Is Your Accounting System Making the Grade? Attributes of an Acceptable Accounting System April 26, 2012

Is Your Accounting System Making the Grade? Attributes of an Acceptable Accounting System April 26, 2012 2012 All Rights Reserved 805 King Farm Boulevard Suite 300 Rockville, Maryland 20850 301.231.6200 P 301.231.7630 F www.aronsonllc.com

Founded in 1962 200+ 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 Financial and Contract Compliance GSA schedules Audit, Assurance & Tax Software Systems and Outsourcing About Aronson LLC www.aronsonblogs.com/fedpoint News and Trends for Today s Savvy Government Contractor 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 2

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. 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 3

Brian M. Bender, Principal Consultant Brian Bender is a Principal Consultant in Aronson LLC s Government Contract Services Group. He has more than ten years of consulting experience with a wide variety of Government contractors. His experience includes Federal Acquisition Regulation (FAR) compliance, indirect rate calculations, accounting system reviews, policies and procedures, small business programs, and forensic accounting and litigation support. Brian has taught several Government compliance courses and has written articles and blogs related to FAR, DCAA, CAS, SBA and other government contracting related topics. Brian is the co-chair of the Northern Chapter of the Virginia Society of Certified Public Accountants (NC-VSCPA) Government Contractor Committee, and is also a member of the Maryland Association of CPA s (MACPA), Greater Washington Society of CPA s (GWSCPA), and the National Contract Management Association (NCMA). Brian earned his Bachelor of Science with Honors in Accounting from the University of Maryland, College Park. Brian is a Certified Public Accountant licensed in the States of Maryland, Virginia, and Washington, DC. 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 4

Agenda Business Systems Rule Overview Accounting System Application Accounting System Criteria DCAA Guidance Deficiency Process and Outcomes 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 5

Business Systems Rule Overview Issued February 24, 2012 77 Fed. Reg. 11355 DFARS 252.242-7005 Six Business Systems DCAA: Accounting (252.242-7006), Estimating, and Material Mgmt. and Accounting DCMA: Purchasing, EVMS, and Property Mgmt. 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 6

Business Systems Rule Overview The contractor shall establish and maintain acceptable business systems in accordance with the terms and conditions of this contract. (252.242-7005 (c)) The existence of a significant deficiency in a business system will allow the Contracting Officer to withhold 5% of the payments otherwise due the contractor until such time as the deficiency is corrected. 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 7

Accounting System Application Applies: DoD contracts subject to the DFARS Cost Accounting Standards (CAS) covered contracts Negotiated contracts > $700,000 awarded to a contractor with > than $50 million dollars of negotiated contracts awarded in one year. Doesn t Apply: Civilian agency contracts Non CAS-covered contracts including all contracts to small businesses 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 8

Accounting System DFARS clause 252.242-7006 Definition: Accounting system The system or systems of methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 9

Accounting System Definition: acceptable accounting system must provide reasonable assurance that: Applicable laws and regulations are complied with The accounting system and cost data are reliable Risk of misallocations and mischarges are minimized, and Contract allocations and charges are consistent with billing procedures 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 10

Deficiency Process and Outcomes Definition: Significant Deficiency A shortcoming in the (accounting) system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 11

Accounting System Criteria 1. Sound internal control environment, accounting framework, and organizational structure Segregation of duties Custody Authorization Record keeping 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 12

Accounting System Criteria Cont d 2. Proper segregation of direct from indirect costs Definition of Direct Costs Definition of Indirect Costs Chart of Accounts Job number functionality Limit job number population on timesheets Direct Indirect 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 13

Accounting System Criteria Cont d 3. Identification and accumulation of direct costs by contract Job number functionality Labor Travel and Meals Other Direct Costs Subcontractors and Consultants 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 14

Accounting System Criteria Cont d 4. Logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives Reasonable tier structure Costs on the Trial Balance should be grouped into homogeneous groupings Consistent application of rates Budget and estimating Billing Forward pricing 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 15

Accounting System Criteria Cont d 5. Accumulation of costs under general ledger (GL) control Job cost ledgers are reconcilable to the GL Fixed Assets QuickBooks does not have sub-ledgers 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 16

Accounting System Criteria Cont d 6. Reconciliation of subsidiary cost ledgers and cost objectives to the general ledger Contract revenue summary Fixed Assets and accumulated depreciation Accrued payroll Billing Unbilled 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 17

Accounting System Criteria Cont d 7. Approval and documentation of adjusting entries Payroll accruals Subcontractor / vendor expenses Month-end and year-end checklists 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 18

Accounting System Criteria Cont d 8. Mgmt. reviews and/or conducts internal audits to ensure compliance with P&P s Based on size and complexity Small businesses may not have a separate internal audit function Quarterly / annual procedures 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 19

