1 Surviving a Government audit Presented by Jerrold Rosenberg, CPA, CFP Gelman, Rosenberg &Freedman, CPAs 4550 Montgomery Avenue Suite 650 North Bethesda, MD

2 Types of audits Incurred cost audits – primary focus  May cover multiple years  Based on incurred cost submission  May be most time-consuming  Sample incurred cost submission is on DCAA web site

3 Types of audits Proposal audits  Organization is key  Provide “scientific” support for projected amounts  Direct costs – history and projection  Indirect cost rates  GSA schedule – conflict between GSA and DCAA

4 Types of audits System Survey  System must be in place  Auditors expect a lot from small contractors o Job costing o Purchase order system Financial Capability  Company assets  Bank commitments o Mobilization o Receivable financing  Owner’s assets  Debt vs. equity

5 Types of audits Other  Termination  Billing system  Floor checks

6 Dealing with the auditor Company contact  One or two key employees  Make sure that other employees are aware that they are not to communicate with auditor Inconsistency between auditors  Level of experience – DCAA now losing auditors to retirement  Levels of knowledge

7 Dealing with the auditor Opening conference  Why are auditors there  Lay out policies for dealing with company employees  Assure auditor that you will cooperate Closing conference  Get opportunity to provide additional information before the auditor has prepared their report  Face to face meeting is preferred  Required  Access to audit reports

8 Dealing with the auditor Monitoring access to records  Pull information for the auditor  Copy any information requested by the auditor  Maintain a list of information provided  Document when the auditor requested the information

9 Biggest problems Timekeeping  General requirements o Signed by employee and supervisor o Prepared in ink o Changes crossed out  Field employees  Electronic  Training

10 Biggest problems Billing doesn’t reconcile to books Different classification on books from invoice to AID  Timing differences

11 Biggest problems Unallowable costs not identified  Reasonable – “Does not exceed that which would be incurred by a prudent person in the conduct of a competitive business”  Allocable – assignable or chargeable  FAR 31 / Cost Accounting Standards  Contract terms  Accounting system should segregate  Directly associated cost - materiality

12 Biggest problems Similar costs treated differently  Telephone  Travel  Home office expenses

13 Biggest problems Improper accounting system set up  Poor chart of accounts  Job costing  Audit trail  Timekeeping  Systems available o Quickbooks o Deltek o Peachtree

14 Steps to avoid audit issues Policies and procedures  Establish and follow o Formal or informal o Employee handbook  Don’t get caught not following one of your own procedures

15 Steps to avoid audit issues Pre-audit  Focus on high dollar items o Labor o Travel o Subcontracts  Internal staff  Outside parties  DCAA auditor access to pre-audit findings

16 Steps to avoid audit issues Employee training  Expense coding  Consistency between employees Consistency in contracts  Huge problem  Costs treated differently between contracts o Home office expenses o Rent  Customer doesn’t understand problem  Contract terms can impact on cost recovery

17 Steps to avoid audit issues Monitoring of indirect rates and contract ceilings  Avoid making large adjustments at year end  Indirect rates can also serve as a budget  Balance costs to avoid ceilings  Allocation of shared services

18 Steps to avoid audit issues Reputation  Auditors talk to each other  You are better off with a reputation for being cooperative

19 Steps to avoid audit issues DCAA Contract Audit Manual  Available from Superintendent of Documents for $60 each year  Contains audit procedures for several types of audits and selected areas of cost  Includes FAR selected costs Information for Contractors  Available from DCAA web site,

20 Determining exposure Ceiling Rates Cost type contracts

21 Surviving a Government Audit Determining Exposure

22 Contract Costs After Disallowances

23 Surviving a Government Audit Determining Exposure