Strategic Consulting Solutions, Inc.


Key Elements of a Compliant Accounting System

Compliance GuageWhile many factors can come into play during an accounting system review, there are several key components that make up a compliant account system.  Our goal is to provide you with the top 10 areas that make or break an accounting system when audited by Defense Contract Audit Agency (DCAA).

1. Segregation of Costs by Contract

One of the primary components of a compliant accounting system is to capture direct costs from indirect costs.  Breaking that down further, costs for each contract must be captured separately as well.  Some contracts may have requirements to collect costs at lower levels of the contract, such as a work breakdown structure.  A compliant accounting system must be able to capture costs not only by contract, but possibly at levels lower.  This requirement also supports the billing by contract and the appropriate levels of the contract.

2. Segregation of Indirect Cost by Cost Pool

Segregation of indirect costs in accordance with the company’s indirect rate structure is another key element to a compliant accounting system.  This generally involves identifying unique ranges of general ledger accounts that correspond with a particular pool or possibly a division.  This helps in recognition of the type of cost as well as assisting in indirect rate calculation.

3. Segregation of Unallowable Costs

Unallowable costs are probably one of DCAA’s hot buttons.  These costs must be properly segregated from allowable costs.  Again, this can be accomplished by creating a unique range of general ledger accounts associated with unallowable expenses.   Generally, DCAA will ask for a policy on how the company handles unallowable costs.  For a better understanding of unallowable costs, you can visit our blog ‘Decoding FAR Part 31’ or spending some quality time ready FAR Part 31.

4. Labor Tracking System

In addition to a solid timekeeping process, the ability to track and report on the labor detail is an important component for a compliant accounting system.  Many systems can lose the visibility of the labor detail after initial input into the system.  But an auditor will want to review labor reports, including Timesheet Edit Reports and Labor Distribution to verify the labor was applied to the appropriate final cost objective.

5. Monitoring Against Contract/Funded Value

Many contracts contain the FAR clauses for Limitation of Funding and Limitation of Costs.  These clauses are beneficial to a contractor in managing where they stand with their contract from a cost/billing standpoint.  These clauses require a contractor to notify the Contracting Officer when they reach a certain percentage of their contract and funded value.  Failure to notify the CO can result in a contractor not being able to complete the contract with the remaining funds allotted.  It can also cause a performance issue for the contractor if they fail to notify.  An auditor will test that a contractor has a process in place to monitor these limitations as part of an accounting system audit.

6. Calculating and Monitoring Indirect Rates

When performing under a cost-type contract, a contractor should calculate their indirect rate frequently and compare them to target or provisional rates.  The impact of indirect rate variances should be analyzed to determine how the contracts will be affected.  For example, significant rate variances can result in an over/under billing to the government which should be adjusted periodically.  During an accounting system review, DCAA will want to know how often a contractor calculates their indirect rates.  They will also want to determine that the contractor is monitoring the impact of the rate variances and making necessary adjustments.

7. Recording Costs as Proposed

One of the Cost Accounting Standards (CAS) requires that contractors collect costs in the same manner as they are billed and also as they were proposed.  Even contractors not subject to CAS are required to follow this principle.

8. Traceability Throughout the Accounting System

As part of an accounting system review, the auditor will trace transactions through the system.  This will start with the source document such as timesheet, expense report, or vendor invoice.  The auditor will review the transaction in the general ledger and/or job cost ledger.  Then the auditor will want to see the transaction showing on the invoice, if a billable costs.  Finally, the auditor will want to see final payment to the employee or vendor.

9. Reconciliation of Job Cost Ledger to General Ledger

Many accounting systems have a separate general ledger from their job cost ledger.  A monthly review should be done to verify that these 2 ledgers are in balance.  An out-out-balance means that a direct cost was not assigned to a job or an indirect cost was assigned to a direct job.  Either of these factors will result in inaccurate indirect rate calculations and possibly inaccurate billing.  Even systems that have general ledgers and job cost ledgers that are interfaced should review this periodically to verify they are in balance.

10. Policies & Procedures

One of the first things that an auditor will request during an accounting system review will be the policies and procedures.  This will usually consist of a document that describes the overall accounting system and structure.  Additionally, policies for timekeeping, travel, purchasing, bonuses, etc. will be reviewed.

So, what does all this mean?

While there’s no magic bullet to passing an audit, those who choose to implement these 10 points will find themselves at a huge advantage.  A compliant accounting system can be the ticket to several contracting opportunities that may not be available to companies without an approved accounting system and will always be an advantage to winning lucrative contract awards.

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