Business Systems: Compliance Requirements for Large and Small Businesses

1. May 2017 Business Systems: Compliance Requirements for Large and Small Businesses

2. Introductions and Housekeeping • Maynard Cooper & Gale 2017 Webinar Series • This Month’s Subject: Business Systems: Compliance Requirements for Large and Small Businesses • Guest speaker this week - - Brandon Smith from Anglin Reichmann • Webinar is hosted by ReadyTalk. You can ask questions by typing into the box in the bottom corner of the screen. We will answer in real-time or shortly after the webinar • We will send slides out this week to all registered attendees

3. Audits • DCAA and DCMA have hundreds of audits between them. • Responsibility is divided up between the two agencies although there is overlap. • The government (usually a Contracting Officer) must request the audit from DCAA/DCMA. A contractor cannot request an audit. • DCAA/DCMA has outsourced some of their audits to independent accounting firms in an effort to reduce backlog and become more efficient. • Some agencies will accept reports from independent accounting firms as an alternative to a DCAA audit.

4. Pre-Award Audit – Compliant System • In accordance with GAAP • Proper segregation of Direct and Indirect Cost • Accumulation of Direct Costs by Contract • Logical/Consistent method to allocate Indirect Costs • Accumulation of costs under general ledger control • Timekeeping systems identifies labor by intermediate or final cost • Direct and indirect labor to appropriate cost objective • Routine posting of books • Exclusion of Unallowable Costs • Identification of cost as required by contract • Segregation of preproduction costs from production cost (mfg) • Limitation of Cost or Limitation of Payments information • Progress Payments • Adequate, reliable data to use for pricing follow-on acquisitions • Ability to collect cost for Cost-Type Contracts

5. Pre-Award Audit - Policies • Accounting System Overview • Allocation of Cost • Direct, Indirect and Unallowable Cost Treatment • Description of Indirect Rate Structure • Labor Recording and Timekeeping • Subcontracting Procedures • Accounts Receivable/Billing • Account Payable • General Ledger – Chart of Accounts Structure • Compensation

6. Pre-Award Accounting System Survey • DCAA performed audit – usually as a result of a contract proposal/win • Test your assertions in the accounting system • Ask you to show them the Job Cost Ledger in the accounting system • Ask you to drill down to cost within a particular contract/task • Ask you to show a payroll check for cost in the job ledger • Trace that cost to contract billing • Trace the payroll check hours to the timesheet for that payroll cycle • Ask you to show them a live timesheet and explain how time is entered • Possibly select a random employee and ask you to produce • Timesheet for a specific period • Paycheck associated to the timesheet • Contract Billing associated to a timesheet line item • Ask you about treatment of Subcontractors • Compare the current indirect rates to the proposal rates

7. Traps to Avoid • An agency can reasonably require pre-award audits and even approved accounting systems for cost-type contracts prior to proposal submission. • Leader Communications, Inc., B-413104.9 A-TEK, Inc., B-299557 • An agency can also require third party verification of an accounting system • AttainX, Inc., B-413104 • The PCO has the right to require a pre-award audit to determine responsibility. • Southwestern Bell Telephone Co., B-292476; FAR 9.104-1(e) • BUT, a negative determination of responsibility must be reasonably supported. • McKissack+DelcanJV II, B-401973.2 (agency failed to explained why a JV’s dual overhead rate structure would lead to an inconsistency in cost accounting under CAS 401 or loss of financial control over costs)’ PMO Partnership Joint Venture, B-401973.3

8. Pre-Award Accounting System Survey • What Happens when it’s over? • You should have an exit conference • They may return within the year for a Post-Award Accounting Audit • You will not get a “letter of approval” from DCAA • DCAA issues a report to the ACO

9. Post Award Audit The Post Award Audit tests the same assertions as the Pre-Award Audit but there is more transactional testing. • DCAA will perform the audit. If the last Post Award Audit report is more than 12 months old, a full audit will be performed. If there is a more recent report an abbreviated audit program will be used. • In a Pre-Award Audit, the contractor must demonstrate that the infrastructure is in place to be compliant, in Post Award, those assertions are actually tested. • Transactions will be traced to the source document to test both direct and indirect costs.

