Preaward Surveys and DCAA

[SSKO]

We are anticipating awarding an $11M single award CPFF contract solicited as a small business set aside.

Our solicitation encouraged the potential small business offerors who did not have a determination of adequacy on their accounting system to notify us so we could initiate a Preaward Survey.

When requesting a Preaward Survey for one small business, I was informed that DCAA has a new "policy" and now will only conduct a Preaward Survey/Accounting System review AFTER we have selected the contractor for award due to their workload and staffing shortages. The DCMA Preaward Survey Rep, told me this policy was pervasive throughout DCAA regional offices and the audits have beent aking up to six months.

I'm searching for an alternative method to determine that the contractor’s accounting system is acceptable for accumulating costs under a cost reimbursable contract. I understand the contracting officer has significant discretion when determining contractor responsibility. However, without a review of the accounting system by either a private accounting firm or DCAA that determination would be very difficult.

[formerfed]

Many agencies are using private accounting sources for this exact purpose. They are available from GSA Schedule contracts. Also there are numerous veteran owned firms as well as 8(a)s so you can get started very quickly.

[Retreadfed]

SSKO, if you are in DoD, look at DODI 7600.2 before you start the process for obtaining audit support by contract.

[Guest Vern Edwards]

Is there any reason why an agency cannot require the contractor to provide a letter from a CPA stating whether the contractor's system is adequate? Why should the government pay for that itself? The CO could put the requirement in the RFP. If the contractor wants the job, make them pay for it. If the accountant is a Certified Public Accountant, why can't we accept his or her letter?

[Heretalearn]

Is there any reason why an agency cannot require the contractor to provide a letter from a CPA stating whether the contractor's system is adequate? Why should the government pay for that itself? The CO could put the requirement in the RFP. If the contractor wants the job, make them pay for it. If the accountant is a Certified Public Accountant, why can't we accept his or her letter?

Why not? CPA firms do opinion letters now. Some parameters might need finessing, but I think you just invented a specialty.

[Retreadfed]

Vern, not all CPAs are familiar with what it takes to have an accounting system that is adequate for the contract tyhpe under consideration. They may know how to do tax returns and not much else. Therefore, if the government is going to rely on private CPAs to attest to the adequacy of a contractor's accountng system, the agency better be sure that the CPA is qualified and experienced in the relm of govenfrment contracts. The Federal Highway Administration has had some bad experiences with private CPAs chosen by a contractor not being qualified to do the work because of their unfamiliarity with government contracting rules.

[Guest Vern Edwards]

Vern, not all CPAs are familiar with what it takes to have an accounting system that is adequate for the contract tyhpe under consideration.

Really? No [bleep]? I'm stunned. I had no idea. Gee, does that mean that not all doctors can do heart surgery? What's next, not all New Yorkers are Yankee fans? Not all birds are pigeons? No oceans in Kansas? No snakes in ireland? DEAR GOD!

How did you ever find that out? Did it take you long?

[joel hoffman]

Is there any reason why an agency cannot require the contractor to provide a letter from a CPA stating whether the contractor's system is adequate? ...If the accountant is a Certified Public Accountant, why can't we accept his or her letter?

Yes, see posts #6 and #7 abnove for a reason why one cannot just simply rely on a letter from a CPA stating whether the contractor's system is adequate. The CPA would have to show competency in that particular area.

[formerfed]

As a CO, I would want something more solid that a letter from some unknown CPA the offeror selected.

I just saw Joel's post and add that integrity with verifiable past performance is also important. I once looked over my daughter's income tax return prepared by a CPA. He really stretched her deductions saying "she's in sales and the IRS won't question increasing her milage and business expenses, and not to worry because he knows what amounts trigger their review." I wouldn't want this CPA, which is hired by the offeror, to critique the offeror's accounting system.

Even though the government might have to pay, I think the government selecting the accounting firm is important. Besides there's nothing wrong about the government paying - agencies must pay for DCAA services.

[SSKO]

Everyone,

Thank you for all your input. I just read that more agencies are moving towards private firms to conduct the compliance reviews. The expansion into the private sector has stimulated by legislation requiring that organizations pay external consultants to perform compliance audits to be submitted to the government. Pro-the government can select the auditing firm and set the paramenters and ensure they have the familiarity with DCAA's compliance determination. Negative-who is going to pay the bill? The customer? Why would they if there are other offerors who already have a compliant system?

