OFPP Finally Issues the Executive Compensation Cap for 2011

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1 Volume 14 APRIL 2012 OFPP Finally Issues the Executive Compensation Cap for 2011 By Michael E. Steen, CPA Technical Director at Beason & Nalley, Inc. We (through NDIA) have obtained the long-overdue OFPP (Office of Procurement Policy) Determination of Benchmark Compensation Amount for Certain Executives. The cap is $763,029 on allowable compensation under FAR (p) for the top five executives for contractors fiscal year 2011 for cost incurred after January 1, OFPP deliberately failed to timely issue the FY2011 cap because of political pressures including those from the current administration which has proposed capping allowable contractor compensation at the pay rate for the Federal Government s most senior executives which would equate to a pay cap of approximately $200,000. In an attachment to the OFPP Notice, the Acting Administrator for OFPP apparently felt compelled to include a diatribe denouncing the existing formula as a lead-in to endorsing the President s proposal to change the pay cap and of course to note that congress has failed to act on the President s proposal. OFPP also noted that the one year increase under the existing formula was approximately $70,000 which is 10% higher than the 2010 cap (which was published in April 2010). OFPP conveniently fails to mention that it has had the data (used to establish the cap for 2011) for at least 13 months, but OFPP simply sat on that data leaving contractors with the 2010 cap for costing and cost estimating. OFPP states that the cap is based upon financial reports for a recent 12-month period for publicly traded corporations with revenues in excess of $50 million. Translated, the recent 12-month period is 2010 which means that OFPP had the data in March 2011 and in previous years the 2011 cap would have been published in April 2011, not April THIS ISSUE: OFPP Finally Issues the Executive Compensation Cap for 2011 DCAA s First Annual Report to Congress Court of Federal Claims Renders Invalid Government Claim Beyond the Six Year Statute of Limitations GSA in the News Unfortunately for the GSA DCAA Audit Guidance Memos Issued in March 2012 Training Opportunities Government Contracts Insight is produced and authored by Beason & Nalley, Inc. Copyright Beason & Nalley, Inc. 1

2 Additionally, OFPP never attempts to explain that the existing formula arbitrarily caps executive pay at levels well below reasonable compensation measured against FAR (b). It is safe to say that the only looming event which forced OFPP to finally issue the 2011 statutory cap was the upcoming due date for contractor FY2011 indirect cost rate proposals (required six months after the end of the contractor fiscal year under FAR ). For calendar year contractors whose 2011 indirect cost rate proposal is due on June 30, 2012, the absence of the 2011 statutory cap would have ultimately lead to a number of rescinded and resubmitted contractor proposals to incorporate the new statutory cap. For obvious reasons, rarely does the government impose due dates on itself notwithstanding the fact that it freely imposes contractually binding due dates on contractors. As evidenced by the article on six year statute of limitations (Court of Federal Claims Renders Invalid a Government Claim Beyond the Statute of Limitations), the government does not fare well when encumbered with due dates. DCAA s First Annual Report to Congress By Michael E. Steen, CPA Technical Director at Beason & Nalley, Inc. As required by Section 805 of the National Defense Authorization Act for FY2012, on March 30, 2012 DCAA issued its first annual report providing an overview of DCAA s critical mission and its audit performance in FY2011. This report highlighted DCAA s success which included examining $128 billion in defense contractor costs, issuing 7,390 reports, recommending $11.9 billion in cost reductions with $3.5 billion in documented savings yielding an ROI (return on investment) of $5.80 for each dollar invested (doing the math, the cost for DCAA is approximately $635 million). Within the body of the report, DCAA includes a chart which displays a dramatic increase in questioned cost to dollars examined by fiscal year. In 2011 the rate was an impressive 9.25% compared to prior years which ranged from 2.19% to 6.75%. From 2001 to 2008, the percentage of questioned costs never exceeded 4%; hence, it would be easy to infer that DCAA has significantly improved its hit rate (questioned costs as a percentage of dollars examined) in the years since being criticized by the GAO for failing to protect the taxpayer (reference to a July 2008 GAO Report). In fact, it is impossible to determine if DCAA has actually improved because the mix of audit types will significantly impact the hit rate. In particular, forward pricing (bid proposals and forward pricing rates) have been the vast majority of the types of audits