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For some awards of U.S. Government funding, a prime contractor requests that a subcontractor certify that the accounting system is compliant, or approved by the relevant Government reviewer, most often by the Defense Contract Audit Agency. By compliant, the customer means in compliance with federal regulations, most importantly the Federal Acquisition Regulations (FAR). For some contracts and grants, the Contracting Officer requests evidence (such as an audit report) that the accounting system is FAR compliant or approved. The accounting system is a misnomer, and - contrary to frequent belief - does not address the particular software program used for the General Ledger. The system encompasses the entire process or function, including source documents (e.g., timecards and travel reimbursement requests); segregation of incompatible duties; evidence showing consistent extraction of unallowable costs from customer invoices; and other human (as well as software) controls. Theoretically, accounting transactions recorded in spreadsheets could result in an approved accounting system; the practices to accurately and completely record the transactions are the issue.
Alternately, the most expensive General Ledger program with the most complex add-ons has zero effect on the FAR compliance or approvability of the accounting system. No software developer can guarantee FAR compliance or approval of an organization's actual accounting practices.
Instead, the starting point is policies, procedures, and forms that facilitate FAR compliance, any applicable FAR supplements (such as DFARS for the Defense FAR Supplement), plus terms and conditions incorporated into contractual language of the award documents (i.e., unique to a particular contract). Formal (written) policies and procedures are signed by an employee with oversight for the applicable area and noted with chronology (e.g., "Reviewed and verified as of X date" or "Revised as of Y date and Effective as of Z date"). For an audit trail, employee access to the policies and procedures, to a knowledgeable manager that can resolve related questions, and to periodic training is documented. The first two of these can be evidenced by an annual certification signed and dated by each employee; the last of these can be evidence by the signature of each employee on a dated roster for annual training, with the topics shown. These mean that FAR compliance requires that every employee understand the proper way to fill out a timecard completely, accurately, and timely - and that every traveler understand the proper way to segregate allowable from unallowable reimbursements.
The accounting system extends to documentation from organization-wide staff plus suppliers and customers. Direct-charged independent contractors submit adequate descriptions of accomplishments, before accounts payable enters the bill. Payment terms on a customer contract affect accounts receivable creation of invoices. Segregation of purchasing and accounts payable, or reasonable internal controls to minimize risk from absent segregation, affect accounting processes and functions.
After considering these organization-wide (not accounting-staff limited) processes and functions, the next logical component of an approvable or FAR compliant accounting system is the Chart of Accounts (CoA) used in the General Ledger and the implementation of job cost accounting (or project accounting). The major CoA focus is on 1) Cost of Goods and Services Sold, 2) Expenses, and 3) Unallowables. The first of these represents direct charges or costs directly caused by or benefitting a specific job or contract. The last of these is defined in FAR Part 31.2. Indirect expenses are charged organization-wide based on calculated rates (e.g., Overhead and G&A).
A customer review begins with a customer invoice or a financial report showing actual incurred costs and expenses. The audit trail traces to supporting source documents (e.g., timecard, vendor bill, or hotel receipt). A FAR compliant accounting system has adequate support for transactions posted in the General Ledger and also demonstrates that actual practices match compliant policies and procedures.