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1 Warning: What you don't know will endanger you. A Government Contractor s survival guide to navigating complex rules and regulations imposed by the DCAA and FAR October 4, 2012 We will be starting shortly Grant Thornton. All rights reserved. If you experience any technical difficulties, please contact or support@learnlive.com

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5 Today's Presenters Presenter 2 Picture Ret. Vice Admiral Lou Crenshaw National A&D Practice Leader Lou.Crenshaw@us.gt.com Julian Rosenberg Government Contracting Practice Leader Julian.Rosenberg@us.gt.com Grant Thornton. All rights reserved. -5-

7 Welcome & What's happening inside the beltway Vice Admiral Lou Crenshaw USN (Ret.), Aerospace & Defense Practice Leader Grant Thornton LLP Grant Thornton Partner and former senior resource and requirements manager of the U.S. Navy where he was responsible for overseeing an annual budget of $130bn

8 Grant Thornton is one of the largest professional service organizations in the world Full range of services: Audit, Tax & Advisory including Corporate Finance 529 offices in 110 countries with over 30,000 partners and employees worldwide. 52 US offices with over 5,000 people. Worldwide revenues of $3.6 billion Ranked as a top 25 Advisor worldwide and one of very few on that list focused on the middle market. 8

9 View from inside the beltway Budget Sequestration Regulatory Updates 9

10 Warning: What you don't know will endanger you. Julian Rosenberg, Government Contracting Practice Leader, Grant Thornton LLP

11 Our Government Contracting Practice We help clients: Identify, evaluate, and prioritize the risks that are inherent in their government contracting compliance environment. Assess the effectiveness and efficiency of internal controls that have been put in place to manage government contracts and industry guidance compliance. Focus on core government contract requirements, including the Federal Acquisition Regulation (FAR), Cost Accounting Standards (CAS), AASHTO Audit Guide, and other specific contractual requirements that are critical to many federal, state and local government contracts. 11

12 The Future The future may bring: increased Terminations for Convenience Mergers & Acquisitions Government looking for any way to reduce costs and/or recover funds Increased debarments 12

13 The Future Increased DCAA & DCMA attention to Business Systems Compliance DCMA now has oversight of the following contractor business systems: -Accounting -Cost Estimating -Earned Value Management (EVM) -Material Management and Accounting (MMAS) -Property Control -Purchasing 13

14 The Future Why the changes? Confusion and Inconsistency In language, e.g., "approved", "adequate", "acceptable" Regulatory Requirements Authority of DCAA & DCMA Addressing corrective action plans 14

15 Business Systems Compliance Intent? Improve the effectiveness of government oversight Weak business systems increase risk of: Inflated contract prices/costs Paying costs that are unallowable, unreasonable and not allocable to the contract Inflated subcontract costs Loss of government property 15

16 Business Systems Compliance The Plan? Contracting Officer, in consultation with DCAA, shall: Determine acceptability of contractor's business systems Approve or disapprove systems Pursue correction of significant deficiencies Withhold payments, until significant deficiencies corrected 16

17 Business Systems Compliance "Significant Deficiency" Definition Significant Deficiency: A shortcoming in the system that materially affects the ability of government officials to rely upon information produced by the system needed for management purposes Deficiency: Failing to meet one or more Systems' Criteria 17

18 Accounting System Criteria 1. Sound internal controls 2. Segregation of direct from indirect costs 3. Accumulate direct costs by contract 4. Accumulate direct costs to intermediate & final objectives 5. Accumulate costs in general ledger 6. Reconcile subsidiary ledgers to general ledger 7. Approve/document adjusting entries 8. Periodic monitoring of system 9. Timekeeping system for employees 10. Labor distribution system for charging direct & indirect labor 11. Monthly posting of books of account 12. Excludes unallowable costs (FAR Part 31 & other contract provisions) 13. Identify costs by CLIN & units if required by contract 14. Segregate preproduction from production costs 15. Cost accounting info required by contract clauses & to readily calculate indirect cost rates from books of accounts 16. Billings can be reconciled to cost accounts for current & cum amounts claimed & to comply with contract 17. Adequate, reliable data for pricing followon acquisitions 18. Compliance with CAS & GAAP 18

