Time s Up: DCAA s Renewed Focus on Incurred Cost Submissions

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2 About Aronson LLC Founded in Professionals located in Rockville, MD One of the largest CPA firms in the DC Metro Area 80 multi-disciplined Professionals dedicated to supporting Government Contractors Audit, Assurance & Tax Deltek Systems and Outsourcing Financial and Contract Compliance GSA schedules News and Trends for Today s Savvy Government Contractor 2013 All Rights Reserved Aronson LLC Slide: 2

3 Nicole M. Mitchell, Partner Nicole M. Mitchell joined Aronson LLC in January 1998 and serves as a Partner in the Government Contract Services Group. She specializes in accounting and financial issues impacting government contractors. She has a broad based background in generally accepted accounting principles and cost principles related to government contractors including the Federal Acquisition Regulations and Cost Accounting Standards. Nicole has been a guest speaker on various financial and government contracting topics for such organizations as the AICPA, MACPA, Deltek Insight Conference, Howard County Chamber of Commerce, Montgomery County Chamber of Commerce, as well as Aronson & Company. She co-authored a Thompson RIA reference manual for controllers Doing Business with the Federal Government. She received a Bachelor of Science majoring in accounting from Frostburg State University and a Masters in Business Administration from Mount Saint Mary s College with a concentration in leadership. She received an award from the state of Maryland for one of the highest scores on the CPA exam and currently holds an active CPA license in the State of Maryland All Rights Reserved Aronson LLC Slide: 3

4 Donna Dominguez, Managing Consultant Donna Dominguez is a Managing Consultant in Aronson LLC s Government Contracts Services Group. With more than twelve years experience working with government contractors, she specializes in the preparation of incurred cost submissions, budgeted provisional rates, DCAA audits, government compliance matters, cost proposals, contract/subcontract administration, contract/subcontract negotiation and assisting clients in the use of Deltek GCS, CostPoint, and QuickBooks software. Through her work in public accounting as well as positions held directly at government contractors, she has comprehensive knowledge and understanding of the complexities of accounting for this unique market. She is a guest speaker on financial and government contracting topics for industry associations and a featured speaker for Aronson LLC. Donna earned her Bachelors of Science in Accounting from the University Maryland and has completed additional coursework in Contracts Administration All Rights Reserved Aronson LLC Slide: 4

5 Provide Background on Incurred Cost Submission initiative Understand requirements for a DCAA Incurred Cost Submission (ICS) Discuss DCAA updates to the submission Review DCAA Adequacy Checklist and Risk Assessment Provide Tips for Surviving an ICS Audit Agenda 2013 All Rights Reserved Aronson LLC Slide: 5

7 DCAA ICS Initiative The backlog of incurred cost audits has quadrupled over the last ten years Facts from DCAA FY 2011 Report to Congress DCAA audited 349 ICS out of the 7,390 total audit reports issues in FY 2011 Question cost by DCAA has grown from 3.9% (2008), 6% (2010) to 9.25% (2011) Average length of time to complete and ICS audit 965 days or 2.65 years Per DCAA s 2012 Year in Review report related to ICS Audits. Completed over 2,700 Incurred Cost Years, a six fold increase over 2011 Audited more than 2,300 Low Risk Close-Out over All Rights Reserved Aronson LLC Slide: 7

8 To address the enormous backlog of Incurred Cost Submission for audit, In 2012 DCAA has made several changes and updates: Multi year auditing of ICS (3/13/2012) Dedicated ICS Audit Teams with increased staff per team Implemented Low-Risk Sampling (9/6/2012) Elimination of Non-Major Audit program for ICS (5/2/2012) Adequacy Checklist (5/22/2012) Updated ICE Model (6/2012) Updated CAM Chapter 6 (2/25/2013) DCAA ICS Initiative 2013 All Rights Reserved Aronson LLC Slide: 8

9 DCAA ICS Initiative DCAA has implemented several strategies to help improve their audit quality & timeliness Centralized QA review at headquarters Conduct more rigorous evaluations of contractors data via more transaction testing Increase communication with contractors Rules of Engagement Attend contract negotiations with Contracting Officer 2013 All Rights Reserved Aronson LLC Slide: 9

10 Steps towards working down the incurred cost backlog with the goal of reaching a steady state by FY (Steady State two years of unaudited fiscal years) Increase staffing to 5,600 by 2016 Dedicated audit teams Developed revised incurred cost audit program Provide incurred cost auditing refresher training courses for staff Multi-year auditing Modified their low-risk sampling approach DCAA ICS Initiative 2013 All Rights Reserved Aronson LLC Slide: 10

11 Effective Incurred Cost Audits (TIP #1) Adequate Submissions Facilitate Effective Audits Providing adequate supporting data to the auditor(s) in a timely manner Coordinating with the auditor(s) on the most effective way to provide supporting data that may have been archived or moved offsite Coordination with the auditor(s) to ensure adequate staff available to support the audit Be prepared to support the proposal and explain how the accounting system supports the cost Provide electronic copy of the general ledger and trial balance, and detailed listing of transactions 2013 All Rights Reserved Aronson LLC Slide: 11

