government contracting in 2015: balancing risks to reap...
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Government Contracting in 2015: Balancing Risks to Reap Rewards - Compliance Update
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DCAA Audit Trends and Projections
DCAA Audit Trends
> “FY2011 was a very successful year for DCAA” > “FY2012 was a very successful year for DCAA” > “FY2013 was a very successful year for DCAA” > “We made major strides in tackling the incurred cost backlog
– we completed about 55 percent of the baseline backlog”
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Source: DCAA Annual Reports to Congress
DCAA Audit Trends (cont’d)
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The “highest priority” audits
Source: DCAA Annual Reports to Congress
DCAA Audit Trends (cont’d)
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“Very successful years”
Source: DoDIG Semi-Annual Reports to Congress Appendix D
DCAA Audit Trends (cont’d)
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Source: DCAA Annual Budget Submissions
DCAA Audit Trends (cont’d)
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Source: DCAA Annual Budget Submissions and DoDIG Semi-Annual Reports to Congress Appendix D
DCAA Audit Trends (cont’d)
> ““DCAA significantly increased its incurred cost audits in FY 2012 and FY 2013” (FY13 Report; this sentence precedes the following graph)
8 Source: DCAA FY13 Annual Report to Congress
DCAA Audit Trends (cont’d)
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Incurred Cost Audit Backlog
Fiscal Year FY2011 FY2012 FY2013 Percent ChangeTotal ICPs Pending and Awaiting Adequacy Determination
24,000 26,000 23,000 -4.17%
Dollar Value of ICPs Pending and Awaiting Adequacy Determination (billions)
574$ 710$ 822$ 43.21%
Source: DCAA Annual Reports to Congress
DCAA Audit Trends (cont’d)
> “A key indicator of DCAA’s effectiveness is the increasing ratio of DCAA questioned costs to dollars examined.” (FY12 Report)
> “An indicator of DCAA’s effectiveness in using its risk-based approach is the increasing ratio of DCAA questioned costs to dollars examined.” (FY13 Report)
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Source: DCAA FY13 Annual Report to Congress
DCAA Audit Trends (cont’d)
> Questioned costs as a % of dollars examined has increased, but DCAA’s sustention rate has not.
> Are DCAA’s recent audits getting closed with these sustention rates?
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Source: DoDIG Semi-Annual Reports to Congress, Appendix E
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Recent Government Contract Compliance Updates
Recent Government Contract Compliance Updates
Contractor Business System Oversight: DFARS Proposed Rule -- July 15, 2014 > Stated purpose: “entrust contractors with the capability to demonstrate
compliance… based on contractors’ self-evaluations and audits by independent CPAs.”
> Accounting system, estimating system, and MMAS > Contractors to provide annual assessments regarding compliance with
business system criteria no later than 6 months after contractor’s fiscal year
> Every three years, contractors must have independent audit report of compliance with DFARS system criteria
Final Rule estimated completion was April 2015*
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Recent Government Contract Compliance Updates (cont’d)
Contractor Business System Oversight Continued: Contractors and CPAs weigh in > Contractors: unacceptable that DCAA is still required to meddle with
contractor and independent auditor every step of way – “entrust” is not what rule achieves
> Contractors: shifts cost burden to industry – will have asymmetrical impact
> Contractors: generally like the idea of more timely audits and working with independent CPAs
> CPAs: DFARS criteria too subjective to perform audit in accordance w/ Prof. Standards
> CPAs: consequences unclear when CPA firms and DCAA disagree regarding deficiencies
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Recent Government Contract Compliance Updates (cont’d)
FPRP Adequacy Checklist DFARS Final Rule > DoD issued a final rule amending the DFARS to provide guidance to
contractors for the submittal of forward pricing rate proposals (FPRP). > Contracting officer will request that the contractor complete the
Contractor Forward Pricing Rate Proposal Adequacy Checklist at Table 215.403-1, and submit it with the FPRP.
