1. Copyright 2011 Beason & Nalley, Inc. DCAA Audits: Current Trends and Issues Presented to: National Contract Management Association October 13, 2011 Wayne Murdock, CPA/CISA Sr. Managing Consultant Beason & Nalley, Inc. 1

2. Objectives Background events affecting DCAA audit priorities and approach Impact of events on audits What audits come first What audits come later Primary audit issues: Cost proposals Accounting systems Incurred costs Predictions going into FY 2012 2

3. Events that Changed DCAA Landscape GAO (2008 and 2009 reports) Independence Inadequate internal controls audits Insufficient transaction testing Audit supervisors overriding auditor findings Lack of auditor training Too much emphasis on metrics 3

4. Events that Changed DCAA Landscape GAO recommendations More audit work to substantiate conclusions Emphasis on quality vs metrics Risk based audit approach More authority should be given to DCAA in access to records 4

5. Events that Changed DCAA Landscape Commission on Wartime Contracting First interim report: lack of sufficient numbers of competent government acquisition officials August 2009 Hearing pitted DCMA against DCAA 2010 Hearings ramped up government challenges to prime contractor management of subcontractors 5

6. Initial Impact on DCAA Increased DCAA independence Increase substantive testing More aggressive access to records policy Less focus on materiality & increase in audit findings All internal controls deficiencies significant Increase in audit staffing DCAA appealing decisions not consistent with audit findings Lack of resources 6

7. DCAA Audits - Highest Priority Cost proposals Any other demand requests from DoD REAs, terminations, & change order proposals Follow-up audits Defective pricing audits DCMA and DCAA Joint Cost Recovery Initiative 7

8. DCAA Audits - Secondary Priority Incurred Cost Internal Controls Accounting System audit Civilian Agency audits Expect stop and go audits 8

9. Understanding Audit Process &Working Relationships with Auditors 9

10. Understanding General Audit Process Auditor Planning –Gain understanding of relevant internal controls –Preliminary evaluation of data –Perform risk assessment –Determine scope –Discuss with supervisor –Audit program 10

11. Understanding General Audit Process Executing Audit Plan –Review policies/procedures if necessary –Obtain sufficient evidential data –Document basis of findings with adequate working papers –Discuss with supervisor 11

12. Understanding General Audit Process Audit Report –Include appropriate opinion or statement of issues –Include adequate explanation of questioned costs or deficient practices –Obtain Contractor Comments –DCAA Internal Review process (Technical and/or Management) 12

13. Contractor Preparations for Audit When notified of audit, discuss with auditor –Defined purpose of audit and likely procedures –Personnel most likely required to support audit –Preliminary data required - ask to put in writing –Dates/duration of audit –Names of auditors performing audit (if “new auditor” will they have a senior auditor helping them) Request entrance conference (face to face), if not offered by auditor 13

14. Contractor Preparations for Audit Preparations for entrance conference –Gather data requested & have available –Read applicable DCAA information/guidance –If follow-up audit, have corrective plan ready During entrance conference –Ask questions & take notes –Designate principal point of contact –Identify methods for delivery of data –Discuss time frame of audit 14

15. Coordination During Audit During audit –Maintain close contact with auditor –Address problems immediately –Provide access to data promptly - know what data auditor has been provided & compliance implications –Request periodic status of audit 15

16. Coordination During Audit During exit meeting –Understand all problems or issues raised –Ask for additional time to resolve problems or provide added data before final report is released –Ask for report draft, not just “findings” –Request added audit calculations/workpapers if necessary to clarify auditor’s position –If General FAR Reference, ask for more specific FAR reference (e.g. FAR 31.205-43 vs. FAR 31.205) 16

17. General Guidelines - Audit Exceptions Audit findings to which contractors must respond Questioned costs—examples:  Incurred cost proposals  Forward pricing proposals  Indirect billing rates Business Systems (internal control) deficiencies:  Systems issues—”risk” of overcharging gov’t  Examples—accounting, billing, estimating, etc.  Recommendations may include added oversight & withholds of billed costs 17

18. Summary of the General Audit Process Contractor’s obligation –Provide all relevant evidential data requested –Adequately support company position/policy –Respond to audit exceptions with sufficient & documented explanation Auditor’s obligation –Provide well-supported conclusions based on adequate evaluation of company data –Support & disclose those conclusions in report/memo 18

19. Responding to the Draft Audit Report Address each exception as there is a valid basis Response should be respectful Identify corrections implemented or provide a corrective action plan Ensure written response identifies all relevant regulations in their full context Do not include “case law” Revisit DCAA’s audit process for compliance with internal DCAA policies and interpretation of regulations 19

20. Issues on DCAA’s Hot Spot List Cost proposals –Overall adequacy issues FAR 15.408, Table 15-2 –Forward pricing rates out years and inadequate budgetary information –Insufficient cost support for subcontractor proposals 20

21. Issues on DCAA’s Hot Spot List Accounting systems - if requested or for follow-up –Attribute statistical sampling of transactions –Accounting for unallowable costs –Insufficient documentation –Lack of written policies & procedures –Almost all deficiencies regardless of apparent insignificance will be deemed significant –Unpredictable time frame for corrective action follow- up 21

22. Issues on DCAA’s Hot Spot List Incurred cost proposals (if initiated) Extensive testing (transaction analysis) - variable sampling Costs questioned if documentation not sufficient - higher use of “reasonableness test” Focus on sensitive accounts— entertainment/recreation, advertising, exec. compensation, prof. fees, travel, and organization costs Recommendations of penalties application (expressly unallowable indirect costs) 22

23. Predictions Turnaround time not likely to improve Internal controls & Incurred Cost audits lengthy Auditors will report internal controls deficiencies More pressure on contractors to provide access to records Improvement in auditor communication Continued extensive testing 23

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25. Comments or Questions 25

26. Beason & Nalley, Inc. 101 Monroe Street Huntsville, Alabama 35801 256-533-1720 Wayne Murdock, CPA/CISA Government Compliance Sr. Managing Consultant wmurdock@beasonnalley.com 26