Is Your Accounting System Adequate and Acceptable?

DoD first published the Business Systems Rule (BSR) as an interim rule in May 2011. The Rule provides for partial withholding of payments on CAS-covered contracts when any one of a contractor’s business systems is determined to have a significant deficiency. Certainly that could be a problem, but the real issue with the BSR came when Procuring Contracting Officers (PCOs) began putting provisions in some solicitations demanding evidence of system approval in order to participate in a competition. Such a solicitation provision effectively locks anyone without a system approval letter out of the procurement process. Contractors frequently ask us what an acceptable accounting system is and how to obtain approval of their system to preclude being “locked out” of those competitions.

What is an acceptable system? An acceptable accounting system is one that meets all of the criteria of the Defense FAR Supplement (DFARS) BSR clause 252.242-7006(c). The objectives of the criteria are to provide reasonable assurance that:

• Applicable laws and regulations are complied with;
• The accounting system and cost data are reliable;
• Risk of misallocations and mischarges are minimized; and
• Contract allocations and charges are consistent with billing procedures.

How does a system get “approved?” Currently, DCAA has sole responsibility for examining contractors’ systems and issuing a report of findings. Each contractor’s cognizant Administrative Contracting Officer (ACO) at the Defense Contract Management Agency (DCMA) is then responsible for making the determination that an individual system is or is not adequate and issuing an approval letter. Many contractors system have never been assessed – especially smaller contractors – and many more have not been reviewed within the recommended three-year interval. DCAA is years behind in performing the examinations required for the ACOs to make those determinations and smaller contractors are “at the end of the line” to get their systems reviewed. Recent proposed changes to the BSR would require larger (CAS-covered) contractors to self-assess their systems and engage an independent CPA firm to audit them at least once every three years. This would certainly clear the backlog for the larger CAS-covered contractors, but it is unclear from the published proposal how smaller contractors systems will be reviewed, if at all.

Some contractors, both large and small, have already taken proactive steps and engaged a CPA firm to audit their systems and issue opinion letters on the adequacy of their systems. Watkins Meegan has performed a number of these system reviews and our clients find that almost all PCOs will accept an opinion letter from an independent audit firm.

If you are seeing solicitation provisions demanding an “approved system” to participate in a procurement opportunity, don’t let an “unassessed” system keep you out of the game. Contact us about an independent accounting system review.

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