Contractor Business Systems Series: Part 2 – Accounting System

ERIC POPPE: Hello, welcome to Cherry Bekaert's GovCon podcast where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward.

ERIC POPPE: My name is Eric Poppe. I'm a director with Cherry Bekaert. With me today is Jacqueline LeClaire, a team member in our GovCon consulting group and part of the same team I am on. Today we are continuing our business systems podcast series. Jacqueline, thanks for joining me; I know this is your first time on one of the podcasts.

JACQUELINE LECLAIRE: Thanks for having me. My government experience spans about 10 years working with DCAA and DCMA. I reviewed small and major contractors in Virginia and Texas.

ERIC POPPE: Today we're talking about accounting systems and the requirements for government contractors, since we're seeing this more and more as part of scoring criteria for proposals. If you have a flexible price contract with the federal government, you're supposed to have an approved accounting system. I'm glad you're on this podcast because of your DCAA experience conducting accounting system audits, and now you help contractors on the consulting side get through these processes.

ERIC POPPE: To start, can you give a quick overview of the accounting system requirements? When are they required and when should a contractor start worrying about them?

JACQUELINE LECLAIRE: Contracting officers are typically informed of contract requirements, such as preferences for small businesses, and they are provided a list of potential contractors. The contracting officer will contact DCAA to determine whether the potential contractor has performed government work previously or if there has been a gap between government contracts. If either condition applies, DCAA will be notified and the contracting officer will typically request an accounting system audit be performed within a week or two.

JACQUELINE LECLAIRE: There are pre-award accounting system audits, post-award audits, and in-depth accounting system reviews. Pre-award audits are requested when a new contractor is being considered or when there has been a multi-year gap between government contracts.

JACQUELINE LECLAIRE: A pre-award accounting system review typically assesses whether the accounting system can distinguish between government and commercial revenue, direct and indirect costs, and whether costs are accumulated by project, task order, or CLIN level as required. It also looks at whether books are closed on a regular monthly basis and whether the contractor uses an accrual basis of accounting, which can be detected through a review of the chart of accounts, trial balance, and balance sheet. The review will also assess whether the contractor can pay subcontractors timely, typically looking for a 30-day window, and will examine AP and AR aging reports.

JACQUELINE LECLAIRE: Post-award accounting system reviews typically occur during contract performance to test compliance with DFARS accounting system criteria. Post-award reviews tend to be more in-depth and performance-focused than pre-award reviews.

ERIC POPPE: In our experience, pre-award and post-award reviews cover similar topic areas; the difference is how in-depth the government gets during a post-award performance audit. Pre-award reviews focus on whether the system is capable of handling a flexible price contract. Post-award reviews test whether you are actually identifying direct versus indirect costs and assigning costs to the correct cost objective, potentially down to a CLIN level.

ERIC POPPE: These reviews can also be triggered by issues elsewhere, such as CAS findings or incurred cost submissions with multiple findings. The contracting officer may trigger an in-depth review after receiving concerning audit results. When the government reviews accounting information, they may also assess whether the contractor is full or modified CAS-covered, since that classification affects requirements.

ERIC POPPE: You mentioned accrual accounting and having proper procedures around AP and AR. For pre-award reviews, they also look at whether the system is fully utilized. On the 1408 there are checkboxes indicating whether the system is currently being used, set up to be used, or not in use. During audits, the government often asks for live demonstrations to show how the system works effectively, tying information to the GL, pulling up timesheets, and demonstrating how costs are identified to intermediate or final cost objectives and how unallowable costs are identified.

ERIC POPPE: From your experience, do you have general advice on how a company should prepare for an accounting system audit if one is on the horizon or if they expect to win a contract soon?

JACQUELINE LECLAIRE: First, ensure that individuals responsible for accounting, payroll processing, and management are available during meetings with DCAA. Be prepared to answer all questions on the pre-award survey or prospective contractor accounting checklist and to provide policies and procedures so auditors can review your timekeeping system, accounting policies, direct versus indirect cost accumulations, and unallowable cost processes.

JACQUELINE LECLAIRE: Be prepared to explain how your accounting and timekeeping systems interact and to provide live or virtual demonstrations, as many meetings are virtual post-COVID. Provide reports such as charts of accounts, trial balances, balance sheets, aging reports, timesheets, labor distributions, payroll reports, and project status reports. Being able to produce these live allows auditors to tick and tie schedules and pull supporting detail on the spot.

ERIC POPPE: I've been part of live walkthroughs where the auditor pulls up the trial balance for the same date and ties it to the number provided in the request list. They will drill down through the chain of transactions to trace direct labor amounts to specific projects and tie everything out.

JACQUELINE LECLAIRE: Typically, I request reports ahead of time so the live demonstrations are useful. From a contract perspective, much depends on the types of contracts the contractor performs—fixed price, T&M, or cost-reimbursement. T&M contracts sometimes burden material, which can be treated as a flexibly priced element with G&A applied. Contract type influences the audit focus.

ERIC POPPE: We are coming up on the end of our time today to talk about the accounting system.