Border Wall, maybe… Fraud, Waste, and Abuse, no please!

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Maybe we need a wall or maybe we don’t. I will save my opinion for a better time and place on the necessity of a border wall. But I do want to make sure that there are no Fraud, Waste, or Abuse in case the wall is to be built.

The cost of constructing the wall is estimated to be around $5 Billion ~ $20 Billion (small range of estimates, huh?)

If things come to it, someone will win the contract and build that wall.

It’s quite clear now that you and I will be paying for it too.

If it does come to it, I just want to make sure that my money pays only for what is intended and not be stolen, wasted, or abused!

So, how can we prevent our money from being abused? Although it’s very difficult to setup a fail safe prevention, we can start with requiring the contractor to do Job Costing. By means of Job Costing, we can;

·         Segregate Direct Costs

o   I only want to pay for what goes in the wall

·         Allocate Indirect Costs

o   I only want to pay for my fair share of the CEO’s salary and rent, etc.

·         Exclude Unallowables

o   I don’t want to pay for alcoholic beverages, advertising, finance interest, etc.

Well, requiring Job Costing may be a carrot, but we do need a stick as well, right?

Let’s require annual audits of the contractor’s incurred costs.

Do you agree that job costing and audits might help with making sure our tax payers’ dollars don’t go to fraud, waste, and abuse?

This is the main reason I am so proud of my colleagues at the Defense Contract Audit Agency (DCAA).

If you are a Government Contractor, you are familiar with this concept.

Feel free to reach out if you have any questions or would like assistance.

Dan Kim, CPA

2019 DCAA’s push for Accounting System Reviews

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It was a normal day at the gym. I was doing some bench presses, when an older gentleman, albeit in better shape than most in their twenties, approached me. “Would you mind if I share some advice with you?” He corrected my posture, lowered the amount of weights, and explained which muscles to use. I thanked him for not only his advice, but also the confidence I felt in how effective my future work outs would be. What a nice feeling!

Well, if you have been paying attention to the news lately, you might have heard that there is a push for more Accounting System reviews at DCAA. This does make a lot of sense. Rather than placing a lot of effort into more incurred cost audits, like I was focused on pushing more weights at the gym, it would be much more effective to ensure that your accounting system is doing the right things, like having a better posture.

So, what is DCAA looking for in an accounting system? Mainly, they are ensuring that your accounting system is designed to do;

·         Job Costing

·         Proper indirect cost allocations

·         and, have proper controls.

I was lucky this morning to run into that gentleman. Turns out that he is a professional trainer and I benefited from his expertise. Just like I was at the gym, you are lucky as well. Turns out that I am not only a former DCAA Supervisory auditor, but also as a “Technical Specialist,” which is DCAA’s title for subject matter expert, with a specialty in Accounting Systems.

Apparently, anything can be done better, whether it is bench pressing or job costing. You just need the right expertise working on your side.

Would you mind if I share some advice with you?

If so, could you kindly give me a call or email?

With big smiles, have a wonderful day.

Dan Kim, CPA

How much was the direct labor cost on that contract again?

Greetings,

In this episode, rather than continuing in the order of the audit program for Pre-Award Accounting Systems, allow me to dive a little bit deeper into the tools that can be used for job costing. More specifically, let’s get into what tools can be used to identify revenues and direct labor costs by contract, and be in compliance with the various Federal Acquisition Regulations (FAR).

 

Objective:

·         Record direct labor dollars by contract and produce reports (Putting what I paid my employees into the right buckets and showing it)

 

Tools needed:

·         Accounting Software

·         Timekeeping System

·         Labor Distribution System

 

Accounting Software:

Since our focus is to achieve this capability with a good balance between functionality and price, I will use QuickBooks Online (QBO) Plus for this example. One aspect that we love about QBO is that it is relatively inexpensive, and constantly evolving. The recent addition of the “Projects” feature is a good example of how the software continues to get better in response to user demands. The benefits of having a cloud based system, along with the commonly known risks associated with anything on the Internet, also characterize the experience with QBO.

So then, how can we “Record direct labor dollars by contract” using QBO?

The first thing we need to do is tell QBO that we have Government contracts (buckets), for which we want to accumulate costs by. Within QBO, this can be done by using its Customers and Subcustomers feature, or by using Classes.

At the time of this writing, QBO’s Projects feature is rather new and promising; however, yet to be tested by us. So, we will stick with using Customers and Subcustomers for now. Maybe in the near future, we will find the Projects feature to be more efficient and effective. I’ll let you know soon.