from , and these contributed 81% of the questioned costs (DCAA conveniently failed to disclose the dollars audited by audit type making it impossible to associate exception dollars with dollars examined by audit type). In DCAA s last published data (FY2009), DCAA did identify dollars audited and exception dollars by audit type wherein the hit rate for forward pricing was 8.6% of dollars examined and forward pricing exception dollars accounted for over 90% of the total exception dollars. To the extent DCAA begins to shift resources and finally perform long overdue incurred cost audits, the overall hit rate will dramatically decline because the exception dollars to dollars examined is dramatically less for incurred cost audits in comparison to forward pricing audits. The hit rate on incurred cost audits was only.4% in FY2009 and there is no reason to assume a significantly different hit rate for 2011 or in future years (although it appears to have been purposely masked in the FY2011 data presented to Congress). With respect to DCAA s lead chart which displays its success in protecting the taxpayer by questioning costs, hopefully someone will tell Congress that DCAA was doing proportionately far more incurred cost audits prior to 2009 (significantly reducing the overall hit rate in those years); hence, the chart with year to year Government Contracts Insight is produced and authored by Beason & Nalley, Inc. Copyright Beason & Nalley, Inc. 2

3 data is a misleading distortion of supposedly comparative data. Although DCAA s report to Congress repeatedly selfdeclares success, there are a number of unfavorable and very telling statistics which were also reported (reported only because the 2012 NDAA required that DCAA report certain statistics). In particular, DCAA issued a grand total of 7,390 audit reports in FY2011 compared to 21,176 issued in FY2009 (and close to 45,000 in audit staffing years leading up to 2008 before the GAO report). The reports issued in FY2011 were accomplished by 4,225 auditors which is approximately 600 auditors more than the FY2009 audit resources. Hence, DCAA issued approximately one-third the number audits in spite of having approximately 16% more auditors. DCAA also reported its FY2011 average elapsed days per audit which were 120 for forward pricing (bid proposals), 184 for special audits (e.g., terminations), 283 days for other audits (which include adequacy reviews of CAS Disclosure Statements, real-time testing of labor and material costs) and 965 days for incurred cost audits (annual incurred cost submission which contractors are contractually required to provide within six months after the completion of a fiscal year). In defending its embarrassing performance (or actually its lack of performance) in elapsed days, DCAA repeatedly states that it does not have mandatory due dates. In an incomprehensible statement, DCAA states measuring audits by the responsiveness and value to the customer ensures that DCAA provides timely, quality and GAGAS compliant audits. This is in opposition to relying upon arbitrary due date that do not take into account the quality of the audit service and ultimately the utility to the contracting officer. DCAA s assertion that its customers are well served is void of any DCAA customer confirmations or data (e.g. surveys); hence, a self-serving unsupported proclamation. DCAA has purposefully avoided asking their customers if the audits are responsive and valuable because completing an audit of a fully adequate contractor bid proposal in 120 days is neither a timely audit nor responsive to the customer. We doubt if there is a single contracting officer who would agree that the 120 day turnaround is responsive particularly when DCAA measures its elapsed days after receiving a fully adequate contractor proposal. DCAA has been gaming that measure through its invention of a contractor adequacy checklist which has allowed DCAA to reject hundreds of proposals as inadequate based upon inconsequential deficiencies. There is absolutely no reason DCAA would have rejected hundreds of proposals based upon self-conceived and subjectively applied adequacy checklists but to make it appear that DCAA is not to blame for its 400% increase in elapsed days (compared to 2008 and prior years). There is simply no contractually required adequacy checklist and DCAA has conveniently used this process to mask significantly longer elapsed days in measuring audit timeliness on contractor bid proposals. Perhaps the most significant unstated fact is that the purposefully understated 120 day time span to audit a contractor bid proposal rarely includes more than 20 days of actual audit fieldwork, the remainder of the time is spent on endless and time consuming risk assessments, group meetings to reach consensus on the audit scope, and an extensive review cycle. Within DCAA s report to Congress, DCAA has benevolently provided recommendations to improve the audit process. In the interest