Changing Environment: Revised DCAA Audit Guidance is Another Concern for Government Contractors

Mark Roberts is a partner with Argy, Wiltse & Robinson, P.C. (Argy), a full-service, independent public accounting firm.  He has over 25 years of experience in government contracts having worked in private industry, public accounting and at a law firm serving as a consultant and litigation specialist. 

We continue to see a fundamental shift in the DCAA’s approach to contract audits, a shift that is making it increasingly more difficult to do business with the DCAA. In July 2008, GAO issued a report criticizing the DCAA for its failure to properly follow Generally Accepted Government Auditing Standards.  This report and subsequent guidance has had an adverse effect on many contractors’ relationships with the DCAA. Many contractors report that the DCAA is less willing to work closely with them to resolve issues fearing it may violate the DCAA’s need for independence.  In the wake of Gov 2.0 and the Government’s initiative to promote transparency concerning federal spending, it is no wonder that the DCAA is taking a strict approach to conducting contractor audits.

In December 2008, the DCAA issued revised audit guidance on “Denial of Access to Records Due to Contractor Delays”. The prior audit guidance stated that supporting information should be provided to the auditors within a reasonable period of time, but did not include guidance on expected or required timeframes for response. The revised guidance defines a reasonable time period and requires auditors to take swift and punitive action (i.e., subpoenas, suspension of costs) if contractors fail to provide information in a timely manner. The revised guidance also makes clear that the DCAA strongly believes that access to records includes access to people.

In reaction to the revised guidance, many contractors are moving to more formal and structured policies and procedures around DCAA requests for information. Many contractors are also implementing automated tracking systems to document the requests and responses for information. Some contractors are also using shared access Web sites to better control and manage the process.

To summarize the revised guidance:

• Supporting documentation should be readily available and should be provided immediately on request unless there are extenuating circumstances.
• If there are extenuating circumstances, the auditor should allow the contractor additional time and agree on a due date.
• If the due date is missed, the auditor is to prepare a formal written request to senior management within five days of the missed due date. Senior management is defined as the CFO or VP within the company.
• The formal request should state that the information is required by a specific date, but that date should not exceed one week.
• If the information is not provided within one week, the auditor must notify the contractor that a denial of access to records situation exists and it is being reported to the appropriate government personnel, including ACO.
• If those efforts by the auditor and ACO fail, the DCAA Regional Director should consider issuing a subpoena for the records.
• The DCAA should consider issuing a DCAA Form 1 and suspending unsupported costs on cost reimbursement contracts.
• The DCAA should consider whether an internal control deficiency exists.
• Even if the contractor agrees to disallow questioned costs based on a lack of adequate support, the auditor should pursue access to the records and report the contractor’s denial of access.
• Access to records includes access to Company personnel.
• Contractor’s use of liaisons should not delay or inhibit auditor’s access to personnel.
• Generally, auditors should obtain support directly from the person responsible for the information. 

While the DCAA considers this revised guidance “clarifying” guidance, many in the industry disagree and view this as a fundamental change, especially with respect to access to people. Compliance officers from several industry associations are already reporting that DCAA auditors are demanding direct access to employees in conducting their audits. It appears that the DCAA is quickly moving beyond the contractor’s liaison personnel.

Interestingly, several attorneys we’ve consulted agree that the DCAA should only has access to Company personnel in very limited circumstances and those situations are normally around time reporting and labor classification. According to these attorneys, the DCAA should not expect unfettered access to contractor personnel.

Typically contractor liaison personnel play a critical role in ensuring that the DCAA is getting current, accurate and complete information in conducting their audits. The liaison understands the applicable rules and regulations and is critical to managing the process for the contractor. By involving less experienced personnel in the audit process, it becomes highly likely that the DCAA will receive information that is not always accurate and that misunderstandings may occur.

Staff may offer inaccurate information while trying to answer questions when he or she does not possess first hand knowledge. When the DCAA discovers that the information is incorrect, the DCAA may increase its audit scrutiny. Another concern is that staff are not always required to talk to the DCAA and may refuse. How the DCAA will react to such a refusal is unclear. If a company decides to allow unfettered access to staff, it may want to consider having a compliance representative present for each interview.

As discussed above, many contractors now have to invest additional resources in their DCAA audit support processes due to these changes. Many are revising policies and procedures as well as, implementing new systems to better track and manage the process.

H1N1 Flu’s Potential Impact on Government Contactors’ Commercial Insurance Programs

Tim Hutton is the Vice President of Sales for USI Insurance Services LLC. He is a frequent commentator on insurance issues for government contractors.