The key in identifying Cost Objectives (buckets) for QBO, is to set-up those Government Contracts as “Customers” by first creating a Customer that represents the Government Agency you are working with, and then a Subcustomer that represents the contract that you have with that Government Agency. By doing this, you have basically created a “bucket” for QBO to dump transactions into. You can create as many of these Cost Objectives (Buckets) as necessary.

Nice, we have buckets now.

Okay then, how do I tell QBO how much to put into each bucket?

This is where the timekeeping system and labor distribution system comes into play.

 

Timekeeping System:

As you know, employees can end up working on multiple contracts. In order to tell QBO how much of an employee’s salary should go into which bucket (or posted under which Subcustomer), we first need to figure out how many hours the employee worked on the different contracts. The tool used to figure this part out is the Timekeeping system. Essentially, we need a Timekeeping system that will;

·         Allow for recording all actual hours worked;

·         Present the contracts (buckets) as a charge code to be selected by the employee;

·         Sync with QBO to transfer over the recorded hours by contract

·         and, meet the requirements in FAR and DFARS; including certification by employee and supervisor, locking mechanism, etc.

As for now, we are finding T-Sheets to be our choice of Timekeeping system. It not only syncs well with QBO, but also offers a version that is designed to meet the government requirements for a timekeeping system. The key in setting up this timekeeping system is to ensure that the Customers and Subcustomers you have set-up in QBO show up as Charge Codes.

 

Great! So now we have buckets in QBO, and a system that can tell how many of an employee’s hours belong in each bucket. Now we have to tell QBO how many dollars each of those employee hours cost. This is where the Labor Distribution system comes into play.

 

Labor Distribution System:

The Labor Distribution System is a tool that shows how much an employee got paid, and how many of those dollars went into each bucket (contract). In a nutshell, the Labor Distribution Report (LDR) will;

·         Reconcile to payroll records;

·         Reconcile to timesheet reports;

·         and, reconcile to amounts recorded in each bucket within QBO.

This is achieved by taking the employee’s salary and dividing that by the total number of hours worked during that pay-period to arrive at an effective hourly rate. The labor distribution system then applies that effective rate to the number of hours that the employee charged to each contract (bucket). This results in those hours charged under each bucket to be converted into dollars.

 

Doing the work:

Cool, so now that I know how much should be charged to each contract, which is setup as a Subcustomer in my QBO, how do I tell QBO to post (dump) that amount under that contract (bucket)?

 

Posting the above direct labor cost under the right Subcustomer (contract) can be done by using a Journal Entry in QBO. When you run payroll, a Journal Entry should have been made into QBO by the payroll system that dumps all the right costs into the right categories, such as Salary Expense and Payroll Liabilities, etc. The Journal Entry that we enter now is one that essentially breaks the employee’s paycheck into a number of pieces that matches the number of buckets he charged this period, and the amounts as calculated in the Labor Distribution System, and “tagged” by the right contract (Subcustomer). Putting this Journal Entry into QBO, allows for the software to recognize how much of the employee’s salary falls under each contract and produce reports that show that. We recommend doing this task after each pay-period, and no less than at least once a month.

 

Please do keep in mind that there are other factors to take into consideration when doing job costing, such as; using the above system to record revenues by contract, charging direct vs. indirect hours, moving the right amounts into the right indirect pools, and the normalization of Uncompensated Overtime, etc.

This seems to be a great opportunity to introduce our CFO Augmented Business Service for Government contractors. We call this the CAB Service, which is a monthly subscription fee based service, that includes among other things, doing the above tasks on your behalf!

By subscribing to the CAB Service, you can avoid having to worry about this task at a cost that is lower than that of hiring an in-house bookkeeper.

Also, as is always the case, please feel free to call or email me if you have any questions!

Until then, happy Government contracting!

 

Dan

 

 

How much did that contract cost?

Pre-Award Accounting System Survey

 

3. Direct costs by contract.

 

Greetings and welcome back to my DCAA Blog.

We’ve been unpacking the audit program used by DCAA for Pre-Award Accounting System Surveys over the past few issues.

As you already know, the Pre-Award Survey is something that DCAA usually performs prior to the award of a contract to ensure that your accounting system can handle a government contract.

Today, let’s dive into Step 3 of that audit program, Direct Costs by Contract, which calls for the auditor to check your accounting system and verify that it can produce a subsidiary job cost ledger which accumulates costs by contract.

That was indeed a mouthful of words.

Some of the technical terms used in this step include; direct costs, job costing, and subsidiary ledger.

Allow me to provide a brief description on what those are.

First thing we should discuss is the concept of a job. In cost accounting, a job is a final object that can be identified separately from other work. More formally, the terminology used is Cost Object. For government contractors, a job is usually a contract, or a task order, or a grant. Such jobs are considered final cost objects because it is the end point where various expenses accumulate and don’t get further allocated to other jobs.