13 What is an Incurred Cost Submission Evaluation of both direct and indirect costs to determine whether such costs are Reasonable and Allocable based on FAR, CAS, GAAP and not prohibited by contract or regulation. Final indirect cost rates shall be established in accordance with Federal Acquisition Regulation (FAR)Subpart 42.7 Indirect Cost Rates. An indirect cost rate proposal is REQUIRED for the determination of a final indirect cost rates All Rights Reserved Aronson LLC Slide: 13

14 The Four W s for an ICS WHAT: When a contract contains the following FAR Clause , Allowable Cost and Payment, normally found in solicitations/contracts that are cost-reimbursement (flexibly priced) or a time-and-materials contract (other than a contract for a commercial items). WHEN: Per FAR (d)(1)(2)(i) The Contractor shall submit an adequate final indirect cost rate proposal to the Contracting Officer (or cognizant Federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years. Reasonable extensions, for exceptional circumstances only, may be requested in writing by the Contractor and granted in writing by the Contracting Officer 2013 All Rights Reserved Aronson LLC Slide: 14

15 The Four W s for an ICS WHERE: To your cognizant DCMA and DCAA Representative WHY: Balancing your Checkbook To settle up on the amount the Government owes you or the amount you owe the Government 2013 All Rights Reserved Aronson LLC Slide: 15

16 Who Does NOT Need to File an ICS Fixed Price Contracts Commercial Contracts Quick-closeout Procedure when conditions under FAR (a) are satisfied Contracting Officer can settle indirect costs in advance of final indirect cost rate determination if 2013 All Rights Reserved Aronson LLC Slide: 16

18 DCAA ICS Model Version 2.0.1c (6/2012) Renamed Schedules Q (1-4) TO Suppl A (1-4) to reflect the FAR change Renamed Schedule S TO Suppl O to reflect the FAR change Renamed and changed format of Schedule T TO Suppl B to reflect the FAR change Modified Schedule J to require reporting of all subcontracts awarded under flexibly priced prime contracts by contract type Modified Schedule K to compute Material Handling Removed Schedules P and R 2013 All Rights Reserved Aronson LLC Slide: 18

19 Data Gathering Trial Balance Payroll Reconciliation Year-end payroll summary report W-2 Summary 941 Quarterly Tax Returns Statement of Indirect Expenses OR Final FY Indirect Rate Calculation Job/Project Summary Reports (at billing level) Flexibly priced government contracts Government T&M (normally GSA N/A) General Ledger Detail A/R History 2013 All Rights Reserved Aronson LLC Slide: 19

20 Contract Revenue by contract type Data Gathering Year End or Last invoices (if contract ended prior to Fiscal year) with cumulatives for all flexibly priced and T&M government contracts with the applicable FAR clause List of contract limitations for all contracts subject to ICS List of total hours booked by labor category for each applicable Federal Government T&M contract (usually GSA task orders N/A). Contract Briefs all for all contracts subject to ICS 2013 All Rights Reserved Aronson LLC Slide: 20

21 Data Gathering Note if each project listed on the ICS is DoD or Non- DoD and if Prime or Subcontract. Note if each project listed on the ICS has physically ended as of the year. Subcontractor & Consultant information (for those that worked on any contracts subject to ICS) Review General Ledger to ensure all unallowable costs have not been claimed 2013 All Rights Reserved Aronson LLC Slide: 21

22 Supplemental Information A Comparative analysis of indirect expense detailed by account (Suppl As) B General Organization and Executive Compensation information (Suppl B) C Identification of Prime contracts which perform as a Subcontractor D Description of Accounting System E Procedures for Identifying and Excluding Unallowables 2013 All Rights Reserved Aronson LLC Slide: 22

23 Supplemental Information F Certified Financial Statements G Management Letter from CPA concerning any internal control weaknesses H Actions that have been and/or will be implemented to correct the weakness described in management letter I J List of all Internal Audit Reports Issues since the last disclosure of the Internal Audit Reports Annual Internal Audit plan of scheduled audit to be performed in the fiscal year when final indirect cost rate submission is made 2013 All Rights Reserved Aronson LLC Slide: 23

24 Supplemental Information K Federal and State Tax Returns L Securities & Exchange Commission 10K report M Minutes from Board of Directors meetings N Listing of delay claims and termination claims O Contract Briefs (Suppl O) 2013 All Rights Reserved Aronson LLC Slide: 24

25 Have support data available, accessible and with copy of submission. The audit of the incurred cost submission will likely occur at a later date (often much later). TIP #2 The individual who prepared the submission or support data may not be accessible or even working for your organization 2013 All Rights Reserved Aronson LLC Slide: 25