10. Timesheet Floor Check - Requirements • All employees must enter time daily • Timesheet approval should be in accordance with the timekeeping policy • Employees should have Work Authorization Form • A copy of the timekeeping policy should be readily accessible

11. Timesheet Floor Check - Procedures • A random employee from a provided roster will be selected for testing • Sample questions that may be asked: • Have you been trained on the company’s timekeeping policy and system? • Were you provided with the nature and scope of the work to be performed? • Did you receive written instructions on labor charging and time allocation across different contracts and tasks? • What do you do if the electronic timekeeping system is unavailable? • What do you do if you are unable to come into work? • Do you know how to correct a timesheet?

12. Timesheet Floor Check • DCAA has procedures for more in-depth analysis and testing. • Additional procedures that may be performed depending on risk assessment: • Review resume/qualifications of the selected employee and verify they are charging to the appropriate level charge codes • Analyze labor cost trends to analyze potential risks or discrepancies • Review profit margins on Time & Material contracts • Scan adjusting journal entries looking for transfers of labor costs Floor Checks may be totally random. DCAA does not have to notify you they are coming.

13. Financial Viability Audit • Performed by both DCAA and DCMA • To determine if a contractor is financially capable of performing on Government contracts • Emphasis on evaluating contractor’s current financial condition and trends, cash flow, and ability obtain funds outside the normal course of operations • May be performed pre-award, post award, or during contract performance • Typically look at last three years of financial data

14. Financial Viability Audit - Ratios • Key ratios used during audit: • Current Ratio – Measures a company’s ability to pay it’s short-term liabilities with short-term assets • Quick Ratio – Measures a company’s ability to pay it’s short-term liabilities using cash or assets easily convertible to cash • Return on Investment (ROI) - This ratio is a measure of economic performance and is used as an indicator of management’s effectiveness, a measure of a company's ability to earn a satisfactory return on investment, and a method of projecting earnings • Debt to Equity – Analyzes the amount of claims of creditors against the claims of owners • Capital Turnover - measures the net liquid assets of the company relative to its total capitalization • Cash Flow to Debt – Indicates the availability of funds for debt servicing • Cash Flow to Sales – Shows the percentage of sales dollars realized as cash • Debt Coverage – Estimates how long it will take to retire all current debt based on current operating cash

15. Financial Viability Audit - Analysis • Trends (Profit/loss; Cash follow from operations, investing, financing; Sales; Working Capital; Long-term liabilities; Net worth) • Review of internal financial controls • Timely payments of payroll tax • Parent company financials and management of subsidiaries • Prior bankruptcies, defaults, liens, covenant violations, etc. • Related party transactions

16. Incurred Cost Submission Audit • Determines if cost charged in the Incurred Cost Submission are allowable, allocable, and reasonable. • Timing - ??? • Getting notification that your Incurred Cost Proposal was deemed adequate is not the same thing as the audit.

17. Incurred Cost Submission Audit • Analytical Procedures • Compare base and pool totals to prior years • Compare base and pool totals to budget • Compare accounts within pools to prior years and budget • Perform trend analysis on labor accounts • Analyze any large variances or new accounts • Review executive comp compared to prior years • Review profit margins on T&M contracts

18. Incurred Cost Audit • Internal Controls • Subcontract management process • Related party transactions • Adherence to budget • Executive compensation • Process for preparing and submitting the ICE • Payment processing

19. Incurred Cost Audit • Procedures • Reconciliation of ICE schedules to books • Labor Testing • Test payroll taxes to evidence of payment • Review AJE’s for labor accounts • Review subcontract and company billed hours on T&M contracts • Trace executive comp costs • Trace Subcontract invoices to claimed costs (Additional testing performed if subs are performing greater than 70% of the work) • Search general ledger for evidence of credits such as discounts, rent income, rebates, refunds, etc. • Transactional testing on indirect accounts • Looking for unallowable costs claimed in allocation pools (bonuses, meals, vehicles, allowances, etc.) • Equity and consistency in allocation bases

20. QUESTIONS?