We’re coming to the end of the accounting course, so let’s put this all together now. Let’s assume that you’ve just been notified that DCAA is sending an auditor to your facility. Everyone is apprehensive the first time they receive this news. But there are a number of ways that you can reduce the stress both in preparation for an audit and as the audit is occurring. Knowing what to expect during an audit gives you the opportunity to prepare properly and have the confidence to answer even the most demanding audit questions.
In previous tutorials we’ve discussed the various types of audits a DoD SBIR/STTR awardee may encounter. Fortunately, the structure and scope of these audits are very well defined and available to the public on the DCAA.mil website. The government, in the form of the Defense Contract Audit Agency (DCAA), in essence provides you with their playbook. As a way of preparation, it may be useful to access these resources for the particular audit that is being performed.
You can also find the Directory of Audit Programs on the DCAA.mil website, where you can download the audit process for your particular audit. Don’t be afraid to ask the auditor if you’re not sure which audit program applies. The language in these instructions may not be familiar. There’s a lot of discussion surrounding the internal DCAA administrative processes that auditors must follow. What is helpful is the section detailing the actual audit steps.
Once you’re familiar with the audit steps, this can now be your guide in performing your own internal audit, whether it be formal or informal. Performing a self-audit, or a dry-run audit, will help you identify gaps in your training, access to records, and accounting problems that could be uncovered during an audit. Nothing gets your heart beating faster than an auditor finding an unfavorable condition of your accounting system before you do.
It’s useful to know that almost every audit will begin, or should begin, with an entrance conference. The exception to this rule is the timekeeping audit, where a DCAA auditor is allowed to visit the contractor unannounced. It bears repeating that a DCAA compliant timekeeping system is critical when performing cost-reimbursement type contracts, including most SBIR Phase II contracts. So preparation for a timekeeping audit is unique in that you could have a surprise visit by the DCAA at any time. An auditor may also conduct a timekeeping audit as part of another audit. Regular training and monitoring the compliance of staff on your timekeeping procedures are the most effective methods of preparation for this particular audit.
Back to entrance conferences. This is typically a face-to-face meeting the DCAA will schedule. The auditor will visit your facility and may ask for a tour and then explain the purpose and scope of the audit, along with their deadline for completing the audit. The auditor may ask general questions about the firm as a way of orienting him or herself to the unique attributes of your business. A couple of customary questions may be asked to detect the possibility of fraud. After this mostly introductory session, the auditor may schedule a return visit to audit source material, or may request electronic delivery of data and documents.
The auditor will usually start with a review of your accounting reports, such as your Trial Balance or Profit-Loss Statement. If it’s a billing audit, they will want to review one of your recent vouchers. They will isolate any number of transactions from these reports or vouchers, then trace those transactions through the accounting system back to its source.
As an example, travel expenses will almost always be reviewed during an audit. The auditor will want all the source documentation justifying the cost of a certain trip. They will expect some sort of expense report that provides the details required by the cost regulations found at FAR 31.205-46. The expense report should also have the receipts attached that validate the expenses.
For labor, the auditor will trace a transaction through the accounting system all the way back to an approved timesheet along with a paycheck stub.
Finally, an auditor will review your contracts to look for any specific items that may be deemed unallowable. It may be as simple as costs that have occurred past the period of performance of the contract. It could be a specific cost, such as unapproved overtime premiums. So it’s a good idea to quickly review the terms and conditions of each contract prior to an audit.
In general, successful audits occur when four conditions exist: (1) the contractor has a well-trained and compliant staff who understands timekeeping procedures; (2) the company’s records, reports, receipts, and other essential documentation supporting expenses are organized in a manner that enables them to be quickly retrieved and copied; (3) The accounting system is current and operating as designed; and (4) contract documents are up to date with the latest modifications.
Keep in mind that it’s better to be over-prepared than under prepared. No one audit or auditor is the same. Auditors are given a tremendous amount of independence so they may go in any direction within the general scope of an audit.
Managing audit etiquette on your end will also help alleviate much of the stress and fear. Much of this depends on how well you communicate with the auditor. The most important thing to do is be courteous. Auditors are busy professionals and just like you they have a heavy workload with demanding deadlines. Auditors, like you, want to complete the audit as fast but as thoroughly as possible.
Antagonizing an auditor may initiate not only a negative human reaction, but it may also raise a level of suspicion that they are trained to act upon. On the other hand, in the very rare case that an auditor either steps far beyond the boundaries of the audit, or exhibits bullying, defiant, or denigrating behavior, then the contractor is well within their right to contact the auditor’s supervisor.
A couple more hints surrounding communication are key. Listen carefully to questions posed by an auditor. Don’t be afraid to ask for clarification. Especially during a first audit, language used by auditors might need to be translated into terms you better understand. Most auditors are happy to provide these types of clarifications.
Also, don’t provide or volunteer more information than what is requested. It’s an easy trap to fall into, especially when you feel confident that your accounting systems and processes are in good shape. There may be a tendency to offer more information as a way of giving the auditor more confidence in your work. Avoiding this tendency will prevent the auditor from wanting to explore further than what they had already planned to do. The urge to fill in silent voids should be resisted. Remember to answer only the question, and provide only the data requested. In this regard, coach any other employees who may be interviewed by the auditor.
The auditor may firmly challenge you on a number of issues or findings that are brought up. Particularly with cost allowability, as this is a grey area where disputes often arise. Contractors, in this case, should feel free to vigorously defend themselves, but without acting defensive. A vigorous defense would entail providing the facts from your perspective and providing legitimate arguments on your behalf. At the end, you may have to agree to disagree. But don’t let a disagreement on a particular item discourage you or put the entire audit under a cloud of mistrust.
Finally, assign a single point of contact in your organization to be the audit lead. This person should be available to assist the auditor on an uninterrupted basis. If that’s not feasible due to travel or personal time-off, the DCAA auditor usually has some schedule flexibility. Your objective for the audit is to satisfy the audit demands as quickly as possible, while remaining focused on the items the auditor requests.