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CAPITAL EDGE NEWS
DECEMBER 2012

 

We would like to revisit a recent DCAA Memorandum for Regional Directors (MRD) following several comments from our clients about recent audit experiences with DCAA. The MRD is titled "Audit Guidance on Performing Sufficient Testing" (12-PAS-015, available here). Clearly, as the opening sentence in the "Background" paragraph states; this MRD is part of the DCAA reaction to criticism by the GAO going back to 2008 and 2009. In our experience, the content, including "Example Scenarios" provides audit guidance in detail that is extraordinary for a DCAA Headquarters communication to the field. Some of the procedures mentioned should be fundamental knowledge, and even intuitive, to the career auditor. However, we are aware that with the significant ICS backlog, DCAA is aggressively hiring to increase staffing levels. The sources for new staffing appear to be recent graduates, auditors from other agencies (such as the Air Force Audit), and individuals from private sector with financial backgrounds. Likely none of the individuals hired from these sources have significant Government contract cost accounting and regulatory compliance experience. It is probably a safe assumption that the attached MRD reflects DCAA's reaction to criticism; as well as the reality that many new hires arrive without the aptitude to immediately perform audits which meet GAGAS standards.

We believe the content of this MRD and the experience level of newly hired DCAA staff can be significant to our clients as they are committed to avoiding future criticism for insufficient testing. Several of our clients have indicated that DCAA is asking for data they have never asked for in the past and auditors are performing significantly more testing. The impact will be that, 1) auditors will remain on-site longer, 2) they will request much more data than in past similar audits; and 3) additional client resources will be required to support the audit related activities. 

 

How you will be impacted and tips for navigating the increased testing:  

Auditors Will Remain On-Site Longer
The risk that an auditor might misunderstand data and documents reviewed increases with the amount of time they are on-site; and with the amount of data reviewed. We recommend to our clients to ensure that the auditors receive a thorough "walk-thru" at the beginning of each audit. The objective is to ensure that they completely understand the nature, source, and significance of the data or documents to be provided; or the business system to be reviewed. Further, clients should stay engaged with the auditors throughout the audit to ensure their continued correct understanding of the documents, data, and processes. DCAA is also currently stressing to its auditors the importance of the walk-thru, and continued communication with the contractor to avoid misunderstandings. 

                                                     

Auditors Will Request More Data than in Similar Past Audits
Additional testing equals more requested data; an unavoidable fact. However, auditors still have the latitude to determine the level of testing based on materiality and risk (although for the same perceived materiality and risk, the level of testing will still be higher than in the past). An effective walk-thru or demonstration can have an impact on the extent of substantive testing. We believe that an auditor without a clear and comfortable understanding of the process or procedure will plan and perform significantly more testing and inquiry, resulting in increased risk for misunderstanding and questioning cost assertions or system adequacy. We recommend clients inquire about the
 purpose of data requested to ensure the auditor understands what they will be reviewing, and how it fits into the process or assertion. Engaging the auditor in these circumstances may sometimes disclose that they really need something different, or in addition to what they have asked for.

Additional Client Resources Required to Support Expanded Audit Activity
DCAA is stressing to its auditors that they address the nature of support provided for assertions, and inquiries related to processes and procedures, with the contractor's subject matter experts (SME). This circumstance can be a challenge for some of our clients, who prefer to work through a single point of contact for any question or information to minimize interruptions, and ensure that correct information is provided. The DCAA Contract Audit Manual indicates that the Agency considers "access to records" to include access to personnel; and it would not be shocking to see an "access" issue raised by an auditor who is denied access to a SME. Providing access to an SME where it is necessary can be accomplished without losing control of the audit. Unsupervised access to client personnel is not required and should not occur. Where necessary, clients should consider "gatekeeper" supervised interaction with the SME. 

Billing System Reviews - Contract Briefing Documents
The "Sufficient Testing Example Scenarios" Enclosure to the MRD devotes only a single paragraph to a "Business System Example." Curiously, the paragraph addresses only Contract Briefing Documents, without any discussion of the other control objectives or control activities related to adequate business systems, which should include accounting, billing, labor, and timekeeping. It is a safe bet that the knee-jerk reaction of too many audit offices (and auditors) to this DCAA Headquarters concern will be to crush contractors with criticism for not maintaining adequate Contract Briefs. Contract Briefs are a critical control activity.  Due to their size, some of our clients may rely on the fact that they have few relatively similar contracts, and the familiarity of the billing staff specifically assigned to bill each of those contracts to ensure accurate billing. In our experience, those circumstances are adequate. However, DCAA may or may not agree; depending on who shows up to perform an audit. We recommend clients address this control activity prior to an audit of the billing system or even a voucher review, since Step (1) of a voucher review is to compare information on the selected voucher with the contract brief.  

  
Future DCAA audits will likely require significantly more client resources than in the past, and the level of analysis and testing will be significantly greater than in the past. Further, because of the experience level of newly hired auditors, there is an increased risk that auditors may not correctly interpret what they have been presented. We strongly recommend to our clients to increase their direct involvement in DCAA audits to avoid unjustly questioned costs and unfounded challenges to system adequacy.   
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