Accounting System Criteria Cont d 9. Timekeeping system that identifies employees labor by intermediate or final cost objective Time recorded by all employees Standard timesheet with signatures and approvals recorded on a timely basis Overtime, Danger Pay, Post-differentials, etc. 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 20

Accounting System Criteria Cont d 10.Labor distribution system that charges direct and indirect labor to the appropriate cost objective Labor records reconcile to payroll records Quarterly 941 s Annual W-2 s Labor accruals are made and reversed monthly 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 21

Accounting System Criteria Cont d 11.Interim determination of costs charged to a contract through posting of books of account Timekeeping, if external to the accounting system Bank reconciliations 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 22

Accounting System Criteria Cont d 12.Exclusion of unallowable costs based on FAR Part 31, and other contract provisions Training of employees and specifically accounting staff Recent DCAA focus Executive compensation Bonuses Trade shows / Conferences Automobile expenses for executives Periodic review by management 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 23

Accounting System Criteria Cont d 13.Identification of costs by CLIN, ACRN, or other unit as defined by the contract Appropriate job number use Job ledger detail Detail shown on employee timesheets 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 24

Accounting System Criteria Cont d 14.Segregation of preproduction from production costs Primarily for manufacturing companies Costs segregated Note: Most costs for manufacturers are direct, and the company would have a single rate structure (G&A) 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 25

Accounting System Criteria Cont d 15.Cost accounting information related to: a. Contract and funding values and limits Contract briefs (ICS Schedule S) Cumulative amounts illustrated on billings PM and Mgmt. review on a periodic basis At-risk review and approval Value Funding Period of Performance FAR 52.232-22 Limitation of Funds Costs will exceed 75% within the next 60 days 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 26

Accounting System Criteria Cont d b. Indirect rate calculations Readily calculated from, or based on information from, the accounting system Calculated on a regular basis (monthly/quarterly) Reasonable structure in compliance with FAR Costs allocated over reasonable bases Labor Hours Labor Dollars Square Feet Monitor actual vs. provisional rates monthly/ quarterly 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 27

Accounting System Criteria Cont d 16.Billings that can be reconciled for both current and cumulative amounts claimed All projects billed on a timely basis; not less than monthly Formalized billing checklist Appropriate information for each contract type T&M and CP labor hours, CLIN, cumulative billing, withholds, etc. FP percentage of completion, withholds, etc. 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 28

Accounting System Criteria Cont d Process for the payment of subcontractor and vendor costs Accrual of invoices not yet received Timely payment of subcontractors and vendors in accordance with subcontractor agreements or vendor purchase orders Coding to appropriate projects 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 29

Accounting System Criteria Cont d 17.Adequate data for use in pricing follow-on acquisitions Job cost reports provide relevant information Costs tracked from a business perspective to allow management to understand future work opportunities 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 30

Accounting System Criteria Cont d 18.Accounting practices in accordance with GAAP and CAS, if applicable Accrual vs. cash accounting Independent audit, review, or compilation CAS-covered CAS 401, 402, 405, 406 apply to all contractors 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 31

Policies & Procedures to be Compliant Direct vs. Indirect Costs Allocation of Indirect Expenses Unallowable Costs Time & Expense Reporting Billing Compensation and Bonus Budget and Planning Travel and Expense Reporting Estimating Code of Conduct and Business Ethics 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 32

Policies & Procedures Cont d AP Disbursements Non-Purchase Order AP Vouchers Vendor Maintenance Voiding AP Checks Billing CP and T&M Billing FP Cash Receipts Contract Modifications Set-Up New Customers Set-Up New Projects Payroll Processing Timesheet and Labor Processing 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 33

DCAA Guidance - MRD 12-PPS-009(R) Internal Control Audit Planning Summary (ICAPS) procedures consolidated Changes the focus of existing audit guidance and the business system they pertain to Accounting System will now include Labor Accounting System and Indirect and ODC. Billing, Control Environment and IT General System Control subsystems performed separately 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 34

DCAA Guidance - MRD 12-PPS-009(R) Other ICAPS Estimating System includes Budget and Planning Compensation System will now be included in forward pricing and incurred cost audits 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 35

Business Systems Rule Overview Administration of the Rule 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 36

Points of Contact Nicole M. Mitchell (301) 222-8231 nmitchell@aronsonllc.com Brian M. Bender (301) 222-8273 bmbender@aronsonllc.com 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 37

Upcoming Webinar Business System Rule Purchasing System Free webinar May 17, 2012, 11am Presented by Tom Marcinko Register at www.aronsonllc.com, under events 2012 All Rights Reserved Aronson LLC www.aronsonllc.com Slide: 38