The anticipated outbreak of the H1N1 flu has certainly raised personal concerns for many people.  However, Government Contractors must also be concerned and prepared for the flu’s potential impact on their businesses and, working with their agent/broker, must examine the coverage that may or may not exist in their commercial insurance programs.

Since a true “outbreak” would be a first time event, it makes the various coverage scenarios difficult to predict as there is no existing case law surrounding such an event.  An “outbreak” of the H1N1 flu could have an impact on any or all of the commercial insurance policies such as these:

• Workers’ Compensation: A “disease” acquired as a result of one’s work is generally covered under most WC policies, but, how would an employee prove they contracted the flu at work/as a result of their work?
• Business Interruption: Business interruption coverage protects a business from losses due to unavoidable interruptions in their business operations, however, this is a property policy and the required coverage ‘trigger’ is physical damage.   Since an outbreak of flu would not be considered “physical damage” coverage may not apply.
• General Liability: This policy includes coverage for third party claims for bodily injury (such as a ‘slip and fall’ injury).  However, the flu may not meet the GL policy’s definition of ‘bodily injury” and the GL policy may include exclusions that limit or deny coverage for bodily injury related to infectious disease and/or “organic pathogens”.

To respond to the potential gaps in coverage, some insurance carriers are offering new policies providing extra expense coverage for a suspension of operations by a public health official.  Since these policies are new, careful attention must be paid to the terms and limitations contained therein.  (NOTE: These policies are generally written on a ‘non-admitted’ basis, have limited coverage per location, have strict exclusions, and can be very expensive.)

Given the exposures outlined above, Government Contractors should initiate a careful review of their current commercial insurance program with a qualified insurance agent/broker.

The following information is from the CDC’s website http://www.cdc.gov/h1n1flu/business/guidance/: Actions Employers Should Take Now:

• Review or establish a flexible influenza pandemic plan and involve your employees in developing and reviewing your plan;
• Conduct a focused discussion or exercise using your plan, to find out ahead of time whether the plan has gaps or problems that need to be corrected before flu season;
• Have an understanding of your organization’s normal seasonal absenteeism rates and know how to monitor your personnel for any unusual increases in absenteeism through the fall and winter.
• Engage state and local health department to confirm channels of communication and methods for dissemination of local outbreak information;
• Allow sick workers to stay home without fear of losing their jobs;
• Develop other flexible leave policies to allow workers to stay home to care for sick family members or for children if schools dismiss students or child care programs close;
• Share your influenza pandemic plan with employees and explain what human resources policies, workplace and leave flexibilities, and pay and benefits will be available to them;
• Share best practices with other businesses in your communities (especially those in your supply chain), chambers of commerce, and associations to improve community response efforts; and
• Add a “widget” or “button” to your company Web page or employee Web sites so employees can access the latest information on influenza: www.cdc.gov/widgets/ and www.cdc.gov/SocialMedia/Campaigns/H1N1/buttons.html

Contractors lament death of partnering

Nick Wakeman, editor in chief of Washington Technology, talks about the challenges government contractors are facing these days with the DCAA. “While it has been several years in the making, government contractors say the ability to form partnerships with their customers has hit a new low.” Click here for the rest of the article.

For a PVBS white paper on how to best work with the DCAA, click here.

EVM Solution with DecisionEdge Software

We are very excited about our partnership with DecisionEdge Software to bring government contractors a comprehensive but easy-to-use earned value management (EVM) solution. Government contractors need to have an EVM solution in place in order to comply with ANSI standard 748,  and most are looking for the easiest, least intrusive solution to meet compliance. We have found that the DecisionEdge Earned Value Manager is an excellent complement to the Microsoft Dynamics NAV for Government Contractors financial management solution and gives our clients what they need to comply.

PVBS and DecisionEdge will be demonstrating the complete solution at a lunch seminar on September 10 at the Microsoft Technology Innovation Center in Reston.  This event will be a great way for government contractors to see the breadth of solutions available for them to meet DCAA and EVM compliance. Click here to register for the seminar.

The DecisionEdge EVM solution produces reports and graphics that help government contractors mine rich data to make sound business decisions about their contracts.  And it integrates with Microsoft Office Project and Microsoft Dynamics NAV for Government Contractors to generate the comprehensive reports that the government requires.

To learn more about EVM, send Bernard Mustafa an email and he’ll send you a copy of the NDIA’s Earned Value Management Systems Intent Guide which discusses EVM in detail.