honestly document their business processes.
Preparing DCAA Documentation
Passing a DCAA compliance audit requires preparing the essential documentation. However, the DCAA audit’s procedures will vary depending on the contractor’s business model. Those subjected to a forward pricing audit, for example, may submit different documents than those subjected to an incurred cost audit.
The DCAA offers a guide to their auditing procedures with a series of checklists based on different audits. For example, large contractors may be required to submit documentation listed on the Forward Pricing Rate Proposal Adequacy Checklist to review their forward pricing rates.
New contractors will likely be required to provide a Pre-Award Accounting System Adequacy Checklist, which assesses their accounting system before a contract is officially awarded.
No matter which checklist a contractor must fulfill, the DCAA will request organized financial records that are accurate and complete according to DCAA standards. This requires contractors to set up strict internal controls to ensure compliance and reduce discrepancies.
Setting Up Internal Controls
For contract success and DCAA compliance, businesses must establish effective internal procedures to organize and document their process. A full DCAA audit could take as long as a year, during which time every internal process will be tested and examined.
Examples of internal controls examined by the DCAA include the contractor’s approval process for expenses, segregation of internal duties, account reconciliation procedure, information access controls, and contract oversight.
These internal controls are reflected by a business’s primary systems, such as the accounting, estimating, and purchasing systems. Resource misallocation, mischarges, and billing reports should be recorded and corrected proactively. Keeping accurate transactional data is key, including vendor histories, prices, purchase dates, purchase order files, and more.
Earned Value Management (EVM) and Material Management and Accounting Systems (MMAS) will also be examined using the contractor’s Contract Performance Reports (CPR) and Integrated Master Schedules (IMS). Reliable and verifiable records on the timing of material requirements will be compared to economic order quantity restrictions and contract dates.
Training Your Team
Ensuring compliance across multiple complex systems requires a team trained in DCAA requirements. Management’s written intentions for compliance are insufficient to pass an audit if team leaders do not enforce actionable regulatory practices that achieve those intentions.
Many businesses are unaware of their vital need for training. They may not have considered that most business-critical source documents are filled out by non-accounting staff. Training all staff for DCAA compliance helps every department keep up with regulatory changes.
Internal training sessions can be conducted by managers or by a consulting firm experienced in DCAA compliance processes.
Conducting a Pre-Audit Assessment
Internal audits allow contractors to prepare for the DCAA audit by pre-emptively correcting their processes, filling training gaps, and assembling the correct documentation. The findings of internal audits should be made available to all team leaders.
These steps provide a broad overview of the internal auditing process:
- Create a chart of accounts
- Print a summary trial balance
- Review general ledger detail
- Conduct a Profit and Loss by Job Report
- Conduct a Labor Distribution Report
- Conduct a Contract Backlog Report
- Review rate calculations
- Review monthly close checklists
Using a third-party, such as CPAs experienced with government consulting and the DCAA, to administer an internal pre-audit assessment provides an unbiased and more thorough review. With the results, they can provide next steps to correct any deficiencies uncovered in the assessment.
Communicating with the Auditor
Achieving DCAA compliance requires more than accurate documentation and internal procedures. Contractors must establish clear communication channels with the auditor to demonstrate transparency and cooperation with the auditing process.
This entails being upfront about recorded discrepancies, cooperating with all document requests, and promptly responding to the auditor’s queries.
Post-Audit Follow-Up
Once your first DCAA audit has concluded, your management team needs to review the report to implement any recommendations. While DCAA audits may change a contractor’s status, most result in regulatory recommendations that businesses can follow to achieve full compliance for future audits.
How Diener & Associates Can Help With Your DCAA Audits
Diener & Associates’ CPAs leverage their training and expertise to help government contractors achieve DCAA compliance. Using DCAA-compliant business systems, mock internal audits, and employee compliance training, Diener & Associate have proven results in helping first-time and long-time contractors establish a culture of compliance.
Contact Diener & Associates today to learn more about audit readiness in your industry and how our CPAs can help you achieve it.