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San Diego ChaptersPresentDCAA Audit R4 —Rights to Records,Requirements & RemediesA Seminar with Panel Discussion andAudience ParticipationFebruary 18, 2009

This Morning’s Agenda 8:30 Introduction8:45 Rights to Records9:55 Break10:05 Requirements & Remedies11:30 Wrap up Recognition of panelistsEvaluation formsUpcoming eventsRecognitions2/18/092

Introductions Maurice Caskey, Moderator E-mail: scracer@flash.net2/18/093

Industry Panel Member Sloane Rosenbaum, Contracts &Accounting, AUSGAR Technologies, Inc. E-mail: srosenbaum@ausgar.com2/18/094

Government Panel Members Michael Morgan, CPA, Navy ContractSpecialist (formerly DCAA Supervisor) E-mail: Michael.j.morgan1@navy.mil Keith Palmer, CACO, DCMA E-mail: keith.palmer@dcma.mil Laura Presberry, CPA, NavyContract Specialist (formerly DCAA FinancialLiaison Advisor) E-mail: laura.presberry@navy.mil2/18/095

Consultant Panel Members Trish Carlin, CPA, Carlin Consulting Group E-mail: tcarlin@carlinconsultinggroup.biz Diane M. Peluso, DMP Consulting E-mail: dpeluso@dmpconsulting.net Thomas A. Kruza, III, Associate, Crowell &Moring E-mail: tkruza@crowell.com2/18/096

Government’s Rights toRecordsBasic questions:How are the Government’s rights to recordsinvoked in a contract?What types of DCAAaudits are there?How does thecontracting officer getinvolved?2/18/097

Contractual Rights to Records CO designates audits to conductProvisions included in contract Demand audit requests Pre-award Post-award Post-performance 2/18/098

Conduct of AuditsBasic questions:What can a contractor do to be preparedfor an audit?What does the contractor do in an audit?What does DCAA doduring audits?What happens whenthe audit is done?2/18/099

Conducting Audits Contractor preparation for an audit Contractor–DCAA interactionduring audit Post-audit actionsDCAA audit report Contractor remedies 2/18/0910

FAR Part 15 and Record RequirementsFAR 52.215-2 FAR 52.215-10 FAR 52.215-11 FAR 52.215-12 FAR 52.215-13 FAR 52.215-20 FAR 52.215-21 2/18/0911

Other FAR Parts & Record RequirementsFAR 52,216-7 FAR 52.232-16 FAR 52.232-25(d) FAR 52.242-3 FAR 52.242-4 FAR 52.249-2 FAR 52.249-4 2/18/0912

Pre-award DCAA AuditsPre-award accounting system Forward Pricing Rate Proposal orForward Pricing RateAgreement (FPRA) Financial capability Price proposal 2/18/0913

Post-award DCAA AuditsBilling system Incurred cost submissions Systems and internal controls Timekeeping system Contract change proposals Actual indirect rates Forward Pricing Rate Proposals CAS Disclosure Statements 2/18/0914

Post-performance DCAA Audits Contract closeout(cost incurred, flexibly priced lineitems) Contract 5

Questions for the PanelThe moderator will ask a series of questionsfor the panel. They will be followed by anopportunity for questions from the floor.When asking questions, please: Be brief Ask questions of general interest Ask no more than 1 follow-up question Speak loudly so everyone can hear you2/18/0916

Moderator’s Questions2/18/0917

Your QuestionsBe briefGeneral interestOnly 1 follow-upSpeak loudly2/18/0918

Abbreviations and Acronyms2/18/0919

Abbreviations and Acronyms (cont.)ODC — Other direct costPCO — Procuring Contracting OfficerPO — Purchase orderPOP — Period of performanceRAM — Regional audit managerRFP — Request for proposalSF1408 Preaward Survey of Prospective Contractor—Accounting SystemSLIN — [contract] Sub-line item numberTINA — Truth in Negotiations ActWAH — Work-at-Home2/18/0920

Abbreviations and AcronymsACO — Administrative contracting officerASBCA — Armed Services Board of Contract AppealsCACO — Corporate administrative contracting officerCAM — Contract Audit ManualCAO — Contract administration officeCAS — Cost Accounting StandardsCLIN — Contract line item numberCO — Contracting officerCPA — Certified public accountant2/18/0921

