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The Criteria For An Acceptable Accounting System

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accounting_systemDFARS 252.242-7006 – Definition of an accounting system

“The contractor’s system or systems for accounting  methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting in compliance with applicable laws, regulations, and management decisions, and may include subsystems for specific areas such as indirect and other direct costs, compensation, billing, labor, and general information technology.”

The 18 Criteria

  1. Sound internal control environment, accounting framework, and organizational structure:
    • Policies & Procedures, Code of Ethics, Tone at the Top, Organizational Structure, and Assignment of Authority or Governance
  2. Proper segregation of direct costs from indirect costs;
    • Direct cost can’t be charge indirect, and the same for the other way around as well
    • Approval by a knowledgeable person
  3. Accumulation of direct costs by contract:
    • Project-based system
    • Job cost ledger – ability to accumulate by contract
  4. Accumulate direct costs to intermediate and final objectives
    • Indirect rate structure should provide for a fair and equitable allocation of cost. Reasonable cost/benefit relationship is established
    • Written description of pools and bases
  5. Accumulation of costs under general ledger control:
    • Frequency of subsidiary ledger posting to GL
    • AR, AP, Labor
  6. Reconciliation of subsidiary ledgers and cost objectives to general ledger:
    • AP, AR, Project Ledger, Rates
    • How often? Monthly, quarterly?
    • How are variances corrected? Monitored?
  7. Approval and documentation of adjusting entries:
    • Segregation of duties – Entry, approval, posting
    • Supporting documentation on entry
  8. Management review or internal audits of the system to ensure compliance with the Contractor’s established policies, procedures, and accounting practices:
    • Policies and procedures for monitoring
    • Who will monitor? – Audit committee, Senior management
    • How will you document this review?
  9. A timekeeping system that identifies employees’ labor by intermediate or final cost objectives:
    • Paper or automated system
    • Employee recording hours worked and to what cost objective
    • Frequency of time entry, self-certification, supervisory approval
  10. A labor distribution system that charges direct and indirect labor to the appropriate cost objectives:
    • Labor is posted to the general ledger (account / project on TS)
    • Reconciliation exists between labor and payroll
  11. Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account:
    • Closing the books on a monthly basis
    • Project reporting on a monthly basis, billings, financial reporting
  12. Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of Federal Acquisition Regulation (FAR) part 31,  Contract Cost Principles and Procedures, and other contract provisions.
    • Separately identified in the chart of accounts
    • Ongoing training for employees on unallowable cost, most importantly A/P folks
    • Burden of proof is on the contractor – adequate backup documentation
  13. Identification of costs by contract line item and by units if required by the contract:
    • Understanding of contract reporting
    • Can the system expand to the level of detail required?
    • Proper set up of project for billing and reporting
  14. Segregation of pre-production costs from production costs, as applicable:
    • Unique project/accounts for segregation
    • Process for communicating actual vs. estimated costs to the pricing group for use in follow on pricing or re-pricing
  15. Cost accounting information as required for:
    • Limitation of Cost (52.232-20), Limitation of Funds (52.232-22) and Allowable Cost and Payments (52.216-7),
      1. You must be able to calculate rates /provide cost incurred/billed information to be in compliance with these clauses
      2. Who monitors?
      3. Process for communication between contracts and accounting
    • Readily recalculate indirect rates from books of account
      1. Calculation of indirect rates based on cost incurred
      2. Monitor and review of actual against provisional
  16. Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms:
    • Invoices should tie to or reconcile to project cost reports
    • If special contract terms, your system should accommodate this
  17. Adequate, reliable data for use in pricing follow-on acquisitions:
    • If you have complied with 1 – 16 your data should be accurate and reliable
    • Use as your basis for forecasting/pricing
    • If necessary, incorporate impact on rates for potential wins
  18. Accounting practices in accordance with standards promulgated by the Cost Accounting Standards (CAS) Board and Generally Accepted Accounting Principles (GAAP)
    • Policies and procedures
    • CAS Disclosure Statement, if applicable
    • Financial statements
    • CAS 401, 402, 405 and 406 incorporated into FAR
      1. CAS 401 -> Consistency in estimating, accumulating, and reporting costs
      2. CAS 402 -> Consistency in allocating cost incurred for the same purpose
      3. CAS 405 -> Accounting for unallowable cost
      4. CAS 406 -> Cost accounting period

DCAA guidance on complying with all 18 criteria:

“A material noncompliance with any one of the 18 criteria indicates a significant deficiency/material weakness exists and the contractor has not complied in all material respects with the DFARS criteria.”

  • Significant Deficiency: “Shortcomings in the system that materially affect the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes.”
  • Material Weakness: “A deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that a material noncompliance with a compliance requirement will not be prevented, or detected and corrected on a timely basis.”

There aren’t any accounting software solutions out there that will make you DCAA compliant.  But there are systems out there designed specifically to help make the challenge of your next audit much less daunting.  To find out more about how JAMIS Prime can help your business, contact us today at info@jamis.com.