Contractors under a microscope

Of course, it's different for many large contractors, whether in aerospace, defense, IT or telecommunications. For them, audits are a routine part of conducting business with the federal government. These big companies not only have policies and processes in place to handle government audits, many of them have a permanent team of auditors from the Defense Contract Audit Agency on site year-round to review various contract components.

But for the uninitiated or companies that have done little government work, a DCAA or General Services Administration audit, which has requirements considerably different from those of commercial audits, can be daunting.

The Defense Contract Audit Agency "gets very resentful of and resistant to anything that appears like you're trying to limit its access." - William Keevan of Navigant Consulting Inc.

Government pre-award and post-award audits cover a wide range of business practices, some of which are unique to the federal sector and include price checks and billing, use of subcontractors, time-sheet verifications, contract scope checks, financial statements, executive compensation reviews, compliance with the Trade Agreements Acts and payment of industrial funding fees for GSA schedule sales.

"Commercial companies venturing into the government sector could potentially get themselves into trouble, because they don't know all the rules and regulations [for government audits], and there's a lot of them out there," said Alex Heidt, director of contracts at Lockheed Martin Corp.'s IT unit in Seabrook, Md.

The global war on terrorism and wars in Afghanistan and Iraq have increased the government's demand for supplies and services from contractors. In response, the government has been issuing a larger number of cost-reimbursable contracts, which usually trigger DCAA audits, said Mary Karen Wills, director of the consulting services group at Beers & Cutler PLLC of Washington. Wills specializes in government contract accounting and pricing at the business advisory and accounting services firm.

"Many of these companies had previously not been audited, because they either sold on a fixed-price basis or a time-and-material basis, so the audit oversight was less," she said.

Make a plan

There's no way to avoid an audit, but contractors can take several steps to prepare themselves and make the process go smoothly, said auditing experts and government contract professionals.

"Essentially, there's no substitute for complete preparation before the audit and 'to lead the auditor' when it begins," said Norman Duquette, now senior government contractor consultant at Grant Thornton LLP, but formerly a DCAA senior auditor. "It is critical that the contractor have the full knowledge of what the auditor is doing with the data being provided."

First, companies unfamiliar with the federal government's audit process should get copies of relevant "how to" publications and read them. A key publication is DCAA's pamphlet "Information for Contractors," and the agency's "Contract Audit Manual," available at www.dcaa.mil. Other agencies, such as GSA, publish Federal Acquisition Regulation supplements about their audit approaches.

Second, companies new to government contracting should consider hiring a consulting firm to ensure they have the correct processes in place from the outset and to help prepare for an audit, experts said.

Specialized consultants can help devise a plan for dealing with auditors, advise a company on which records they'll need and put relevant systems in place. They also can advise the company whether or not to seek legal counsel before responding to an audit letter, said Tony Fuller, a partner at Beers & Cutler, and a specialist in government contract consulting services.

Third, contractors must have certain accounting systems in place that will produce the data that government auditors want to see in the form they need.

"Whether a government contractor uses our accounting system or someone else's, the No. 1 thing that auditors look for is transparency and audit trails," said Rich Wilkinson, industry director for government contracting at Deltek Systems Inc. The Herndon, Va., company provides project management software for expense reporting, human resources administration, materials and customer management and sales automation.

"They have to be able to trace a transaction from a source document, like a time sheet or an invoice, from a vendor all the way through to billing to the government," he said.

Lockheed Martin IT, for instance, has readily available for auditors databases with all its contract information and financial data, Heidt said.

Keep records handy

Contractors must know which records to retain and for how long for when the government auditors come calling. Companies new to the government market and small contractors are sometimes unfamiliar with federal recordkeeping requirements, said Alan Chvotkin, senior vice president and counsel at the Professional Services Council, a trade group for federal government contractors.

"That's when the audits become contentious, because the auditor wants information, and you don't know if you have it or where to find it," he said.

Contract records should be kept at least nine years ? one year before and three years after a basic five-year contract, said Scott Needleman, a lawyer who leads the government division at immixGroup Inc., a McLean, Va., government business consulting company offering contract management services.

"Whether a government contractor uses our accounting system or someone else's, the No. 1 thing that auditors look for is transparency and audit trails." - Rich Wilkinson, Deltek Systems Inc.

An internal pre-audit that parallels the government's audit should be done before the government audit, to allow time for any potential problem areas to be discussed and explained. To ensure objectivity, outside firms should do pre-audits, said Wills of Beers & Cutler.

Meet your auditor

Contractors are entitled to an entrance conference with DCAA auditors. Companies should take advantage of this option before the audit starts to understand its purpose, how it will be done, which records will be reviewed, how long it will take, and to agree on policies and procedures for how auditors request information from the company, said William Keevan, senior managing director of the government contracts group at Navigant Consulting Inc., a Chicago management-consulting services firm.

This also is the time when contractors should discuss with auditors any issues they believe may need clarification, such as a particular policy or company regulations, to avoid a misunderstanding later, he said.

Contractors also should appoint one person or a team of up to three people as liaisons to the auditors. These employees should be the primary point of contact for the auditors, and they should be responsible for fulfilling the auditors' requests. They should coordinate information needs with the auditors, and interact with them to prevent the audit from interfering with the company's daily operations.

Keevan said contractors should be reasonable with their requests when working with auditors, especially when dealing with DCAA.

"This is a very sensitive issue with DCAA and can become very problematic," he said. "DCAA gets very resentful of and resistant to anything that appears like you're trying to limit its access."

While an audit is in progress, contractors should arrange to have interim meetings with the auditors to "know what the findings seem to be, and head off problems by answering questions before they get to the end of the process," Keevan said.
DCAA audit rules also require an exit conference. Although the conference is mandatory, contractors should make their request for it on the record, Keevan said. Here, contractors can ask questions and clear up any murky areas before the auditors draft a report.

Contractors generally cannot see the auditor's final report; even if an audit contains incorrect information at this point, it is difficult to get it corrected, Keevan said. The exit conference is "a contractor's last chance to get his side on the table," he said.

Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.