Compliant Accounting System | General Ledger Program

Accounting System

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.

DCAA COMPLIANT ACCOUNTING SYSTEMS

Management needs job cost accounting to contrast proposed/budgeted costs on each sales contract with actual incurred costs (AIC) on that one contract. To earn a Defense Contract Audit Agency (DCAA) approved Accounting System, the General Ledger segregates direct costs by job. With an approved GovCon DCAA Accounting System, the organization may attain GovCon-funded contracts that include cost reimbursements – as opposed to a bottom-line fixed price. Reimbursement may be for some costs (such as Travel, only) or for the entire contract (such as Cost Plus Fixed Fee). Before billing AIC, a consistently followed process for compliant recording of AIC is verified and approved.

Mahnke Consulting guides Job Cost Accounting to accumulate and separately record all the costs of the project or contract. Through pre-audit, we assist management in their implementation of compliant, accrual basis, Job Cost Accounting – which allows easy analysis of direct costs, allocation of indirect expenses, plus gross profit and net profit for each Job or contract. Clients benefit from our proven guidance and drafts in many areas of GovCon DCAA accounting.

Program Managers need accurate
accounting data …and they need it now.

Cost Controls

Cost controls are designed to segregate incompatible duties (even in very small businesses), verify General Ledger data with information from outside sources, intermittently analyze specific costs (by account or line item) for reasonableness (with follow-up of anomalies), and strengthen other internal controls. Management is responsible for protecting employees from unnecessary distrust; if one person has access to all components of a function, that person is the first suspect after fraud, theft, or other irregularities are discovered. Also, in an environment where GovCon funding (ultimately) pays for costs, the risk of non-compliance or even suspension/debarment outweighs the inconvenience of implementation. Controls affecting cost include:

Written policies and procedures that are compliant with both laws and contract terms;
Evidence of actual practices that mirror written policies and procedures;
Travel, Business Meeting, and Reimbursement expense forms that facilitate compliance;
At a minimum, separation between the requisitioner and the payment-approver of goods/services; and
Adequately documented (complete and accurate) time tracking, for both direct and indirect labor hours.

Project Cost Analysis

Project Cost Analysis begins with a foundation of a well-designed Chart of Accounts (direct costs, each indirect pool, and unallowable costs each grouped), job numbers/names that are unique but comprehensive, and data-entry source documents that segregate costs into the correct account and job. These ingredients form the nature of job cost accounting. Project financial reports from the General Ledger provide information as originally recorded. The three well-designed foundations allow the following analysis:

Contrast Direct Labor, Direct Material, and ODC for the same project from month to month – and drill down to the specific component causing a variance;
Compare profitable or wasteful components, among projects, and center on the costs/practices to cultivate or reduce; and
Improve the basis of spreading indirect costs to better match the causal/beneficial relationship between each pool and base.

Approved Accounting Systems

Job cost accounting formats the General Ledger to accumulate costs by project or contract. Alternatively, process costing excludes job cost accounting and may be substituted only for a continuous process with comingled output – such as pouring the same steel compound into the same mold, repeatedly. Standard costing tracks each component unit and AIC that vary from the standard cost of each (due to quantity variances and due to unit cost variances). Fund accounting segregates first by fund, then by job. One fund may have more than one job; however, if one contract spans more than one fund, a consistently applied method of combining contract cost information must correlate to the cost elements proposed and invoiced. Process costing uses a starting and a stopping point/date for AIC on each award (and customer invoice). Standard costing and fund accounting segregate all standard costs (using Bills of Material, etc.) or all jobs within all funds for each award (and customer invoice). The majority of organizations selling on contract to the federal government do not use process, standard, or fund accounting; cost is recorded for the company as a whole. Initially segregating recorded costs into jobs allows project cost analysis. The goal is not to determine net profit or loss for the organization, but for each job (or project or contract). GovCon DCAA accounting requires some reasonable way to differentiate costs by contract, recorded in the General Ledger. Building a budget for each job, by month, promotes comparison to AIC by month. Contractual milestones are planned and tracked during contract performance; likewise, costs to accomplish each milestone are budgeted and evaluated for variances. Project cost analysis determines the causes of variances.

Chart of Accounts

The Chart of Accounts for job cost accounting separates Cost of Goods and Services Sold as direct-charged accounts. Typically, these are Direct Labor, Direct Material, and Other Direct Costs (ODC). ODC accounts contain Subcontracts (which are purchases, not Direct Labor from employees) and Travel. After Cost of Goods and Services Sold the Expenses section follows. Expenses are organized by indirect rate. Generally, Labor Overhead pool accounts (for employer portion of payroll taxes, employer paid fringe benefits, etc.) top the Expenses. Facilities followed by General and Administrative (G&A) accounts might suffice. If the company proposes and invoices Material Overhead, the accounts comprising that pool follow Labor Overhead accounts; between Facilities and G&A, additional “pool” accounts can be added. Large organizations have many pools. Job cost accounting separately records all costs of the project, including AIC for indirect pools. Project cost analysis considers overheads and other indirect costs when calculating net profit or loss on a job or contract. Facility rent or mortgage principle represents cash money out the door; achievements on the project required an allocable share of that cost. Source documents (timesheets, Purchase Orders, etc.) with the correct job, as well as account number or name (from the Chart of Accounts), foster a DCAA-approved Accounting System.