I'm not familar as to how the agency pays DCAA but government to government agency and government to private agency requires different methods. I would assume we would have to have a contractual agreement with the auditing firm.

Past Performance is a very good idea. I can also check in PPIRS. I'm rewriting section L and treading new ground.................

[Guest Vern Edwards]

In 1975, GAO recommended that only CPAs should be hired to make audits of federally chartered, financed, or regulated private organizations. It wrote a letter to Senator Abraham Ribicoff to explain why it thought it was important for CPAs to do that work. At the end of its letter it said:

PUBLIC ACCOUNTANTS WHO DO NOT MEET THE QUALIFICATIONS WE RECOMMEND MAY DO MANY OTHER TYPES OF GOVERNMENTAL ACCOUNTING WORK, INCLUDING, BUT NOT LIMITED TO, AUDITS OF EFFICIENCY AND ECONOMY OF OPERATIONS, AUDITS OF EFFECTIVENESS, AND ACCOUNTING SYSTEMS DESIGN WORK.

B-148144, May 28, 1975. Emphasis added. Capitalization in original.

So GAO thought that non-CPAs could design accounting systems.

In the Defense Contract Audit Agency Manual (DCAAM), section 5-202, DCAA provides its auditors instructions for performing pre-award survey audits of contractor's accounting systems and says the following:

The audit scope should be limited to obtaining an understanding of the design of the prospective accounting system so as to appropriately complete Stan­dard Form 1408, "Preaward Survey of Prospective Contractor Accounting System" (see FAR 53.301-1408) and those procedures essential to reach an informed opinion on wheth­ er or not the design of the prospective contractor’s accounting system is acceptable for accumulating costs under a Government contract. It is not necessary to conduct an in- depth evaluation of the overall accounting system (see 9-302).

Emphasis added. In short, review of a contractor's accounting system to determine if it is adequate to accumulate costs and determine which are "applicable to the contract," which is all that FAR 16.301-3(a)(3) requires, is not rocket science. It is not review of the adequacy of a CAS disclosure statement. A CO could quote the DCAAM instructions in the RFP or refer the contractor to the DCAAM and instruct them to make sure that the CPA states that the system is adequate to meet DCAA's standards. Moreover, we are not talking about the accounting systems of major defense contractors working major system program contracts, but of medium to small companies, probably working service contracts. No damned big deal. A letter signed by a certified public accountant would be "solid" enough for me.

I did this more than 35 years ago, and there is at least one GAO decision from 1990 where an agency did it, a small business protested, and the GAO said that what the CO asked was reasonable. See Harry G. Kirschenmann, Comp. Gen. Dec. B-239114, 90-2 CPD para. 63.

No one reading some of the comments here should wonder why or be surprised that we can't get innovation and streamlining in the acquisition system. It would be impossible to overstate the backwardness, excessive cautiousness, and lack of ingenuity and creativity of some members of the contracting "profession".

[Heretalearn]

Yes, see posts #6 and #7 abnove for a reason why one cannot just simply rely on a letter from a CPA stating whether the contractor's system is adequate.

Not post #6. I'm all for it. When I said, "some parameters might need finessing," I had nothing more in mind than that there might be a detail here or there to iron out. When I said Mr. Edwards invented a specialty, I meant that CPA's would jump at the work. I don't think it would be excessively expensive if a "pass" would last awhile, or until an accounting system was significantly altered. I don't know that I'd want to pay for an entire review for every bid requiring a determination though. Why overthink something that makes sense?

[formerfed]

I just checked. Last year DCAA charged $113.84 per hour to agencies. So it wouldn't cost that much more, if any, to have a CPA contractor to perform the audit.

[Guest Vern Edwards]

Actually, I don't think most CPAs would jump at the work. It would be too simple and not yield enough billing hours.

As for trusting "some unknown CPA" here is what GAO told Senator Ribicoff:

WE BELIEVE ALSO THAT, WHEN THE GOVERNMENT ENGAGES PUBLIC ACCOUNTANTS, IT NEEDS THE BEST QUALIFIED ONES IT CAN GET. IT IS CLEARLY FAR LESS COSTLY TO THE FEDERAL GOVERNMENT TO RELY ON THE STATE-SPONSORED CPA EXAMINATION AS A MEANS OF TESTING COMPETENCE TO GIVE OPINIONS ON FINANCIAL STATEMENTS THAN IT WOULD BE FOR US OR FOR ANY OTHER FEDERAL AGENCY TO ADMINISTER A SEPARATE TEST. NO OTHER EXISTING TEST SEEMS AS WELL SUITED TO THIS PURPOSE AS THE CPA EXAMINATION.