of brevity, we will only address item 4a which is to improve Adequacy of Contractor Forward Pricing Proposals. DCAA asserts that contracting officers often ask DCAA to audit inadequate proposals due to acquisition timelines requirements further contributing to extended audit cycle times. We have listed two of DCAA s examples of DCAA s interpretation of contractor noncompliances with FAR , Table 15-2; however, there is simply no validity to DCAA s interpretation because the requirement in FAR Table 15-2 is non-existent or purposefully misstated. Variances between prior buy actual cost data and proposed amounts without supporting justification. There is no requirement to base current estimates on prior buy actual data or to explain (in the submitted cost volume) differences in current procurement estimates from prior buys. The DCAA auditor may (during the audit) inquire on such matters; however, it would be impossible and/or prohibitively expensive to include an explanation for every potential audit inquiry within a cost volume. Even more indefensible, DCAA auditors have been rejecting contractor estimates based upon prior buys as unsupported insisting that Government Contracts Insight is produced and authored by Beason & Nalley, Inc. Copyright Beason & Nalley, Inc. 3

4 material and subcontract cost estimates must be based upon current vendor quotes. Rates not based on contractor budgetary and/or trend data. In fact FAR Table 15-2 specifically requires the contractor to show trends and budgetary data to provide a basis for evaluating the reasonableness of the proposed rate (emphasis added). If DCAA were to accurately interpret and apply FAR, the wording is clear that the proposed rates are not the same as trends or budgetary data which are to be compared to the proposed rates. DCAA has completely misinterpreted the actual FAR verbiage to support its assertion that contractor rates are inadequately supported. Additionally, there are endless examples where the contractor has in fact proposed rates based upon the contractor s budgetary data and has provided trend data (often specified in the solicitation) but the DCAA auditor applied his/her subjective criteria to assert that the contractor s budgetary data was insufficient (DCAA auditors have little competency in preparing budgetary data involving economic projections in a highly unpredictable government funding environment; hence, they are unqualified to judge the adequacy of contractor rate budgets). There is absolutely no way for contractors to avoid inadequate bid proposals or inadequate indirect cost rate proposals when DCAA invents its own version of adequacy checklists which are highly detailed (loosely based upon actual regulations), include a number of highly subjective criteria, and are too often used by DCAA to shift the blame for unduly and inexcusably delayed audits to the contractors. In that context, the DCAA first annual report to Congress is everything we would have expected; misleading data, blaming the contractors, and DCAA promising to do better in spite of overwhelming obstacles including DOD s failure to properly fund DCAA. Now that DOD has increased DCAA s funding we must reemphasize the fact that in spite of a significant increase in DCAA staffing, DCAA only managed to complete 7,390 audits in FY2011 in comparison to completing 21,276 in Even the statistically challenged (which includes DCAA based upon the J.F. Taylor ASBCA Case see our February 2012 newsletter) would surmise that DCAA s trend data seems to be going the wrong direction. This trend data also begs the question: can the taxpayer afford funding additional auditors if the end result is fewer audits? Court of Federal Claims Renders Invalid Government Claim Beyond the Six Year Statute of Limitations By Darryl L. Walker, CPA, CFE, CGFM, Technical Director at Beason & Nalley, Inc. The Court of Federal Claims (COFC) issued an April 2 decision holding that a government (DCMA) claim against Raytheon for $25 million in alleged unallowable retirement plan costs was outside the six-year accrual of claim time frame under the Statute of Limitations, and therefore not valid. The dispute originated when Raytheon purchased Hughes Aircraft and assumed sponsorship of a Hughes nonbargaining retirement plan, but because of errors in payment under the wrong plan, government contracts under Hughes had been under billed and underpaid by the government, thus threatening the tax status of the plan. Raytheon submitted a proposal to the Department of Defense requesting a total of $105.9 million of costs to rectify this situation, submitting detailed information supporting the validity and allowability of this amount, and in November 1999, entered into an Advance Agreement with the Defense department (DCMA) for which $105.9 million would be reimbursed, subject to further review of the costs. The DCAA completed an audit of the $105.9 million proposal in March 2004, questioned $4.75 million, and