> Proposals submitted at least 90 days prior to proposed effective date > Checklist includes three elements:
– Submission Item – Proposal Page No. (if applicable) – Explanation if not provided
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Recent Government Contract Compliance Updates (cont’d)
“Commercial Items of a Type” Determinations DoD Reviewing Acquisition Procedures > DoD is reviewing acquisition procedures for “commercial items of a
type.” These are privately-developed items sold exclusively or nearly exclusively to federal customers.
> DoD believes that some contractors are overcharging federal customers for commercial items and are unable to substantiate their prices based on commercial market sales data.
> If contractors have market based prices that can be substantiated through sales in the commercial market place, then the Government pays what the market pays.
> DCMA is hiring and training full-time commercial pricing experts to assist contracting officers in making determinations of whether an item meets the definition of commercial item.
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Recent Government Contract Compliance Updates (cont’d)
New Executive Compensation Regulations Blended Rate Calculations > Director, Defense Pricing has deemed contractor’s use of the “blended
rate” approach a practical and cost efficient way to address the FAR Council’s new interim rule on allowable annual compensation costs.
> The blended rate methodology will be calculated on a weighted average composite cap amount based on a contractor’s contract volume prior to and after June 24, 2014 – Contractors may elect to use this approach or another compliant approach
(e.g., apply the $487k cap to all contracts) – This approved methodology only applies to DoD contracts and requires an
advance agreement.
> DCAA, however, deems blended rates unacceptable (DCAA CAM 6-414.9), making the advanced agreement an important aspect of this methodology. – It is unclear if DCAA will update their guidance subsequent to this memo.
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Recent Government Contract Compliance Updates (cont’d)
Contractor Internal Audit Reports GAO Audits DCAA Requests, Use, & Safeguarding of IA Reports > 2013 NDAA required DCAA to revise its audit guidance on:
– Documenting requests for contractors’ internal audit (IA) reports and; – Safeguarding the IA reports against unauthorized use.
> According to GAO, DCAA has not revised its guidance sufficiently to define authorized use or prescribe adequate safeguards.
> GAO identified that DCAA used disparate standards and procedures for reporting to DCAA headquarters the number of requests and their disposition.
> GAO recommends that DCAA provide: – Specific details that should be in requests for IA reports – Guidelines on documenting how IA reports are specifically tied to audit work – Definition of authorized use – Consistent guidelines and controls for reporting information to headquarters
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Recent Government Contract Compliance Updates (cont’d)
DoD Cost-Reimbursements Acquisitions DoD IG Audits DoD Implementation of Revised FAR Rules > Inspector General (IG) issued an audit report on DoD’s compliance
with revised rules (issued in 2012) for issuing and managing cost-reimbursement contracts. Rules cover five areas: – Approval level: at least one level above CO – Justification: justified use of cost-reimbursement contract – Transition Strategy: documentation of potential of cost-reimbursement
contracts to transition to firm-fixed-price contracts – Adequate Resources: resources available to management the contract – Adequate Accounting System: determination of contractor’s system
> IG found that DoD contracting personnel did not consistently implement the revised rules for 68% of cost-reimbursement acquisitions reviewed.
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Recent Government Contract Compliance Updates (cont’d)
DoD IG Audits Hotline Complaint of DCAA DCAA Did Not Follow GAGAS or Agency Policy > DCAA questions $6.6M in claimed subcontractor costs > Auditor did not obtain sufficient evidence to conclude that subcontract
costs were unsupported > Field audit office applied an arbitrary and unsupported 20% decrement
factor to calculate questioned subcontract costs > Use of decrement inconsistent with DCAA policy
– DoD IG noted that other DCAA auditors could be using the decrement inappropriately at other field audit offices
Additional Errors Noted on DCAA Form-1 > Errors resulted in DCAA disallowing incorrect amounts on contractor
billings – Could have led the contracting officer to make an inappropriate final
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Tom Tagle Partner Baker Tilly Government Contractor Advisory Services (703) 923-8312 [email protected]
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Questions?