Keep in mind that GAO thought that auditing financial statements was more demanding work than designing accounting systems.

And one more thought: It is a lot harder to become a CPA than to become a contracting officer.

[Retreadfed]

No doubt there are some CPAs who could do this work, but there are risks in allowing contractors to select the CPA. For example, see the DoT IG report no. ZA- 2009-033 dated Feb. 5, 2009. While this report looked at incurred cost audits the following quotes illustrate potential problems with relying on CPAs selected by contractors:

"the CPA firms missed significant unallowable costs that should have been detected. For example, our review at one D&E firm found more than $950,000 of unallowable costs including a political contribution, alcohol, and spa resort charges. These costs were not questioned by the CPA firm because it limited its review only to costs the D&E firm identified and removed from the indirect cost rate claim as unallowable."

"an audit supervisor at one state audit office commented, "We believe that getting reliable audits from private CPA firms on a consistent basis is an unrealistic expectation." The state auditor further added, "Because the consulting firm is engaging the CPA and paying the bill, most CPA firms will exploit the lack of well defined expectations to the benefit of the consulting firm rather than the government."

For issues that can arise in regard to using CPAs in the pre-award process see the protest decision regarding PMO-JV at http://www.gao.gov/assets/390/387823.pdf. However, in PMO, it appears the agency was clueless also.

[Guest Vern Edwards]

There is little risk in allowing the contractor to choose the CPA. Make a rule that the CPA cannot be an employee of the contractor. Beyond that, the certified in the CPA is sufficient. The reason for having certified public accountants is to protect investors in publicly traded companies, which is a bigger deal that determining if an accounting system can identify and accumulate costs. While there are always liars and cheats, even among contracting officers, there is no more risk to trusting a nonemployee CPA chosen by the contractor than there is in trusting a CO who works for the agency with the need. Remember, all the CPA would be doing is saying that the contractor's accounting system can identify and accumulate costs. How many CPAs would risk their certification to do that falsely?

As for consistently getting reliable audits from CPAs, you can't consistently get reliable audits from DCAA. In any case, I'm not talking about using contractor-selected private CPAs for incurred cost audits.

And I could find no reference to certified public account or CPA in the GAO decision cited by Retread. Did I miss it?

Naysayers!

[Guest Vern Edwards]

I just checked. Last year DCAA charged $113.84 per hour to agencies. So it wouldn't cost that much more, if any, to have a CPA contractor to perform the audit.

It shouldn't cost anything. My idea is to have offerors pay CPAs to check their systems. Corporations pay the CPAs who check the financial statements they send to the Securities and Exchange Commission. Why shouldn't companies that want government contracts pay to have the adequacy of their accounting systems checked? My idea wouldn't cost anything, not directly. It would save money. Moreover, if the CPA finds one or more problems the offeror can have the CPA fix them.

[formerfed]

I understood your idea and saw that companies pay for their own review. Actually the more I thought about it, the more I like it. Like you said it's just a statement on the adequacy of the accounting system.

[Guest Vern Edwards]

The fact is that requiring a CPA is probably overkill. (Are all DCAA auditors CPAs?) But I knew that I would get a lot of flack from naysayers if I didn't require some kind of certification. Government folk love credentials.

[here_2_help]

In reviewing this thread, I don't see any discussion about what happens if an independent reviewer (whether or not a CPA) concludes the contrator's accounting system is adequate for cost-reimbursement contracting, but that a subsequent DCAA post-award review concludes it is not adequate. Or if an IG or LEO investigation concludes it is inadequate.

Let me tell you, accounting firms are concerned about liability exposure. Very concerned. I can almost guarantee that the contract they sign will contain as many weasel words as their high-priced attorneys can come up with, all designed to "protect the firm". Thus, the value of the independent review will be diminished because the reviewer won't accept accountability for the quality of the review.