the government agreed to accept a Raytheon credit for that questioned value. The DOD agreed with the settlement and the issue was considered closed. The DOD Inspector General (DOD IG), however, issued a 2007 report criticizing DCAA s 2004 report on the matter, prompting DCAA to rescind its March 2004 report, begin a new audit, and issue a revised audit report that deemed $25.0 mil of the $105.9 million as unallowable. The ACO agreed with the revised DCAA unallowable costs, and issued a final decision in December 2008 to Raytheon, nearly nine years after the Advance Agreement date, stipulating that the $105.9 million was overstated by $25.0 mil. Raytheon appealed the ACO s 2008 final decision asserting that the government did not file a claims action within the six years stipulated period from the accrual of the claim which is, in short, defined as the date all events Government Contracts Insight is produced and authored by Beason & Nalley, Inc. Copyright Beason & Nalley, Inc. 4

5 that fix the alleged liability were known or should have been known. Raytheon asserted that November 1999 at which time the Advance Agreement was entered into represented the snapshot in time at which point the accrual of a claim actually occurred. The government contended, however, that its claim accrued beginning in March 2004, at which time the first DCAA audit of the Advance Agreement amount was concluded, which simply represented the process of finalizing the 1999 Advance Agreement. The court disagreed with the government, and considered the 1999 Advance Agreement the point in time an accrual of a claim began, since Raytheon had provided all necessary calculations, data and facts for the government to have made a complete and final decision of allowability of the $105.9 proposal during the first DCAA audit the court stated the defendant (government) had all the financial information that it needed or would ever have to assess allowability of the costs proposed by Raytheon. The court decision notes that the second audit begun by DCAA was outside the statute of limitations, and moreover, was apparently in response to pressure created by criticism from the IG, using financial information identical to that used by the first auditors (e.g., no new data was sought by DCAA from Raytheon in the second audit). In its written decision Discussion comments, the court dismissed several government assertions which go beyond the discussion of limitations for filing a claim; examples include the Continuing Claims Doctrine which is an assertion that individual claims do not accrue until actually claimed by the contractor (e.g. certified incurred cost proposals). The court rejected that notion stating that annual cost claims in this case represent in fact only one central claim, and that the government s use of this doctrine is an attempt to bypass its statute of limitations problem. Another government assertion was that Hughes effectively compensated Raytheon for those same pension costs ($105.9 Mil) within its acquisition settlement agreement, thus prompting the government s unsupported contention that those pension costs were recovered twice and should therefore be credited to the government under the Credits cost principle (FAR ). The court also shot-down that argument stating the defendant has no evidence of the contents of the settlement agreement, but only speculation. This court ruling is the second one we have noticed in the past three months where government officials have missed the mark in timely prosecution of claims. In an ASBCA decision issued in January 2012, the court dismissed a government claim against Boeing for increased contract costs due to changes in cost accounting practices because the government, as in the Raytheon case, did not correctly define the date of claim accrual, thus allowing the Statute of Limitations six-year window to lapse before filing the claim. GSA in the News Unfortunately for the GSA By Michael E. Steen, CPA Technical Director at Beason & Nalley, Inc. GSA Las Vegas Meeting The GSA (General Services Administration) recently made the headlines which invariably means that something went wrong and in this case, it was an $835,000 meeting insensitively held at a Las Vegas resort. Insensitive because regardless of the cost or in some cases the potential for cost savings versus other locations, a number of conservative government agencies will not hold conferences or meetings in Las Vegas because of public or political perceptions personified in the proverbial Washington Post Test (if the Washington Post were to uncover the event and to report it, the political implications are anything but favorable). In the case of the GSA s meeting in Las Vegas, GSA ultimately involved 300 GSA employees including GSA officials who approved and expended $147,000 for six planning trips to Vegas. Apparently Las Vegas is a remote location with venues unaccustomed to BGMs (big government meetings); hence, the need for multiple planning trips which apparently could not have been accomplished in part using commonly available remote meeting tools (which the GSA actively promotes, apparently for every government agency but the GSA). Beyond the indefensible frequency and cost for preplanning trips, the GSA meeting also involved the following headline grabbers : $3,200 for a mind-reader $6,300 for commemorative coins Government Contracts Insight is produced and authored by Beason & Nalley, Inc. Copyright Beason & Nalley, Inc. 5