So, direct costs are those expenses that can be clearly tied to a particular job. For example, at a manufacturing firm, direct costs could be the salary of an employee who worked on a particular order. Direct costs can also include the cost of materials that went into working on that order.

Next is the ledger.

Within one’s accounting system, we find many accounts. Examples of those accounts include Cash, Revenue, Direct Labor, Direct Materials, Overhead, Fringe Benefits and such. Accounts are basically a collection of transactions of like kind that are grouped together. So, as you look into a particular account, you’d be able to see all the transactions that make up that account. A ledger is a collection of such accounts. Meaning, if you look into a ledger, you would see all the accounts that make up that ledger, and also, all the transactions that make up each account in that ledger. The ledger that has all the accounts within an accounting system, and all the transactions that make up each account, is known as the General Ledger.

When you make a ledger of not all but a choice of accounts, that ledger is known as a subsidiary ledger.

In this audit step, the auditor is required to verify that your accounting system can generate a subsidiary ledger that has all the accounts related to a particular job (contract). In other words, your system should be able to generate a report that shows which accounts are related to a contract, and also show every transaction that makes up each of those choice accounts. If you have multiple contracts, then this report would show the contracts next to each other. Using this report, you would be able to see how much of expenses you have for each contract.

Most advanced accounting systems have this capability and are found suitable for government contracts, with the drawback of having price tags that can prevent some small contractors to purchase.

For small contractors, often times the choice of accounting system is QuickBooks for it’s ease of use, reasonable capabilities, and price.

So, is it possible to produce a subsidiary job cost ledger which accumulates costs by contract using QuickBooks?

Yes, it can be done. It does require some initial setup work. For example, setting up the jobs (Contracts) as customers and sub customers, setting up the direct labor and materials as service items, and setting up accounts to be used for indirect cost allocations. But the point is that it can be done.

Do you have questions on how to setup QuickBooks to meet this steps requirement?

Please feel free to reach out to me directly by phone or email.

Thank you and see you next time!

 

Dan Kim, CPA

Thoughts on Segregation... of costs that is.

Hello,

 

So, on our last blog, we began unpacking the audit program for DCAA's Accounting System review. Remember, that is the audit program used by DCAA to see if your accounting system is ready to handle a government contract. Well, last time we covered step 1 - verifying the accounting system's compliance with GAAP. In this issue, we continue with audit program Step 2 - Proper Segregation of Costs.

 

Step 2 - Proper Segregation of Costs.

 

So, what does "Proper Segregation of Costs" mean?

The easy answer would be to group your expenses by types. The common understanding is that we should not do this with people; however, when it comes to expenses, we do need to segregate them by like-kinds.

So, what are the types then? Good question! We’d have to know the types in order to group them, right? Well, let’s dive into this audit program step together.

Step 2 requires the auditor to review your accounting system and check to see if it can prevent direct charging of indirect expenses and indirect charging of direct costs.

In other words, your accounting system must be able to segregate direct vs indirect costs.

I assume that most of you understand the difference between direct and indirect costs, so rather than explaining that difference, let's dive into an example scenario.

 

Let's say at ABC company, you have an engineer, Ms. Angelina, who also serves as a manager.

 

Ms. Angelina spends a portion of her day working with the marketing department, another portion talking to her managers, and a portion of her day doing engineering work on a specific contract for a specific government agency.

 

You see, in this situation, there is a high risk for Ms. Angelina's time to be charged directly when she's actually working on an indirect function and vice versa. This situation presents a risk to the government, and also other clients of the company. If her indirect hours inadvertently get charged directly to a contract, that one customer ends up paying for indirect work that everyone else benefited from without having the other customers pay their fair share. This situation also presents the risk that the company may purposely charge some indirect costs directly to a contract in an effort to lower the indirect costs on other contracts. The risk here is that costs may be shifted between contracts through the misclassification of direct and indirect costs. Therefore, the audit program directs the auditor to verify that adequate controls, designed to prevent and detect such errors, exist.

 

The specific type of control that should be in place, and the effectiveness of such control, depend on the type of cost element (i.e. labor, materials, etc.) and business. Popular controls for labor include the use of Work Authorization Forms, restrictive timekeeping systems, and written Policies & Procedures that describe the proper treatment of such costs.

 

I hope that going over audit step 2 provided some insight into controls for direct vs indirect costs.

 

In our next issue, we'll unpack step 3 - accumulation of direct costs by contract.

 

Until then, as always, please feel free to reach out with questions or comments.

