In an earlier article, we discussed that Quick Books Pro as part of a documented and controlled accounting process with trained accountants can be made DCAA Compliant. For the question above “will DCAA approve your accounting system?” the answer is “No”, because DCAA doesn’t approve any accounting system.
Even the best project accounting software can be managed badly, and your accounting system deemed inadequate. Your accounting system is more than just the software; it’s also the people that are running it, the procedures and the speed at which you process information that go into successful systems. In this article, we will review requirements for accounting systems and how DCAA rates these systems as either adequate or inadequate.
DCAA reviews accounting systems through pre-award surveys, financial capabilities audits, billing system reviews and labor reviews including floor checks. Here is what you are expected to have as a government contractor, whether as a prime or as a subcontractor on a prime contract.
·Accounting System under General Ledger Control means that you have costs classified by account names and numbers and organized into Assets, Liabilities, Equity, Revenue, Direct Costs, Indirect Costs and Unallowable Costs.
·Timesheets showing employee hours by charge numbers, signed by employee and approved by supervisor, identifying contract direct labor, indirect labor and leave and tracking any changes made, plus a documented timesheet policy and procedure.
·Method to calculate payroll labor cost from timesheet hours and apply to the charge numbers listed on the timesheet, flowing through the accounting system to billings and also to the Income Statement for computing indirect rate allocations.
·Segregating direct cost from indirect costs, where direct costs are incurred for a specific contract and indirect costs are shared costs such as fringe benefits, overhead and general and administrative (G&A) and unallowable costs such as interest expense and entertainment.
·Consistent method of identifying, classifying and allocating indirect costs
·Tracking of costs according to contract requirements such as contract line item and ability to track contract cumulative costs including across fiscal years.
·Financial reporting required for financial capability reviews, include Income Statement and Balance Sheet, Payroll Tax returns, Aged Accounts Receivable and Payable, cash flow forecast and other financial reports. DCAA will use this information to assess the company’s financial strength for performing on contracts. Your banker will require similar reporting in order to establish a line of credit and then on a monthly basis report Accounts Receivable and financial statements.
In the past, your system could be marked “inadequate in part” and you would be giving time to address system weaknesses. Under the latest guidelines issued to DCAA in December 2008, your accounting system is now on a pass-fail system, rated either adequate or inadequate. An inadequate rating could cause payments on your current contracts to be suspended, or delay a contract award.
So, in answer to “will DCAA Approve my accounting system” the answer is still “No.” But you need to do everything possible to make sure your system passes the audit and is deemed adequate, or you could find yourself short for the next payroll.