6 $75,000 for a team building exercise on building a bicycle (some reports have this amount at $7,500, but in the absence of an issued IG report, we can t confirm the amount). The fallout from GSA insensitivity has been the resignation of the GSA Administrator, the termination of two high-level political appointees, and four Western Region Executives have been placed on administrative leave (although not stated in any of the news articles covering this, it is presumably paid administrative leave). Ultimately, the GSA has promised to identify others involved in planning or approving this political fiasco and the GSA will also try all means to recover some portion of the $835,000. A Whitehouse spokesperson has already issued a public statement calling for accountability with respect to the government employees as well as the contractors. Because the GSA IG (Inspector General) has not yet issued its report, there is absolutely nothing which has been publicized which has implicated any contractor miscues other than perhaps by having any association with this politically embarrassing GSA meeting. The current administration cannot pass-up any opportunity to criticize contractors which has been a consistent pattern starting with an Executive Office statement issued in February 2009 denouncing government contractors as greedy (among other unfavorable adjectives). Regarding the tobe-issued GSA IG report, the news articles have stated that the GSA investigation of the Las Vegas meeting has taken more than one year (report still not issued) which implicates either i) due diligence to assure that all facts have been obtained and any report will be fair and unbiased or more likely ii) the IG report must be briefed to the current administration and untold other politicians before its release. From the GSA to the Whitehouse, all will be posturing to assure the taxpayer that this will never happen again (at least until the next time political appointees show extremely poor judgment in managing scarce taxpayer funds only to testify that they did not know they were using taxpayer funds). As additional information comes to light on this GSA meeting, we now understand that the Deputy GSA Administrator was the source who initiated the investigation purportedly through a hotline referral. Amazing that the Deputy Administrator could not get this matter addressed by direct communications with the Administrator (which perhaps explains why the Administrator resigned or was essentially given no choice but to resign). The Government Executive magazine also reported that GSA officials could not agree on how best to handle the Regional Commissioner most directly involved in planning and approving the extravagant meeting with the end result a minor reprimand plus a $9,000 bonus. If this is factually accurate, there is absolutely no defense for any bonus compensation in time proximate to a reprimand; however, it is all too obvious that the fundamental flaw was that GSA was playing with someone else s money ; hence, no concern for prudence, appearance or accountability. In the aftermath of reports of this GSA waste of taxpayer dollars, the Government Executive has also reported that the GSA had an incentive program ( Hats Off Store ) which paid out $438,750 in awards to GSA employees from 2007 to Awards were ipods, digital cameras, and expensive gifts which in 2009 averaged $328 per gift in spite of a $99 limit within the policy. Although $438,750 over a four year period (approximately $109,175 per year) is inconsequential in the scheme of things, it is notable that the GSA conveniently ignored the explicit limits of their program. If contractors did this, it would result in disallowed costs; when government agencies do this it is merely an Oops moment. Unfortunately for the GSA and ultimately for the US Taxpayer, the political grandstanding and finger-pointing which will continue and the continued review and blamegame will cost substantially more than either the $835,000 Las Vegas meeting or the $438,750 Hats Off Store. A witch-hunt has already ensued wherein Senate or Congressional committees will scrutinize virtually every offsite meeting held by the GSA since 2009 (the timing going back to 2009 is of course political to attribute blame to the current administration). The expenditures by the GSA are inexcusable; however, the congressional witch-hunt and the untold costs to ferret out inconsequential dollars are beyond inexcusable. As we deal with trillions in deficits, the exhaustive pursuit of recovering a few hundred thousand dollars simply confirms that the political process is anything but rationale. GSA IG (Inspector General) Report A much less controversial GSA IG report was issued, involving GSA compliance with an interim rule 76 Federal Register concerning cost type contracts. The review Government Contracts Insight is produced and authored by Beason & Nalley, Inc. Copyright Beason & Nalley, Inc. 6

