DOCUMENT RESUME 02619 - [A17126891 [Department of Defense Procedures to Determine Contractor Compliance with Cost Accounting Standards]. PSAD-77-125; B-39995. June 8, 1977. 5 pp. Report to Frederick Neuman, Director, Defense Contract Audit Agency; by Richard W. Gutmann, Director, Procurement and Systems Acquisition Div. Issue Area: Federal Procurement of Goods and Services: aea onableness of Prices Under Negotiated Contracts and Subcontracts (1904); Accounting and Financial Reporting (2800). Contact: Procurement and Systems Acquisition Div. Bua&get FuL'ction: National Defense: Military Assistance (052); miscellaneous: Financial Management and Information Sys t ems (1007 . A limited evaluation of the adequacy of Department of Defense procedures to determine contractor compliance with cost accounting standards and regulations disclosed numerous instances of contractor noncompliance. Findings/Conclusions: The evaluation was directed toward the work of the Defense Contract Audit Agency, which has basic responsibility for ensuring contractor compliance. In addition to num¢:ous identified instances of noncompliance, some have gone undetected because the Agency does not have adequate controls to ensure that all significant provisions of the standards hate been included in the reviews of contractor compliance. The Agency is considering a "control schedule for compliance reviews" which would identify cost accounting standard provisions significant to a particular contractor based on potential for impact on contract costs, and which would signif-cantly improve the planning of Compliance reviews. Recommendations: The Agency should proceed with the further development and implementation of the controls needed to assure that sufficient audit coverage is given to contractor compliance with cost accounting standards, rules, and regulations. (DJM) UNITED STATES GENERAL ACCOUNTING OFFICE WASHINGTON, D.C. 0548 P"OlRM1MZ ANA SIYI'MS ACML8MCMON CM830ftJUN 0 8 197? _-' 6-39995 Mr. Frederick Neuman Director, Defense Contract Audit Agency Cameron Station Alexandria, Virginia 22314 Dear Mr. Neuman: We completed a limited evaluation of the adequacy of procedures and practices followed by the Department of Defense to determine contractor compliance with cost accounting standards, rules, and regulations. i;ithin the Department, admi.s.strative contracting officers are responsible for administering cost accounting standards and determining contractor compliance. Although the final deci- sion regarding contractor compliance rests with the contract- ing officers, basic responsibility for ,,valuating contractor compliance was delegated to the Defense Contract Audit Agency as part of its audit activities. Therefore, we primriily directed our evaluation toward the work performed by your Agency. In a separate review, we are ?valuating the Depart- ment's settlement of noncompliance cases identified and reported by your auditors to the contracting officers. We examined the work performed by your Agency at three contractors. These contractors were selected because they represented a diversified universe--two were major, large volume suppliers to the Department while one was a relatively smaller supplier. At two of the locations, contracts were administered by the Defense Contract Administration Service offices, while at the other they were administered by an Air Force plant representative office. Further, the two larger contractors were audited on a continuous basis by a resident staff while the smaller contractor was audited on an as-needed basis by auditors assigned to a nearby branch office. The auditors responsible for review of the three contractors' activities were assigned to two different Audit Agency reqional offices. We found that the procedures and practices followed by the auditors have resulted in their identification of numerous PSAD-77-125 b-39995 instances where the contractors were not in compliance with the cost accounting standards. However, some instances of noncompli- ance have gcae undetected because, in our opinion, your Agency did not have adequate controls to insnre that all significant provisions of the standards have been included in the reviews for cont:actor compliance. Your Agency is considering implementing a procedure w:ich couldt provide tne type of control we believe is essential. As discussed on page 4, we recommend tnat you further develon and implement tne needed controls. DEENS3L COlTRACT AUDI'i AGENCY PRCCfDUhES aiNDrFRACTICES Sour Agency's pr.cedures provide for reviews of a contractor's initial disclosure statement of cost accounting practices and subsequr?nt changes to determine compliance with cost accounting standaras. In addition, audits are to be accomplished during the performance period of covered contracts to ascertain that e contractor's practices coriply with its disclosure statement and cost accounting standards. The oro- cedures state that a determination of compliance will be made ducing the auditor's normal reviews of a contractor's incurred costs, price proposal evaluations, and functional audits which evaluate a system or cost account for propriety of charges and equity of allocations. hIowever, the procedures provide for separate audits to determine conpliance when there are little or no usual audit requirements for a particular contractor. The auditors had ioentified and reported 30 instances where the 3 contractors were not in compliance. Noncomplianrce was found most frequently witn respect to Standards 401, Consistency in Estimating, Accunulating and Reporting Costs and 