Understanding the Intent and Letter of the law as it pertains to small prospective contractors accounting systems.
Despite all of the various focus and opinions that are discussed on this topic, the following depicts my SME interpretation and preferred applicability of the current guidance and objectives to auditors, government procurement staff, and the small contractor as it relates to the pre-award survey of the accounting system, and the post-award audit option.
The interpretation of the guidance and ensuring the customer requesting the review understands the options they have and the limitations of a small contractor are important to this process. The post-award audit option is an important issue that the requesting customer should be aware of.
According to the DCAA Audit Program and DCAAM 7640.1Guidance
The major objectives of the pre-award audit are to obtain an understanding of the accounting system to appropriately complete the Pre-award Survey of Prospective Contractor Accounting System, SF 1408, and to opine as to whether the design of the contractor’s system is acceptable for the award of a prospective Government contract.
DCAAM 7640.1 July, 2009 5-202 Pre-award Survey of a Prospective Contractor’s Accounting System
a. A pre-award survey of a prospective contractor’s accounting system is an examination of the accounting system at either a major or non major contractor before contract award. The audit is made at the request of a contracting officer to determine the acceptability of a contractor's accounting system for accumulating costs under a prospective Government contract. It is usually requested as part of an overall pre-award survey of a contractor conducted by a contract administration office under FAR/DFARS/PGI 9.106/209.106/209.106. The audit scope should be limited to obtaining an understanding of the design of the prospective accounting system so as to appropriately complete Standard Form 1408, "Pre-award Survey of Prospective Contractor Accounting System" (see FAR 53.301-1408) and those procedures essential to reach an informed opinion on whether or not the design of the prospective contractor’s accounting system is acceptable for accumulating costs under a Government contract. It is not necessary to conduct an in-depth evaluation of the overall accounting system.
b. When performing the pre-award survey of a prospective contractor’s accounting system, the auditor will determine the acceptability of the contractor’s system and determine if the system is:
(1) in operation,
(2) set up, but not in operation,
(3) anticipated, or
(4) nonexistent.
DCAAM 7640.1 July, 2009 5-203 Post Award Accounting System Audits
a. The post award accounting system audit is an examination of the accounting system at non major contractors after contract award. The major objective of the post award accounting system audit is to determine if the contractor’s accounting system is adequate for accumulating and billing costs on Government contracts.
b. A post award accounting system audit is usually performed at the request of the contacting officer when:
(1) a follow-up audit to a pre-award survey is recommended or
(2) a pre-award survey was not conducted prior to contract award, and the contracting officer determines that an audit is now required to support contract requirements.
Additionally, auditors may self-initiate a post award accounting system audit, based on audit risk at a non major contractor location.
Generally, once a non major accounting system is determined adequate for accumulating and billing costs on Government contracts, future full-scope accounting system audits should only be performed when deemed necessary based on audit risk.
c. The post award accounting system audit program includes comprehensive steps to gain a detailed understanding of the contractor’s accounting system (e.g., tracing costs billed to source documentation) sufficient to render an opinion on the adequacy of the system.
The pre-award survey report provides 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.
The post award accounting system report provides an opinion on whether the accounting system is adequate, inadequate, or inadequate in part.
Pre-award Survey audit program, Version 5.5, dated June 2009
Part of the Pre-award Survey audit program, based on Version 5.5, dated June 2009, is to determine to what extent the Accounting system in operation.
Is the accounting system in full operation? If not, which portions are in operation and what is the status of implementing the full accounting system? (SF 1408, Section II, 5)
SUMMARY:
There is a difference in a survey and an audit. It can be confusing based on the interchangeable use of the terms audit and review. It appears that the pre-award survey is a review to determine if DESIGN of the system is acceptable where the post-award audit is to determine if the Actual Operating System is adequate.
It is in the governments and the contractors’ best interest to understand these differences and it may take direct discussions with the customer to clarify the two.
I continue to suggest that any firm, including small contractors, should move toward implementing an accounting system that complies with the major adequacy requirements. I believe any contractor should be able to explain and show in detail the Design of their acceptable, anticipated accounting system.
In moving toward this goal, specialized training and tools are readily available to any and all contractors who are serious about doing business with the government. This has been our firms primary goal over the years.
However, I still maintain that it is an unreasonable time and cost burden on small businesses to expect them all to have a fully operational system prior to considering them for any applicable contract award.
If a firm can show their anticipated accounting system Design and indicate a reasonable time table for implementation to a fully operational system, then a post-award accounting system audit should be the option afforded an auditor and/or customer to make, considering no other issues.
This is in the true spirit of assisting and supporting small businesses and improving their chance of succeeding in the government and commercial marketplace.
If an auditor does a pre-award survey on the Design and derives an opinion that the system is not acceptable or inadequate simply because it is not fully operational, then it defeats the purpose of the stated objective. Currently, this does not appear to be the law or guidance.
Therefore, an anticipated, clearly defined and designed accounting system should be deemed acceptable with a recommendation for a post-award audit. It should be noted that a contractor should be prepared to show they have included the cost of implementing the system as designed, or any recommended changes, within their indirect cost structure. Timely implementation should be considered as a measurement metric of contract performance.
I hope this detailed discussion sparks other interest and feedback on this important topic.
Paul Sr.
Pre-award versus Post-award - Survey versus Audit