Demystifying the Pass/Fail, Adequate/Inadequate, of DCAA Pre-award/Post-award Accounting System Surveys/Audits

 

The Issue

A lot is being said about the DCAA moving to providing only a Pass/Fail option for a firms accounting system.  Along with this misinformation are many scare tactics designed to influence the small business to invest large sums into the design, setup and implementation of their accounting systems and related controls.

Yes, it is important for even the smallest firm to begin the learning process and subsequent design of their accounting system and related policies.  I do not dispute this.  What troubles me is when a small business is coerced into spending more than they should in time, money, and frustration before it is necessary.

 

The Process and Goal

Establishing a sophisticated accounting and financial system is a “Process”.  Your systems and policies grow with your firm.  You should not buy a Rolls Royce with Ford/Chevy pockets.  Both the government and supporting CPA/Consulting firms should understand where a small business is in their evolution and what level of complicated system and policies are truly needed at that point.

I have been teaching, defending, and advocating this concept for years.  Yes I do want all my clients, workshop attendees (Live or DVD), and all small businesses to have acceptable and adequate accounting systems and related policies.  And that is the “Goal”. 

It starts with an understanding of the where the firm is currently, and where it has been.  Have the systems been adequate and acceptable for their status thus far?  If not, then the firm needs to work on changes regardless of additional government proposed effort.  They need adequate financial data according to GAAP and the IRS.  Which by the way are also requirements under government guidelines.

 

Related Information

I recently wrote a detailed article on this topic in an earlier newsletter issue.  Many members found the article extremely helpful as they discussed their situation with the auditor, but more importantly with the Contracting Officer.   Having a better understanding of what requirements apply, when, and under what circumstances, empowers you to confidently discuss options.  Follow this link to read the article.

 

Recent Auditor Feedback

Recently I talked with current DCAA auditors, who have been around for awhile, about this pass/fail adequate/inadequate issue.  My opinion from these discussions is that the only difference, recently in place, is the determination if a firms accounting system is Adequate or Inadequate.  The option for “Inadequate in Part” is no longer applicable. And this opinion is typically only under a post-award accounting system audit, not a pre-award survey.  

However, the SF1408 still provides the auditor with the option in their pre-award survey report to provide an opinion on whether the design of the accounting system is acceptable, not acceptable, or accept­able with a recommendation that a follow-on accounting system audit be performed after contract award.

It is important to review the entire April Article referenced above.  You must begin to understand the difference in a Pre-award Survey and of a Post-award Audit.  So please read and study the article in detail.

 

FYI - Other

FYI: Even the DCAA CAM Manual (please check for more current guidanance) has yet to reflect limitations that are being discussed.  The following is the statement as it currently reads “The post award accounting system report provides an opinion on whether the accounting system is adequate, inadequate, or inadequate in part.”  According to discussions with DCAA auditors, the inadequate in part has been eliminated.  Yet it is still indicated online and in the most current CAM.

 

Summary

In summary, if you are contacted for a Pre-Award Accounting System Survey, the goal is (should be) to determine “Acceptability of the Design” of your accounting system and procedures (policies).   If you are contacted for a Post-Award Accounting System Audit, the goal is to determine “Adequacy of the Accounting System”, typically Operating and not just Designed. 

To those who have had accounting system surveys and received an acceptability report, remember that these are not permanent.  Any reviews or audits of your systems should be current.  What is current may be subject to interpretation.  So stay on top of your system through annual reviews/audits by your internal/external accountants/CPA.

 

The Challenge

The challenge is, do the auditors, prime contractors, contracting officers, COTR’s, ACO’s, and SBA BDS staff understand these concepts enough to ensure a Fair and Equal Opportunity to the Small Business without requiring undo financial and reporting burdens on them?

Either I am totally off-base on this in my interpretation or there is some serious training needed in the government world.  You as a small firm might find yourself in the position to be training a new auditor or government person while discussing this issue.  If so, be prepared, be patience, be kind, and be tactful! 

Comments on this are welcome!

 

Paul Sr