7 involved a sample of cost type contracts and the sample equated to 99 percent of the total cost type contract awards during the period under review. The review noted that Contracting Officers did not fully comply with the interim rule in large part because the cost type contracts were awarded before the GSA issued its policy to implement the interim rule (we typically refer to this as a duh moment). In its conclusion, the GSA IG report stated, this increases the likelihood that the risks characteristic of this type of contract will occur. We have no idea how much this particular IG review and report cost the taxpayer, but it is an example of a complete waste of time, resources and money. It is inexcusable to sample 99% of the contract awards knowing that the contract awards occurred before the GSA issued its implementing instructions. Once it was determined that implementing instructions were delayed, there was no logical reason for reviewing awards before the contracting officers had been provided an implementing policy, and it is absurd to conclude that this sample of cost type contract awards increase the likelihood of further occurrences. The only valid predictive test would be limited to those cost type contracts issued after the implementing instructions. In our opinion, the GSA IG report is a waste of taxpayer funds, but no one seemingly noticed with all negative attention directed to the Las Vegas meeting. DCAA Audit Guidance Memos Issued in March 2012 By Darryl L. Walker, CPA, CFE, CGFM, Technical Director at Beason & Nalley, Inc. DFARS Final Business System Rule Guidance memo 12-PPS-009( R ) March 28, 2012 The DFARS business rule guidance memo lays out the basic requirements of the new rule, noting specifically that the DFARS contract clause allows the contracting officer specific authority to withhold percentage of payments to contracts when significant deficiencies are disclosed and the process for executing withholdings of billed costs. The guidance also states that the clause will only be included within contracts and solicitations covered by the Cost Accounting Standards and when one or more of the business system clauses, which identify criteria against which adequacy of the individual systems are measured, are applicable. More importantly, DCAA clarifies distinctions in responsibilities between DCMA and itself in monitoring adequacy of business systems, and to some extent the current thinking on blending business system rules with the current DCAA standard audit Internal Controls Audit Planning System (ICAPS) audit programs. The memo states consolidation of ICAPS and business system audit objectives will occur for the following system audits: Accounting System audit procedures under existing ICAPS Labor Accounting and Indirect/Other Direct Cost Systems will be blended within a single audit consistent with the new DFARS business rule, but other accounting audits such as Billing, Control Environment, and Information Technology General Systems will be retained as separate audits external to the Accounting System review; however applicable work done in those audits will be incorporated into the accounting system audit. The discussion stops short of defining if the Accounting System (excluding billing, control environment, & IT reviews) audit policy and the criteria will be applied to all accounting systems audits of all government contractors, regardless of company annual incurred reimbursable contract dollars. There are indicators that DCAA will use one set of criteria (i.e. DFARS Business Systems for Accounting System Administration) to be applied to any audit for the adequacy of a contractor accounting system. Estimating System DCAA will blend into this ICAPS audit program procedures for evaluating the Budget and Planning System (separate ICAPS audit), and that estimating system audit program will be modified so that adequacy criteria is mapped to the new DFARS business system criteria. The memo also states that the existing ICAPS Compensation System internal controls audit reviews will be included in future forward pricing and incurred cost audits, and that the DCAA Material Management Accounting System (MMAS) ICAPS audit program will be revised presumably to mirror the DFARS MMAS business system criteria. Government Contracts Insight is produced and authored by Beason & Nalley, Inc. Copyright Beason & Nalley, Inc. 7