402, Consist- ency in Allocating Costs Incurred for the Sair- Purpose. The auditors identitied 14 instances of noncompliance during reviews of initial or revised disclosure statements and 7 instances of noncompliance during reviews of contractor proposals. Other noncompliance determinations resulted from reviews of contractor oillings, progress payments, projected overhead rates and incurred overhead. We found that orescribed audit procedures generally had been followed. when the contractors initiated accounting system changes, or new standards were issued, compliance was ascertained primarily through reviews of the contractors' published account- ing procedures. Evaluations of the contractors' practices to determine compliance were integral darts of all audit efforts. - 2 - 8-39995 However, our evaluation of planning for detailed examinations revealed that your Agency did not have a control system that separately identifies the extent to which contractor practices had been evaluated for compliance with provisions of the standards. Planning of future audits was accomplished by the auditors considering the magnitude of expenditures, historical audit experience in the specific area, and how recently the particular cost area had been audited. Although this process did consider to some extent the results of prior reviews, it did 'oc assure that sufficient audit work was done to determine whether the contractor fully complied with cost accounting standards, rules, and regulations. Our review of the detailed audit work for selected standards indicated that the auditors evaluated the contrac- tor's compliance with many of the provisions in the selected standards. However, some cost accounting standard provisions were not addressed. At two of the contractors we made limited tests of selected accounting practices not addressed Dy the auditors. We found Instances at eacn of the contractors where existing accounting practices did not comply with the standards. Because of the limited scope of our examination, we did not attempt to measure the significance of the noncompliances. Your headquarters representatives told us that audit effort was directed to those areas believed to have tale greatest potential for cost savings. Further, they said that since effec- tive coverage of the contractor's compliance with cost accounting standards is inherent to this system of planning, it is unnecessary to give it special consideration in the planning process. However, with the increasing number of standards, the possible value of a supplemental management tool to assist in monitoring compliance tests is recognized. Agency officials showed us a relatively new management control procedure which is being considered by headquarters personnel and is being tested at selected sites. Under this new procedure, the auditor determines which cost accounting standard provisions are significant concerning the particular contractor based on a materiality criterion. A provision is considered material if noncompliance would have a significant impact on Government contract costs or the administrative and audit efforts. Planned audits are reviewed to determine if compliance reviews can be included as a part of these audits. If the compliance reviews cannot be included, seoarate audits are to be programed. A control schedule will show the planned - 3 - B-39Y99 review of each cost accounting standard and whether the contractor complied or aid not comply with the standaid. CONCLUSIONS Yout Agency Jeviews have included evaluations of the contractors' operations for compliance with cost accounting stanaards, rules, and regulations. This effort has resulted in numerous violations being id.ntifie' and tepoLted. However., systematic contl.ols to provide for etfective evaluation ot contractor practices foi compliance with provisions of the standards shoula be improvea. Further, out tests of contracto, practices Levealea noncompliance in areas not adclressed ny you! Agency. Since the auait proceauLes ana practices followeU by youL auditors were genelally plescti !ed toL agency-wide application, we would not expect this situation to vary substantially at other locations. Your Agency is consiael.ing a "control scheaule for compliance reviews" which would identify cost accounting standard provisions significant to a particulai contractor based on potential for impact on contract costs. 'his schedule would show the !esults of audit woik accomplishea and provide a basis fo,. planning additional work necessary. We believe implementation of this proceaule woula signifi- cantly improve the planning of compliance reviews, providing the critelia established to iaentify significant standaid provisions include all provisions that materially affect the contLacto 'b accounting system. RECOMMENDATION We recommend that you proceea with tne £uLthei aevelopment and imple:nentation of the controls needed to assure that sufficient audit covetage is given to contiactoL compliance with cost accounting standaids, rules, and IecJulations. We would appreciate youL comments on this matter and would be pleased to discuss any questions that you may nave. B-39995 We ate furnishing copies of this leport to the SecLetaiy of Defense, Office of Management and Budget, and interested congressional committees. 3incel ely yours, R. w. Gutmann DiL ectot
Department of Defense Procedures to Determine Contractor Compliance with Cost Accounting Standards
Published by the Government Accountability Office on 1977-06-08.
Below is a raw (and likely hideous) rendition of the original report. (PDF)