Contractor Business Systems

Finalized in 2012, the “Business Systems Rules” outlined mandatory requirements for certain contractor business systems, further defined as (1) accounting and billing; (2) estimating; (3) purchasing; (4) material management; (5) government property; and (6) earned value management. Applying only to contracts awarded after May 18, 2011, the DOD Federal Acquisition Supplement (DFARS) 242.70 specified requirements for each system, and established financial penalties for instances of noncompliance qualifying as “significant deficiencies.” There has been a lack of clarity in how these business systems are analyzed by the government, and in many cases, significant business systems have not been reviewed for many years.
The matter at hand has prompted the issuance of a proposed rule to amend DFARS aspiring to improve the backlogged audit situation and increase the effectiveness of auditing contractors’ accounting systems, estimating systems, and material management and accounting systems.
Note: These proposed rules are not applicable to all contractors, generally will not be applicable to small businesses unless contracts exist which are covered by Cost Accounting Standards.
The proposed rule issued on July 15th, 2014 places the responsibility on the individual contractors to demonstrate compliance with DFARS systems criteria related to the contractor’s accounting systems, estimating systems, and material management and accounting systems. Simply stated, contractors’ will now perform self-evaluations and hire an independent CPA of their choosing to perform an audit on such criteria. Additionally, the contractor is responsible for disclosing any significant deficiencies discovered during these evaluation engagements. Contracting officers and government auditors will then review the results of the independent CPA audits and self-evaluations.
The proposed rule is not without significant controversy, and in August 2014, the DOD held a public meeting. Questions included in the public meeting were items such as whether or not the Defense Contract Audit Agency (DCAA) would provide an audit program to CPA’s, or if DCAA would be performing re-audits after CPA reports are submitted. DCAA indicated they would provide feedback on a CPA’s audit program, and indicated they do not intend to perform re-audits. Questions have also been raised regarding the level of access provided to government auditors and expected increased costs as a result of the rule. Needless to say, the proposed rules have several glitches to be improved upon.

Katz Abosch will provide further updates as appropriate and when available.

For more information, contact Josh Sutherland, CPA.

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