Government Audits: Post TARP, Banking Meltdowns, Going Concern Assessments, and More

There are two extremely important issues that government contractors and grant recipients may not be aware of that may significantly impact them when they are under audit in the coming months and years. First, the banking, real estate, and other economic crises have initiated a “going concern” basket of auditor interpretations, assessments, and recommendations that are being applied in audits that are of substantial impact to how contractors/recipients to do business. Second, the level of understanding of business practices, methods, and “reasonable” standards may be lacking when it comes to the application and interpretation of standards and requirements being applied to companies.

Did You Know?

Government audit agencies are audited, including the Defense Contract Audit Agency (DCAA). In July 2008, the General Accounting Office issued GAO-08-857 Report entitled DCAA Audits Allegations That Certain Audits at Three Locations Did Not Meet Professional Standards Were Substantiated[i]. In this audit report, the findings were that the auditors were influenced to be favorable or that “auditor judgment” was sufficient to determine the adequacy of a contractor system. In light of this report, in December 2008, the DCAA issued new guidance REMOVING THE AUTHORITY OF THE FIELD AUDITOR TO EXERCISE JUDGMENT IN MAKING DETERMINATIONS.

Impact of Lack of Judgment

A colleague has likened the DCAA audit force to “automatons”; they go to the field and look around. They are by the book and the book has one set of standards. As a result, if you are a small business with a manual timekeeping and accounting system and the auditor in the course of gathering his field paperwork follows the checklist as prescribed (no judgment), then you may find yourself with the determination that you do not have an “adequate” accounting or timekeeping system. Because the auditor had no discretion or ability to exercise judgment in the field, your perfectly documented, completely accurate, manually maintained and calculated, signed, recorded, calculated, allowable costs could all be disallowed. Even worse, you could lose the contract entirely because you failed the audit. To make matters worse still, you just passed an independent, external audit to government Yellowbook standards that took two months and cost you $50,000. How is that possible?

Ongoing Concern: How Far Will They Go?

Health and Human Services auditors arrive to review your independent audit. They note that you have an investment account for your excess funds on hand. They inquire as to whether the account is FDIC insured. You answer “no, but there are no government funds in the account.” (Yes there are grant proceeds in which you have been reimbursed or profits from contracts, but no GOVERNMENT funds.) The question is NOT if there are GOVERNMENT FUNDS, but if the account is INSURED. The answer is no. What is the issue? Is there a regulation against a private company having its own funds and profits invested in a non-insured account? There may be …

The Point

It may not be in the Code of Federal Regulations, Federal Acquisition Regulations, or any of the other terms and conditions you signed up for … yet. But the reality is, the rules have and are changing. And as the old saying goes, “The piper calls the tune.” The auditors and agencies awarding your contracts and auditing are changing how they interpret and apply the tests for reasonableness, looking at business practices for how they impact the “going concern” ability: if you put your money in an investment account and lose it in the stock market, will you be able to finish your contractual obligations, and so on. What were acceptable business practices and reasonable risk levels before may not be today. Passing your audit from an independent audit firm, no matter how thorough and qualified, won’t guarantee the government auditor will have the same perspective tomorrow.

The Recommendation

What is a business to do in the face of changing requirements and interpretations? The following list is a good place to start.

  1. Be sure you have all the recommended/required policies
  2. Review existing policies and ensure that no policy is more than one year old
  3. Make sure your policies reflect what your business actually does
  4. Update cash management and control policies to include:
    1. Banking
    2. Credit
    3. Investments
    4. Risk assessments
  5. Evaluate government funds policies and tracking methods, including
    1. Advances
    2. Reimbursements
    3. On-hand balances
    4. Program income
    5. Interest
    6. Credits
  6. Update audit policies
    1. Government agency requirements and exceptions
    2. Commercial business requirements
  7. Evaluate cost policy
    1. Sufficient detail to support process
    2. Cost/benefit explanation for level of tracking
    3. Segregation of costs
    4. Definition of costs
    5. Indirect rate calculation method and pools
    6. Chart of Accounts
  8. Have appropriate corresponding procedures that detail “how-to” for critical processes related to each policy

You may not be able to prevent the regulatory landscape from changing right under your feet, but you can watch your step as you go.

©2009 F.O.C.U.S. Resource Inc.

All Rights Reserved


[i] Retrieved from http://www.gao.gov/products/GAO-08-857

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