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The Criteria For An Acceptable Accounting System

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Navigating DFARS Compliance: Understanding the Criteria for an Acceptable Accounting System

In the government contracting industry, adherence to the Defense Federal Acquisition Regulation Supplement (DFARS) is paramount. Among its crucial sections, DFARS 252.242-7006 delineates the definition of an accounting system, outlining the standards necessary for contractors to maintain robust financial practices. Let's delve into the 18 criteria outlined within this regulation and explore how businesses can ensure compliance.

The 18 Criteria

  1. Sound Internal Control Environment: Establishing a sturdy internal control framework, including comprehensive policies, procedures, and a code of ethics, sets the tone for ethical conduct within an organization. It encompasses governance structures, delineation of authorities, and fostering a culture of accountability from the top-down.
  2. Proper Segregation of Costs: A fundamental principle in accounting, ensuring the clear demarcation between direct and indirect costs is imperative. This includes meticulous approval processes by knowledgeable personnel to prevent misallocation.
  3. Accumulation of Direct Costs by Contract: Implementing a project-based accounting system and maintaining a job cost ledger facilitates the meticulous tracking of direct costs associated with specific contracts.
  4. Equitable Indirect Rate Structure: Establishing a fair allocation mechanism for indirect costs is essential. This entails documenting pools and allocation bases to ensure transparency and accuracy.
  5. Accumulation of Costs under General Ledger Control: Integrating subsidiary ledgers seamlessly with the general ledger streamlines financial reporting and ensures accuracy in accounts receivable, accounts payable, and labor costs.
  6. Reconciliation of Subsidiary Ledgers: Regular reconciliation between subsidiary ledgers and cost objectives to the general ledger is vital. This process, conducted monthly or quarterly, helps identify and rectify variances promptly.
  7. Approval and Documentation of Adjusting Entries: Segregation of duties concerning entry, approval, and posting of adjusting entries, coupled with robust supporting documentation, strengthens internal controls.
  8. Management Review or Internal Audits: Regular audits or management reviews ensure adherence to established policies and procedures, fostering accountability and compliance.
  9. Timekeeping System: Employing a reliable timekeeping system that accurately records employees' labor by cost objectives is crucial. This includes self-certification and supervisory approval processes to enhance accuracy.
  10. Labor Distribution System: A robust labor distribution system ensures the accurate allocation of direct and indirect labor costs to respective cost objectives, bolstering financial transparency.
  11. Routine Determination of Costs Charged to Contracts: Monthly closure of books and routine project reporting facilitate timely billing and financial reporting, enhancing contract management efficiency.
  12. Exclusion of Unallowable Costs: Identifying and segregating costs not allowable under federal acquisition regulations prevents their inclusion in government contract billings, ensuring compliance.
  13. Identification of Costs by Contract Line Item: Accurately tracking costs by contract line item and units, if required, enables precise contract reporting and billing.
  14. Segregation of Pre-Production Costs: Distinct accounting treatment for pre-production costs ensures accurate cost allocation and facilitates communication of actual vs. estimated costs for pricing purposes.
  15. Compliance with Cost Accounting Standards (CAS): Adhering to CAS standards and Generally Accepted Accounting Principles (GAAP) in accounting practices and financial reporting is essential for regulatory compliance.
  16. Reconciliation of Billings and Cost Accounts: Ensuring that invoices reconcile with project cost reports and comply with contract terms mitigates discrepancies and enhances financial accuracy.
  17. Adequate Data for Pricing Follow-On Acquisitions: Accurate and reliable data derived from compliant accounting systems serves as a foundation for informed decision-making in pricing future contracts.
  18. Continuous Training and Improvement: Ongoing training on unallowable costs and compliance requirements, coupled with a commitment to process improvement, fosters a culture of compliance within the organization.

By adhering to these 18 criteria, not only does compliance with DFARS become achievable, but it also lays the groundwork for robust financial management practices within government contracting. While there's no one-size-fits-all solution, leveraging specialized software solutions like JAMIS Prime can streamline compliance efforts and alleviate the challenges associated with audits.

For more information on how JAMIS Prime can boost your organization's compliance efforts and streamline your accounting processes, reach out to us at info@jamis.com, or check out our Project Accounting Brochure HERE.