19 Executive Compensation ASBCA Nos , 56322: DCAA Executive Compensation Approach Fatally Flawed we conclude that there are statistical flaws in the government methodology for determining reasonable compensation 19

20 Other Issues Small companies are not equipped to deal with DCAA & DCMA pressures - They will be taken advantage of! 36% of government IT workforce is over 50 years old Most people believe the government will continue to kick the can down the road so the next Congress has to deal with the issues 20

21 FAR Council Proposed Basic Safeguarding for Government Information The proposed FAR clause would mandate basic safeguarding measures for information provided by or generated for the government which resides on or transits through [contractor] information systems. Required protective measures would include: Public computers: A prohibition on processing information on public computers (e.g., public kiosks, hotel business centers) and computers that do not have a form of access control. Public websites: A prohibition on posting government information on websites that do not control access by user ID/password, user certificates, or other technical means. Electronic communications: Transmission of , text messages, blogs, and similar communications using technology and processes that provide the best level of security and privacy available, given facilities, conditions, and environment. Voice and fax communications: Transmission of voice and fax messages only when the sender has a reasonable assurance that access is limited to authorized recipients. Physical and electronic barriers: Protection of information by at least one physical and one electronic barrier (e.g., locked container or room, login and password) when not under direct individual control. Mobile media: Sanitizing media such as flash drives and external hard drives before disposal. Intrusion protection: Regularly updating malware protection measures (e.g., anti-virus, anti-spyware) and applying security-relevant software upgrades (e.g., patches, service-packs, and hot fixes). Subcontractors: Transmission of information to subcontractors only when they require such information for purposes of contract performance, and when they comply with the FAR clause (which is a mandatory flowdown). By its own terms, the clause would apply broadly to nearly all federal contracts and orders including those for commercial items and commercially available off-the-shelf items when the contractor s information system may contain information provided by or generated for the government. The clause would not apply to public information, defined as information that an agency discloses, disseminates, or makes available to the public. 21

22 FAR Council Proposed Basic Safeguarding for Government Information Physical and electronic barriers: Protection of information by at least one physical and one electronic barrier (e.g., locked container or room, login and password) when not under direct individual control. Mobile media: Sanitizing media such as flash drives and external hard drives before disposal. Intrusion protection: Regularly updating malware protection measures (e.g., anti-virus, anti-spyware) and applying security-relevant software upgrades (e.g., patches, servicepacks, and hot fixes). Subcontractors: Transmission of information to subcontractors only when they require such information for purposes of contract performance, and when they comply with the FAR clause (which is a mandatory flowdown). 22

23 FAR Council Proposed Basic Safeguarding for Government Information By its own terms, the clause would apply broadly to nearly all Federal contracts and orders including those for commercial items and commercially available off-the-shelf items when the contractor s information system may contain information provided by or generated for the government. The clause would not apply to public information, defined as information that an agency discloses, disseminates, or makes available to the public. 23

25 Contact Information Lou Crenshaw Grant Thornton LLP 333 John Carlyle, Suite 500 Alexandria, VA 22314, USA T E Lou.Crenshaw@us.gt.com Julian Rosenberg Grant Thornton LLP 2010 Corporate Ridge, Suite 400 McLean VA USA T: E: Julian.Rosenberg@us.gt.com Camila Wingrove Grant Thornton LLP 175 W. Jackson, 20 th Floor Chicago, IL 60602, USA T E Camila.Wingrove@us.gt.com Grant Thornton LLP. All rights reserved.

26 Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. For additional information on matters covered in this presentation, contact your Grant Thornton LLP adviser. Grant Thornton LLP. All rights reserved.

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