Abbreviations and Acronyms (cont.)CPAF — Cost plus award fee [contract type]CPFF — Cost plus fixed fee [contract type]DCAA — Defense Contract Audit AgencyDCAAM — DCAA Audit ManualDCMA — Defense Contract Management AgencyDFARS — Defense FAR SupplementDFAS — Defense Finance and Accounting ServiceDoD — Department of DefenseECP — Engineering change proposal2/18/0922

Abbreviations and Acronyms (cont.)EVMS — Earned Value Management SystemFAR — Federal Acquisition RegulationFFP — Firm-fixed price [contract type]FPIF — Fixed-price incentive fee [contract type]FPRA — Forward pricing rate agreementG&A — General and administrative [indirect] costsICP — Incurred cost proposalICQ — Contractor Survey & Internal Control QuestionnaireIG — Inspector generalLOE — Level-of-effortMRD — Memorandum for Regional Directors2/18/0923

Background Material2/18/0924

DoD Reference Information DoD Directive 5105.36, "DefenseContract Audit Agency (DCAA)"2/18/0925

DCAA Reference InformationOn DCAA’s Website: www.dcaa.milAudit Guidance and Audit ManagementGuidance Memorandums for RegionalDirectors (MRDs) Information for Contractors, DCAAP7641.90 Directory of Audit Programs and OtherAudit Guidance Documents Contract Audit Manual, DCAAM 7640.1 2/18/0926

Recent DCAA MRDsAudit Management Guidance MemorandumNo. 08-PAS-042 issued 12/19/08“Denial of Access to Records”Audit Management Guidance MemorandumNo. 08-PAS-043 issued 12/19/08“Adequacy of the Contractor's InternalControl System”2/18/0927

DCAA Audit Guidance 08-PAS-42"Denial of Access to Records" memo instructsauditors to require that contractors provide"timely" access to supporting records requestedby DCAA, with timeliness defined in many casesas the same day. Ignoring the provisions of thestandard Audit clauses limiting the Government'saudit rights to contractor "records," "support" isdefined in the guidance to include "access topersonnel" in addition to documents and otherdata.2/18/0928

Memo 08-PAS-42 [continued]The guidance directs auditors generally to obtainsupport information "directly from the personresponsible for the information," rather than from a"liaison" designated by the contractor. Auditors arerequired to report failure to provide "support" in atimely way as a "denial of access" to records, toconsider issuing a subpoena for the supportingdata (either directly or through the DOD InspectorGeneral), to follow other published guidance aboutsuspending payment (generally using a Form 1 torecommend suspension),2/18/0929

Memo 08-PAS-42 [continued 2]and to consider whether an internal controldeficiency exists (see the bullet below). While theassertion of an audit right to contact individualcontractor employees directly is likely to be themost controversial element of this policy, it alsoseems inevitable that at least some auditors willrely on the guidance to take precipitous actionwhen a contractor is unable to produce supportingrecords instantly in response to a request fromDCAA or contests the scope or relevance ofDCAA requests.2/18/0930

Memo 08-PAS-42 — ConclusionThe guidance is clearly intended toencourage DCAA's increasingly commonpractice of issuing Form 1s to attempt tosuspend payment to contractors, aprocess almost never used for 30 yearsafter the passage of the Contract DisputesAct in 1976.Extracted from Crowell Moring “Government Contracts Bullet Points”of 1/7/092/18/0931

DCAA Audit Guidance 08-PAS-43“Adequacy of the Contractor's Internal ControlSystem” memo instructs auditors to report any"material internal control" weakness identified inan audit. The guidance states that since DCAAonly performs internal control audits that arematerial to Government contract costs, a findingof an internal control deficiency by DCAA willgenerally have a material impact on Governmentcontract costs and should result in a reportfinding that there is a "material deficiency" thatrenders the contractor's "system" inadequate.2/18/0932

Memo 08-PAS-43 [continued]The guidance suggests that it is not necessary toidentify any actual questioned costs in order tomake a finding of a "material" deficiency, citingas an example the possibility that inadequaciesidentified by DCAA in controls related to ethicsand integrity may be material even though thefinding involves no identified actual cost impact.2/18/0933