8 DCAA will retain leadership in accomplishing Estimating System and MMAS audits, and will participate (if invited) in DCMA initiated purchasing system and EVMS reviews which are the contracts administration offices lead responsibility. Charging Direct & Indirect B&P Costs Guidance memo 12-PAC-008 ( R ) March 22, 2012 DCAA provides the thrust of a November 10, 2011 Director of Defense Pricing memorandum which attempted to clarify criteria for charging Bid and Proposal (B&P) costs either direct or indirect. DCAA states that proposal preparation costs not funded by a grant, or required specifically by a contract provision, are to be charged as indirect expenses, and proposal and negotiation costs should only be charged as direct when a contractual provision exists for the contractor to prepare a proposal. The memo states that indirect B&P costs are to be allocated consistent with CAS 420, and for auditors to report CAS 402 non-compliances if costs not supported by a specific contract requirement are charged as direct contract costs. The memo avoids stating that B&P costs which are generated by a specific contract requirement may not be charged as indirect, as was incorrectly asserted in the November 10, 2011 DPAP memo referenced above. In our February 2012 newsletter, we called attention to verbiage in that memo erroneously stating that costs of preparing proposals as a result of specific requirement of an existing contract are allocable only to the contract requiring the proposal preparation. In fact, CAS (c ) notes that all B&P costs, including those generated as a consequence of a contract provision, may be charged as indirect provided the accounting practice is consistently applied. Multi-Year Incurred Cost Proposal Audit Techniques Guidance memo 12-PPD-006(R) March 13, 2012 Given the DCAA elevation of incurred cost audits as a higher priority in the current government fiscal year, the agency encourages auditors to use multi-year audit techniques to facilitate timeliness in completing incurred cost proposal audits. Multi-year techniques mean simultaneous evaluation of data and supporting transactions for multiple, consecutive annual submissions. DCAA stipulates certain parameters in which multi-year audit approach may be most advantageous without increasing risk to the government. Contractors to which a multi-year audit process could be reasonably applied would be smaller companies, where business organization has been relatively stable and consistent among all years to be audited simultaneously; examples of this parameter included in the memo include similar types of contracts were performed, no significant changes in business systems, and no major alterations in the organization or operations. The memo states that auditors should not utilize a multiyear approach for companies with greater than $250 million in annual dollar volume (ADV). Other stipulations that come with auditors selecting a multiyear audit approach include: Sufficient transaction testing must be performed in all years, preferably to include both direct and indirect cost transactions; In applying testing procedures, auditors may review a specific expense account for the first year, and based on the outcome, may adjust the level of testing for the same account in subsequent periods; Auditor may group a homogenous population of like transactions across all years for testing; Sampling techniques may be employed to include judgmental sampling, but if judgmental techniques are applied, auditors must justify that this less preferred technique results in adequate coverage of the universe being reviewed. The guidance surprisingly allows a great deal of flexibility and discretionary auditor judgment in making decisions that will satisfy what have previously been agency mandated strict standards for thorough and never-ending, exhaustive reviews of transaction data. In exchange for what appears to be some relaxation of the meticulous and specific methods imposed on auditors for rigorous risk assessments and subsequent audit testing, there will likely be multiple and continuous layers of management oversight of the multi-year audit process to ensure no stone Government Contracts Insight is produced and authored by Beason & Nalley, Inc. Copyright Beason & Nalley, Inc. 8

9 is left unturned by the field auditors. Additionally, all DCAA audit programs have adopted the concept of team deliberations (risk assessment) and team decisions (transaction testing plan) making it less likely that any single auditor will have the flexibility to make decisions without team consensus. Training Opportunities September 18, 2012 Cost and Price Analysis in Government Contracting September 25, 2012 Incurred Cost Submissions (ICS) The Inevitable Audit October 16, 2012 FAR Part 31 Cost Principles Beason & Nalley, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: Beason & Nalley Sponsored Seminar Schedule COMING SOON! May 22, 2012 Understanding the Requirements for an Adequate Incurred Cost Submission (ICS) May 29, 2012 Incurred Cost Submission (ICS) Adequacy Requirements June 13, 2012 Truth-In-Negotiations Act (TINA) or Defective Pricing June 26, 2012 Incurred Cost Submission (ICS) Adequacy Requirements July 24, 2012 Incurred Cost Submissions (ICS) The Inevitable Audit August 21, 2012 Fundamental Requirements of Cost Accounting Standards October 17, 2012 Fundamental Requirements of Cost Accounting Standards October 20, 2012 Truth-in-Negotiations Act (TINA) or Defective Pricing November 7, 2012 Incurred Cost Submissions (ICS) Issue Resolution November 13, 2012 Cost and Price Analysis in Government Contracting November 14, 2012 Understanding Government Contract Audits and Dealing with Audit Issues March 8, 2012 Understanding Government Contract Audits and Dealing with Audit Issues November 27, 2012 Claims and Terminations December 11, 2012 Business Ethics FAR & - 14 December 18, 2012 Incurred Cost Submissions (ICS) The Inevitable Audit August 28, 2012 Incurred Cost Submissions (ICS) Issue Resolution Government Contracts Insight is produced and authored by Beason & Nalley, Inc. Copyright Beason & Nalley, Inc. 9

10 2012 Federal Publications Sponsored Seminar Schedule May 8-10, 2012 Masters Institute in Government Contract Costs LaJolla, CA May 15-16, 2012 Government Contract Audits Las Vegas, NV July 10-12, 2012 Masters Institute in Government Contract Costs Hilton Head, SC August 6-7, 2012 Accounting Compliance for Government Contractors Washington, DC August 8-9, 2012 Government Contract Audits Washington, DC August Masters Institute in Government Contract Costs Washington, DC October 10-11, 2012 Government Contract Audits Orlando, FL October 22-23, 2012 Accounting Compliance for Government Contractors Washington, DC Instructors Mike Steen Darryl Walker Scott Butler Courtney Edmonson Cyndi Dunn Wayne Murdock Asa Gilliland Go to and click on the Government Contracts tab or call Beason & Nalley, Inc. at Reader Inputs for Future Newsletters Beason & Nalley, Inc. develops its topics based upon recent regulations, information, publicly accessible Government policies and our experience in assisting clients with regulatory compliance. However, we are also interested in the ongoing compliance experiences of our readers; hence, we invite your input in terms of suggestions for topics based upon your compliance experiences. Suggested topics along with any background information (i.e., your experience) should be sent to Specialized Training Beason & Nalley, Inc. will develop and provide specialized Government contracts compliance training for client / contractor audiences. Topics on which we can provide training include estimating systems, FAR Part 31 Cost Principles, TINA and defective pricing, cost accounting system requirements, and basics of Cost Accounting Standards, just to name a few. If you have an interest in training, with educational needs specific to your company, please contact Ms. Lori Beth Miller at lmiller@beasonnalley.com, or at About Wall, Einhorn & Chernitzer, P.C. Wall, Einhorn & Chernitzer, P.C. (WEC) is a Hampton Roads owned and operated accounting firm that has been serving clients since WEC consists of nine shareholders and over 75 professional and administrative staff members. Our specialized industry niches include: manufacturing; government contracting; construction; real estate; not-for-profit; employee benefits; cost segregation; wealth management; service businesses, consulting and business valuation. These niches allow us to better serve the needs of our clients. WEC has consistently been named to the lists of: "Best Places to Work in Hampton Roads" by Inside Business and "Best Accounting Firms to Work For" by Accounting Today. Contact Wall, Einhorn & Chernitzer on the web at About Beason & Nalley, Inc. Beason & Nalley, Inc. is a full service accounting and consulting firm primarily focused on businesses that contract with the Federal or State governments and their agencies. Beason & Nalley's professional team is committed to the delivery of services in the areas of federal acquisition regulation, cost accounting standards compliance, training, software implementation, accounting outsourcing, audit, business valuations, mergers & acquisitions, corporate tax, research & development credit studies, human resources consulting, human resource placement services and litigation support. The company is headquartered in Huntsville, Alabama with additional staff present in Washington, DC, Atlanta, Georgia and Orlando, Florida. Please visit Beason & Nalley on the web at This newsletter is produced and authored by Beason & Nalley, Inc. and distributed to Wall, Einhorn & Chernitzer, P.C. in conjunction with our affiliation agreement. Wall, Einhorn & Chernitzer, P.C. 555 Main Street, Suite 1600 Norfolk, VA Tel: Fax: Beason & Nalley, Inc. Washington, DC 101 Monroe Street Commerce Park Dr, Suite Reston, VA T: T: Toll Free: Government Contracts Insight is produced and authored by Beason & Nalley, Inc. Copyright Beason & Nalley, Inc. 10