Recent DCAA Guidance (MRD) Part 1: DCAA Multiple Years Behind on Your Incurred Cost Submissions? There’s New Guidance for That.

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In March 2012, DCAA issued guidance in the form of Memorandums for Regional Directors (MRD). This blog post is the first in a three-part weekly series discussing these MRDs. Check back next week for part two.

It is widely known in the contracting community that the Defense Contract Audit Agency (DCAA) is many years behind in their audits of Incurred Cost Submissions (ICS), especially for small contractors. On March 13, 2012, the DCAA issued Memorandum for Regional Directors (MRD) 12-PPD-006(R) on their new “Audit Guidance on Utilizing Multi-Year Audit Techniques for Incurred Cost Audits.”

The DCAA will be applying multi-year auditing techniques, for between two and five years, at small contractors with an Auditable Dollar Value (ADV) of less than $250 million. Other criteria the DCAA will use when considering whether to use multi-year auditing arewhen:

• There were similar type contracts being performed throughout the audit years,
• There have been no significant changes in the contractor’s business systems and internal control environment, and
• There have been no significant organizational or operational changes.

The DCAA auditor’s risk-based testing approach will allow the auditor to select one of two approaches. “The auditor may select an account in one year for the initial testing of details and then adjust (increase or decrease) the risk level and related testing required for that account in the remaining years.” Conversely, the auditor may include all transactions for one account over multiple years into one “homogeneous population” and test the transactions across all years at once.

When multi-year auditing is employed, provided no significant issues are uncovered, the DCAA auditor will issue one report for all years being audited. However, if any significant issues are noted, the auditor will assess the risk and may decide to split the audit and perform separate audits for each year. If the auditor uncovers a specific issue unique to one particular year the auditor may decide to question the costs in only that year. However, if the issue is systemic and affects multiple years, the auditor may project the questioned costs to the sampling universe.

This guidance is good news for contractors as the DCAA is attempting to work on the ICS audit backlog. While contractors cannot make the DCAA perform their audits any faster, they should be prepared to have multiple years audited. We have noted that small contractors do not always have multiple years ready for audit for a number of reasons, including accounting system changes, accounting personnel changes, etc. However, in preparation for the potential DCAA audit(s), and based on this recent guidance, the audit(s) are coming, and contractors should ensure their accounting data and ICS supporting data is readily accessible.

Please contact Brian Bender at 301.222.8273 or bmbender@aronsonllc.com for questions or assistance with your federal government compliance issues.

In March 2012, DCAA issued guidance in the form of Memorandums for Regional Directors (MRD). This blog post is the first in a three-part weekly series discussing these MRDs. Check back next week for part two.

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