Memo 08-PAS-43 — ConclusionAlthough not specifically mentioned in theguidance, audit reports asserting that asystem is inadequate could result inproblems under FAR 16.301-3, whichrequires as a prerequisite to awarding anycost reimbursement contract that contractor'saccounting systems be "adequate fordetermining costs applicable to the contract.”Extracted from Crowell & Moring “Government Contracts BulletPoints” of 1/7/092/18/0934

Rumbaugh on Memo 08-PAS-043issued 12/19/08The guidance “clarifies what constitutes asignificant deficiency/material weakness andestablishes new guidance on reporting auditopinions on contractors’ internal control systems.Effective immediately, audit reports oncontractors’ internal controls that report anysignificant deficiencies/material weaknesses willinclude an opinion that the system isinadequate.2/18/0935

More on Memo 08-PAS-043DCAA will no longer report inadequate in partopinions. In addition, the audit report willidentify the portions of the system affected bythe deficiencies and recommend that thecontracting officer disapprove the system (ifapplicable) and pursue suspension of apercentage of progress payments orreimbursement of costs.2/18/0936

Memo 08-PAS-43 Implemented(APPS audit report shells have been revised toreflect the appropriate recommendationdepending on the system involved and shouldbe used for any in-process assignments.)Further, suggestions to improve the systemwill no longer be reported in internal controlaudit reports .” (sic)Taken from Charles E. Rumbaugh Regulatory/Contractual Update, Volume14,Issue1, January 5, 20092/18/0937

Relevant FAR Clauses2/18/0938

Basic FAR RequirementsFAR 9-105 & -106, Procedures fordetermining contractor qualificationsFAR 4.804, Closeout of Contract FilesFAR Part 12, Acquisition of Commercial ItemsFAR Part 15, Contracting by NegotiationFAR 15.406-2, Certificate of current cost orpricing data2/18/0939

FAR Requirements continuedFAR 15.408, Table 15-2, Instructions forSubmitting Cost/Price Proposals WhenCost or Pricing Data Are RequiredFAR 16.306, Cost-Plus-Fixed-Fee ContractsFAR 31.204, Application of principles andproceduresFAR 31.2, Contracts with CommercialOrganizationsFAR 32.006, Reduction or Suspension ofContract Payments Upon Finding of Fraud2/18/0940

Post-performance FAR Rqmts.FAR 42.705, Final Indirect Cost RatesFAR 42.708, Quick-Closeout ProcedureFAR 49.107, Audit of prime contractsettlement proposals and subcontractsettlementsFAR 49.206, Settlement proposalsFAR 49.206-1, Submission of settlementproposalsFAR 49.303-1, Submission of settlementproposal [cost-reimbursement contract]2/18/0941

FAR Part 52 Clauses (re. Part 15)FAR 52.215-2, Audit and Records—NegotiationFAR 52.215-10, Price Reduction for DefectiveCost or Pricing DataFAR 52.215-11, Price Reduction for DefectiveCost or Pricing Data—ModificationsFAR 52.215-12, Subcontractor Cost or PricingData2/18/0942

FAR Part 52 Clauses [re. Changes]FAR 52.215-13, Subcontractor Cost orPricing Data—ModificationsFAR 52.215-20, Requirements for Cost orPricing Data or Information Other ThanCost or Pricing DataFAR 52.215-21, Requirements for Cost orPricing Data or Information Other ThanCost or Pricing Data—Modifications2/18/0943

FAR Part 52 Clauses [re. Accounts]52.216-4, Economic Price Adjustment—Labor and MaterialFAR 52.216-7, Allowable Cost and PaymentFAR 52.216-16, Incentive Price Revision—Firm Target [FPI contracts]FAR 52.230-2, Cost Accounting StandardsFAR 52.230-3, Disclosure and Consistencyof Cost Accounting Standards2/18/0944

FAR Part 52 Clauses [re. Payments]FAR 52.232-16, Progress PaymentsFAR 52.232-20 & -21, Limitation of CostFAR 52.232-22(b), Limitation of fundsFAR 52.232-25(d), Overpayments2/18/0945