26 Common Pitfalls to Avoid Lack of adequate documentation to support cost Lack of description of work provided by subcontractors Reclassification of time without proper support Out of period costs claimed Common Questioned Costs Business Meetings Employee Moral Executive Compensation Bonuses Credit Card Expenses (Travel & Per Diem) Marketing Costs Leased Autos TIP # All Rights Reserved Aronson LLC Slide: 26

28 Proof Trial Balance to Submission Verify that all unallowables have been removed Go to each Tab and validate information ties to related schedules Verify formulas and hyperlinks throughout Make sure to sign AND date Schedule N Save all data used to develop ICS ICS Adequacy Checklist Pull DCAA s checklist and verify before submission 2013 All Rights Reserved Aronson LLC Slide: 28

30 DCAA s Low Risk Sampling All incurred cost proposals will be evaluated upon receipt for adequacy in accordance with FAR Incurred Cost Adequacy Checklist All adequate incurred cost proposals exceeding $250 million in auditable dollar value (ADV) will be audited. A mandatory incurred cost audit will be performed once every three years for all proposals with ADV greater than $100 million and less than $250 million. All other incurred cost proposals received and determined adequate will be assessed for high or low risk. Risk Assessment 2013 All Rights Reserved Aronson LLC Slide: 30

31 DCAA s Risk Assessment Are there audit leads or other significant risk identified (e.g. any known business system deficiencies that would have a significant impact on the final indirect rate proposal for this FY, significant risk identified by the contracting officer, etc.)? Is this a new incurred costs contractor? (i.e., a contractor where we have no incurred cost audit experience). Were there significant questioned costs in the prior year s audit $1M or Less ADV with $15,000 or greater questioned costs = High Risk $1M to $15M ADV with $25,000 or greater questioned cost = High Risk $15M to $50M ADV with $55,000 or greater questioned cost = High Risk $50M to $250M ADV with $100,000 or greater questioned cost = High Risk With a YES response to ANY of these questions, place proposal in the High-Risk pool 2013 All Rights Reserved Aronson LLC Slide: 31

32 DCAA s Audit Selection All high-risk adequate incurred cost proposals will be audited (oldest to newest). Low-risk adequate incurred cost proposals will be sampled for audit using risk criteria. Low-risk adequate incurred cost proposals not selected for audit will be dispositioned with a memorandum to the contracting officer. DCAA new Incurred Cost Audit program Concurrent Auditing Major & Non-Major (Sept. 2012) (audit program #10100) 2013 All Rights Reserved Aronson LLC Slide: 32

34 At the beginning of the Incurred Cost Audit Assign a Point of Contact Tips for Surviving an ICS Audit Request a walkthrough of the Audit to be conducted Establish guidelines for information transfers and requests Set realistic timelines for the fieldwork and conclusion of the audit Monitor the progress of the audit Be sure to keep track of requests from the auditors 2013 All Rights Reserved Aronson LLC Slide: 34

35 At the beginning of the Incurred Cost Audit Be sure to keep track of documentation provided to the auditors Prepare a booked to billed Tips for Surviving an ICS Audit Understand how DCAA audits flexibly priced vs. T&M 2013 All Rights Reserved Aronson LLC Slide: 35

36 Save the following documents with the incurred cost submission so they are available at the time of audit. Organizational Chart Tips for Surviving an ICS Audit Proof of 941 tax payments Proof of only eligible dependents on health insurance Documentation to support Executive Comp All Rights Reserved Aronson LLC Slide: 36

37 Policies Segregation of Unallowables Bonus Policy Labor & Timekeeping Subcontractor/Vendor procurement and payments Travel Policy Billing Policy Tips for Surviving an ICS Audit Handling of withholds Contract Limitation 2013 All Rights Reserved Aronson LLC Slide: 37

38 Go to DCAA web site Under Guidance Directory of Audit Programs Incurred Cost Concurrent Auditing Major & Non-Major AP (Sept. 2012) Risk Assessment Checklist Audit Program for Incurred Costs - Post Year End Audit (Aug Under Guidance FAR Cost Principles Guide DCAA Resources & Audit Programs Cost Accounting Standards Contract Audit Manual (CAM) Chapter 6 Incurred Cost Audit Procedures Under Checklist and Tools Incurred Cost Electronically (customize to contractor indirect rate structure) Incurred Cost Submission Adequacy Checklist 2013 All Rights Reserved Aronson LLC Slide: 38

39 Summary Prepare a compliant DCAA Incurred Cost Submission Satisfy the requirements for filing an adequate ICS Understand how DCAA determines high risk Be well prepared for audit process which can reduce audit time needed TIP #4 Stephen Covey s, The 7 Habits of Highly Effective People Begin with the End in Mind 2013 All Rights Reserved Aronson LLC Slide: 39

40 Contact Information Nicole Mitchell, Aronson LLC Aronson LLC 805 King Farm Boulevard, Suite 300 Rockville, MD (301) Connect with me on Donna Dominguez, Aronson LLC 805 King Farm Boulevard, Suite 300 Rockville, MD (301) Connect with me on 2013 All Rights Reserved Aronson LLC Slide: 40