Understanding Adequate Accounting Systems and Pre-Award Accounting System Reviews

It is necessary for numerous reasons to have an adequate accounting system. Perhaps the most important one is to be able to successfully qualify and compete for certain Government contracts. Passing a Government Pre-Award Survey of Prospective Contractor Accounting System (Standard Form (SF) 1408)) is helpful. But this doesn’t guarantee that a contractor’s accounting system is adequate for the purposes of being eligible for award of certain contracts. You must ensure that your accounting system is compliant before getting audited.

Here are answers to three key questions contractors ask in relation to adequate accounting systems.

Which businesses are required to have an adequate accounting system?
This depends on the type of contract under which the contractor is performing. According to Federal Acquisition Regulation (FAR) 16.301-3, Cost-Reimbursement Contracts, a cost-reimbursement contract may be used only when the contractor’s accounting system is adequate for properly allocating costs applicable to the contract. Conversely, a firm-fixed-price contract generally does not require an adequate accounting system. This is due to the fact that the contract value is not subject to adjustment, redetermination, or detailed cost accounting on the basis of the contractor’s cost experience in performing the contract.

Who is responsible for determining the adequacy of the accounting system?
Following contract award, a contractor’s accounting systems will be audited by the Defense Contract Audit Agency (DCAA) or an independent public accounting firm. Both can issue an opinion regarding compliance with the criteria of an acceptable accounting system. The Contacting Officer (CO) is responsible for making the final determination on the adequacy of the accounting system based on the findings of the audit report.

Does passing a Pre-Award Survey of Prospective Contractor Accounting System (SF1408) always guarantee an adequate accounting system?
Not necessarily. A Pre-Award Accounting System Survey only requires the contractor to demonstrate its ability to meet the requirements outlined in the SF1408. These include, among other things, having appropriate written policies and procedures, having an adequate timekeeping system, maintaining a proper segregation of accounting system duties and responsibilities, and having the ability to properly accumulate and bill contract costs. The SF1408 is not an accounting system audit, as there is no transactional testing performed, but the SF1408 can be documented on a prospective system not yet in existence. As such, only a Government Post-Award Accounting System Review, conducted in accordance with the 18 different accounting system criteria presented in Defense FAR Supplement (DFARS) Clause 252.242-7006, can verify that a contractor’s accounting system is actually operated in accordance with the policies and procedures that are compliant with applicable guidelines and regulations. The auditing entity (DCAA or independent public accounting firm) will verify this by performing detailed testing of transactions processed by the subject accounting system.

How You Can Use This Information
Contractors should use the 18 DFARS accounting system criteria as a checklist for determining the adequacy of their accounting systems. Contractors should also review and update their accounting policies and procedures, if necessary, to ensure they comply with the DFARS criteria and requirements. Accounting systems must then be operating in accordance with the contractor’s policies and procedures.

CohnReznick has performed many pre- and post-award business system reviews including accounting system reviews. We can conduct an independent accounting system review to help you maximize your eligibility for the award of Government contracts.

What does CohnReznick Think?
CohnReznick appreciates the opportunity to help Government contractors implement and maintain adequate and compliant business systems. Toward that end, we have several resources you should look into:

  • CohnReznick Insights (www.cohnreznick.com/insights): Provides CohnReznick’s latest insights on business trends, regulatory developments, and economic issues. You can subscribe to receive Insights e-newsletters by email.
  • CohnReznick Website (www.cohnreznick.com): In addition to Insights, our website provides extensive information about all aspects of Accounting and Assurance, Tax, and Advisory services.
  • CohnReznick GovCon360 (www.govcon360.com): Keeps you up-to-date on the ever-changing regulatory environment that is government contracting. From reference materials to educational presentations and thought leadership pieces on industry matters, GovCon360 is a valuable resource for the Government contracting professional.

Please contact Kristen Soles, Partner (kristen.soles@cohnreznick.com or 703.847.4411).

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