By Peter Collins, President & CEO, A2B Tracking
Welcome to the era of Annual Defense Audits.
At this point, everyone operating in the defense industry should be aware of the Financial Improvement and Audit Readiness (FIAR) Mandate, which is the Department of Defense’s (DOD) established plan for improving asset and inventory accountability.
Last year (2018) marked the first-ever full financial statement audit of the entire Department of Defense. Results from the audit were mixed, but many in the Pentagon have pointed out that simply completing an audit of this magnitude for the first time should in itself be viewed as a success.
One of the clear outcomes from last year’s audit process is that the defense audit as an annual exercise will continue for years to come. Former DOD Comptroller, David Norquist clarified when he said, "It’ll be an annual process, and as I like to say to the workforce, it will go on as long as we both shall live.”
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Steps Toward Audit Confidence
With the 2019 audit already underway, today’s government contractors need to have business systems in place to help them achieve compliance with Defense Contract Audit Agency (DCAA), for financial accounting, and Defense Contract Management Agency (DCMA) audits, for physical assets.
As a government contractor, it’s a critical responsibility to maintain compliance with federal rules and regulations. Unfortunately, this is no small task. There are a myriad of regulations to comprehend and adhere to.
Having a platform in place that can not only make sense of these regulations, but can also provide a structure to help achieve sustained compliance, is essential. Gone are the days where Quickbooks® and Microsoft® Excel are realistic, long-term solutions. Government contractors need robust accounting with an aligned asset management system in order to manage their government projects and achieve sustained audit readiness.
The DCAA performs contract audits for the Department of Defense and many other agencies. The Agency audits contractors to provide definitive recommendations to contracting officers in order to help them better negotiate prices and settle contracts for services and supplies.
Passing a DCAA Audit requires adherence to the Federal Acquisition Regulations (FAR), the Generally Accepted Government Accounting Standards (GAGAS) and, in many cases, the Cost Accounting Standards (CAS), which are meant to create consistency in accounting practices.
Some of the key items that DCAA auditors look for is how the contractor handles different types of accumulated cost. It is vital for government contractors to have an accounting system that can identify and quickly reference indirect versus direct costs, as well as recognize costs that are unallowable.
The DCMA is a DOD agency that works directly with defense contractors to ensure government supplies and services are delivered on time, come in at projected costs, and meet all performance requirements.
When DCMA representatives evaluate government contracts, they are looking to ensure that every asset is uniquely identified, labeled, tracked and reported in accordance with military and government standards. To that end, DCMA has developed a series of policies and procedures that allow auditors to systematically assess compliance under two important policies, MIL-STD 129 (Shipment Identification) and MIL-STD 130 (Asset Identification). Furthermore, passing a DCMA audit requires strict adherence to FAR 52.245-1 for managing government property, Defense Federal Acquisition Regulation Supplement (DFARS) 252.211-7003 for item identification and DFARS 252.211-7007 for reporting of government furnished property.
To put it bluntly, the consequences for non-compliance to either DCAA or DCMA are ugly. Possibly, there would be only a delay in payment. But, it’s also possible for contracts to receive a Corrective Action Request (CAR) that can be time consuming to resolve or put your organization at a disadvantage to winning new business. In a worse case scenario, it’s even possible that civil or criminal penalties may be imposed.
Needless to say, a non-compliance situation would be detrimental to an organization's’ reputation at the very least, which might make it challenging to acquire future contracts with the government.
Taking the Long View
Government contractors trying to navigate this audit readiness obligation need to take the long view. Proactive thinking is the best course of action here, not scrambling at the last minute when the auditors show up. Establishing business systems to help support proactivity, as well as, fostering a cultural awareness inside the organization for audit compliance, are both worthwhile and prudent investments.
Furthermore, leveraging vendors with an experienced track record is worth its weight in gold. Demonstrating your commitment to accountability will put the auditors at ease.
Path to Audit Readiness
Auditors with both DCAA and DCMA are well versed in the effectiveness of Deltek Costpoint with an A2B Tracking integration. Both platforms have supported government contractors for more than 25 years. Deltek Costpoint provides a compliant enterprise resource planning (ERP) accounting solution to manage the full contract lifecycle. A2B Tracking asset management helps government contractors maintain compliance to be DCMA audit ready. Together, the platforms provide visibility with process needs, such as advanced barcode and RFID technology to improve efficiency and accuracy while tracking government property and inventory.
Learn more about both Deltek Costpoint, A2B Tracking and how they can support your audit preparation efforts with the on demand webinar DCAA and DCMA Audit Readiness.
About the Author
Peter Collins has worked within many industries, including the Department of Defense (DOD), on auto identification policy development and implementation. He has played a key role as a consultant to the DOD regarding their effort to adopt the use of IUID technology in 2004. He received the ID Global Leadership Award in 2009 for his role in worldwide adoption of IUID, and is an active participant in IUID industry trade associations.
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