 

Happy Government Contracting!

Dan

Got the big contract, now what?

Have you won a government contract?

Congratulations!

Government contracts are great in that they provide stability and a foundation for continued growth.

In my perspective, winning a government contract is, in a sense, like taking on the responsibility to function as the government. I say that because you will enjoy the stability, but also own the risk of slim margins, and the responsibility of controlling costs. Your customer, the government, also has a great interest in how you manage your costs. After all, you are using tax payers’ dollars. A talk about the government budget and the now so familiar Continuing Resolutions will take place on another blog.

Today, let’s talk about the initial audit you may face as a government contractor.

The Defense Contract Audit Agency (DCAA) provides services to the DoD and the rest of the federal government for its audit needs. When a contract is awarded, it is common for the awarding agency to request DCAA to perform an Accounting System Survey of the contractor. In a nutshell, the government is trying to ensure that your accounting system can handle the contract.

Now that we know who conducts the audit, let’s find out what the actual audit looks like.

DCAA auditors conduct accounting system reviews based on one of the two following audit programs;

1. Pre-award Survey of Prospective Contractor Accounting System

2. Post-award Accounting System Survey

These audit programs are publicly available on DCAA’s website and serve as a step by step guide for the auditors. Check out the awesome video while you’re on their website!

As a contractor, it would help to know what the audit program steps consist of, right?

Well, how about we take a deeper dive and unpack DCAA's audit program for accounting systems?

Since the audit program does have many steps, roughly 30, I’ll go over the important ones on separate blog posts going forward.

For today, let's start with the first step in the audit program for the PreAward Accounting System Survey.

Audit Program Step 1

Generally Accepted Accounting Principles (GAAP)

The first step in this audit program asks the auditor to determine whether the accounting system is designed to be in compliance with GAAP.

What is GAAP?

GAAP is the accounting principles currently used in the United States and provides rules on how financial transactions should be accounted for. A few of the more famous principles within GAAP include the Revenue Recognition Principle and the Matching Principle.

A quick glance at the Revenue Recognition Principle:

The Revenue Recognition Principle helps us determine when to record the fact that we have made money. You may think of this as such a simple concept that it's strange to even have a principle.

We record revenues when we get paid, don't we?

Well, if you are on a cash based system, then posting a sale in your books when you get paid is correct. However, if you are going by the Accrual Basis, which is a GAAP requirement, then it gets just a bit more complicated. GAAP and its Revenue Recognition Principle state that you should record the fact that you have "made money" when you have "earned the right" to your customer's money. The principle states that you record revenues when you have delivered the product or completed the service, rather than when you actually get paid from your customers. This means that you record revenues when you have delivered on your promise regardless of whether they have paid you ahead of time, right as you complete the services, or even much later. This is what causes the need for an Accounts Receivable account and at times an Unearned Revenue account! So, how does an auditor determine whether your accounting system is in compliance with this principle? The answer is pretty simple. When I was at DCAA, I'd advise my auditors to ask for the company's Chart of Accounts and look for account names that indicate intentions to comply with the Revenue Recognition Principle.

Another fun concept in GAAP is the Matching Principle. The Matching Principle provides guidance on when to post expenses. It states that expenses are to be recognized at the time the relative revenue is being recorded. You're probably scratching your head by now... I know... This concept takes a little more time to understand. In any case, complying with this principle would result in accounts such as, Accounts Payables, Accumulated Depreciation, Prepaid Expenses, etc. Again, compliance with the Matching Principle can be observed by reviewing your Chart of Accounts and looking for names that indicate intentions to comply with this principle.

Good stuff!

Well, the Revenue Recognition Principle and Matching Principle are only two of the most famous principles in GAAP. In this same step, the auditor may seek for additional facts that prove the existence of basic accounting tools, such as a journal, general ledger, capability to produce trial balance sheets, adjusted trial balance sheets, and financial reports. Contractors can usually satisfy this step by showing the auditor the accounting software that they intend to use. Most accounting software today provide all of the above tools and functionalities. Hence, the reason for auditors to have more interest in the customized parts of your system, for example, your unique Chart of Accounts.

On our next blog, we will cover;

Step 2. Proper segregation of costs.

Until then, as always, please feel free to reach out to us with questions or comments.

Happy Government Contracting!

Dan

DCAA Compliance Seminar in Columbia, MD

Greetings,

We are hosting a DCAA Compliance Seminar right here in our hometown Columbia.

The course is designed for small government contractors that have the need to comply with compliance requirements on a budget.

Course content includes basic accounting concepts describing how to understand your financial statements.

Please RSVP by calling or emailing our office.

Thank you