Audit Obligations for Defense Contractors

Posted by Guest Author on June 19, 2020

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By Peter Collins, CEO of A2B Tracking Solutions

The last two years marked the first full financial statement audits of the Department of Defense (DoD). These were massive audits during 2018 and 2019 that covered more than $2.7 trillion in U.S. military assets. Each year, the audits were carried out by more than 1,200 auditors during 900+ site visits across the entire DoD.

The DoD will not be stopping there, more audits are on the way. The one message that comes through loud and clear is that defense audits should be recognized as an annual exercise for the entire defense community.

Today’s defense contractors need to have business systems in place to help them achieve compliance for the Defense Contract Audit Agency (DCAA), for financial accounting, and the Defense Contract Management Agency (DCMA) audits, for physical assets.

Financial Improvement and Audit Readiness (FIAR)

The topic of audit readiness begins with the directorate that has been put forth by the Department of Defense Comptroller’s Office known as the FIAR Directorate.

The goal of this FIAR plan is to focus on the financial management of the DoD by improving internal controls, resolving material weaknesses and advancing the Department’s fiscal stewardship. This audit readiness focus spans across all the branches of the DoD, as well as to the contractor community that supports them.

Audit readiness also includes DoD property, plant equipment, operating material, and supplies. It puts the highest priority on the accounting controls and accountability of all mission-critical assets. Which means that there needs to be accountability throughout the asset’s lifecycle – from cradle to grave.

DCAA Audit Obligations

The DCAA provides the DoD with audit and other financial advisory services to support government contract administration. In regards to the FIAR requirement for financial accountability, the DCAA has two main areas of focus:

  • Where is the asset specifically located?
  • How much did the government pay for the asset?

In regards to the financial accountability of a government contract, reporting standards known as cost accounting standards (CAS) have been established by the government. There are 19 CAS standards outlined in the cost accounting manual (CAM). The most important of these CAS standards in regards to the FIAR obligation are:

  • 8-401: Consistency in Estimating, Accumulating and Reporting Costs
  • 8-405: Accounting for Unallowable Costs
  • 8-406: Cost Accounting Period
  • 8-410: Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives
  • 8-411: Accounting for Acquisition Costs of Material
  • 8-418: Allocation of Direct and Indirect Costs.

These CAS standards are critical for a DCAA audit. Auditors will want to verify the financial costs of any mission critical assets that are in a contractor’s possession. They are also looking to determine that the organization has business systems in place to track and manage this financial responsibility.

Deltek Costpoint is uniquely positioned to support this DCAA audit readiness obligation. Costpoint provides unparalleled visibility and financial control for better management of project costs. The purpose of Costpoint is to aid organizations with maintaining CAS compliance, as well as Federal Acquisition Regulation (FAR), Defense Federal Acquisition Regulation Supplement (DFARS), and Sarbanes-Oxley Act (SOX) compliance, plus other accounting obligations in order to pass DCAA audits. Virtually every transaction is recorded to an element of a contract or a project work breakdown structure. This means that financial traceability to the final cost objective is assured.

DCMA Audit Obligations

To compliment the financial accountability obligations, there are also property and asset management specific obligations that flow from this FIAR Directorate. These physical asset management audit obligations typically fall under the domain of the DCMA.

The Pentagon has provided guidance on the FIAR obligation to prioritize all mission-critical assets, including:

  • Military equipment – ships, aircraft and transportation
  • Inventory – rations and supplies
  • Operating materials and supplies – ammunition and missiles
  • General equipment– material handling, training and testing equipment.

In order to meet the FIAR obligation for any of these mission-critical assets, there is specific data that needs to be reported to the government. In particular, the financial asset management information required includes:

  • Item Unique Identifier (IUID)
  • Category/Type
  • Location
  • Status
  • Description
  • Custody
  • Controlling/Financial Reporting Entity.

This all returns to the FIAR initiative objective of enabling the DoD with an Accountable Property System of Record. The goal here is to maintain accountability of this mission-critical inventory and verify that the assets actually exist and that the records are complete.

A2B Tracking’s platform, UC! Web, a government property management business system, is able to integrate with Costpoint to provide enhanced asset management functionality to support these DCMA obligations. By taking advantage of automated reporting to government systems (e.g., PIEE, WAWF, IUID Registry, PCARSS, GFP Module), as well as advanced barcode and modern RFID technology, Costpoint users are able to save time and improve the accuracy of government property and inventory.

An Unbeatable Audit Readiness Solution

Costpoint ensures comprehensive DCAA compliance to help defense contractors fulfill their financial responsibilities. UC! Web provides total compliance to DCMA obligations with enhanced asset visibility, robust audit trails and automated data exchange to PIEE, WAWF, GFP Module, IUID Registry and PCARSS to easily report to government systems.

The combination of Costpoint and UC! Web provides defense contractors an unbeatable audit readiness solution to achieve and maintain compliance with both DCAA and DCMA regulations. Learn more about how Costpoint and UC! Web can support audit readiness initiatives, information presented during a recent webinar with Deltek’s Costpoint Lead Solution Engineer Kim Meagher and Peter Collins, CEO and President of A2B Tracking Solutions. Want more? This snippet outlines additional DCAA and DCMA Audit obligations for defense contractors.

Audit Obligations for Defense Contractors Screenshot

About the Author

Peter Collins is the CEO of A2B Tracking Solutions and 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 item unique identification (IDIU) 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.