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 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 contractors 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.