And let's talk about cost. If the accounting firm does sign a contract that creates some sort of accountability for the quality fo the review, the firm is going to price that risk into the work. Moreover, while DCAA may charge $114/hour for its work, a decent CPA firm is going to have a tiered pricing structure that runs up to $500 - $600/hour for a partner's time. Sure, the firm will have people at $125/hour or thereabouts, but those will be the most junior (non-CPA) folks who are right out of school. (With obvious implications for the resulting audit quality.)

It sounds nice to have a non-DCAA "magic bullet" to solve the issues created by the confluence of FAR 16.301-3 and DCAA's productivity problems. I caution those advocating such a solution to think carefully about the implications.

[Reciffo Laredef]

In reviewing this thread, I don't see any discussion about what happens if an independent reviewer (whether or not a CPA) concludes the contrator's accounting system is adequate for cost-reimbursement contracting, but that a subsequent DCAA post-award review concludes it is not adequate. Or if an IG or LEO investigation concludes it is inadequate.

Whether by DCAA, CPA, or even an MFA, it's a weak CYA anyway. No doubt the contractor will work the cost of the review into his pricing/overhead. But that's no different than how they recoup the costs of complying with any other government requirement. The offeror likely is already paying for the same or similar services for which the accounting firm has already charged it. Given the time value of money and the paucity of other options for obtaining quality reviews, however, it may be less expensive to require the offerors to provide their own certifications. Require certain credentials if it's important and make them apply the same standards as a DCAA audit or whatever level of comfort the Contracting Officer thinks the situation warrants. The resultant review may be better or it might be worse than what DCAA would have provided. If it turns out to have been bad, the government can invoke its remedies and the contractor can take whatever action it deems appropriate against its accounting firm.

Nevertheless, Contracting Officers should be more than capable of managing this low level of risk.

[Whynot]

Commercial firms that receive certain ARRA Grants are required to have progam specific audits performed by independent auditors. These audits follow established audit programs and guidelines.

http://www.whitehouse.gov/sites/default/files/omb/assets/a133/a133_revised_2007.pdf

Subpart 235 of OMB Circular A-133 sets forth the requirements specific to commercial organizations.

It works for Grants.

[Guest Vern Edwards]

What risk? Adequacy of the accounting system is a matter of responsibility under FAR Subpart 9.1. So, what if the CO decides that the firm is responsible based on a CPA's letter and then DCAA later decides that the system is not? The consequence is that the parties may have some issues of cost allowability, most likely with respect to indirect costs. That's it. A decent CO will ask DCAA for a list of the deficiencies and then tell the contractor to fix them within a certain period of time. Say, 30 days. Until then the CO/DCAA will disallow some costs, not all. The contractor will have to have to hire someone to take care of that to the satisfaction of DCAA and the CO. Presumably, hopefully, the issues can be resolved promptly and the contractor will recover its costs.

What about liability of the CPA? That's between the CPA and the contractor and their lawyers. I don't see the liability being very great. The CPA will not be liable to the government.

What about the cost to the contractor? If the contract is big enough and lucrative enough, then a prospective contractor will pay the cost. If not, then not.

When should the government do this? Do it when DCAA or a civilian agency audit office is not available to make a prompt determination of adequacy. If DCAA is available, then the CO should use it. The problem is much more complex if the objective is to determine whether a system is CAS compliant. That is not what FAR 16.301-3 is about. I would not use the private CPA approach to that end.

This is something that I have done on a few occasions for medium to small C-R contracts and it posed no problems whatsoever. The key is for the CO to understand what is required in determining whether an accounting system is good enough to identify and allocate costs associated with a government contract. There are few grounds for serious concern on the part of the government. I cannot speak to the fears of CPA firms, but they do all kinds of work and I don't see them being very fearful of this.

[Reciffo Laredef]

What risk? .... Presumably, hopefully, the issues can be resolved promptly and the contractor will recover its costs.

Yes, that risk. Because our presumptions always come to fruition, because hope springs eternal, and because nothing ever goes awry, would it be better to say, "Contracting Officers should be more than capable of managing this low, low, low, low, low, almost non-existent, level of risk"? Ultimately, I agree that it should not become an issue.

[Guest Vern Edwards]

It's not much of a risk to the government. If the contractor cannot prove the allowability of its costs because its accounting system is inadequate for that purpose the CO can disallow the questionable costs as unallowable. The burden is on the contractor to prove the allowability of its costs, so the main burden of risk due to an inadequate accounting system is on the contractor.