The Defense Federal Acquisition Regulation Supplement (DFARS) outlines specific requirements for contractors’ accounting systems. These systems play a crucial role in ensuring accurate financial reporting, compliance with regulations, and effective cost management. Let’s delve into the key aspects of DFARS accounting systems and their significance.
What Is an Accounting System?
DFARS 252.242-7006(a)(2) defines an accounting system as “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”.
System Criteria for an Acceptable Accounting System
To maintain an acceptable accounting system, contractors must adhere to specific criteria outlined in DFARS 252.242-7006. Here are the essential elements:
- Internal Control Environment: Contractors should implement an internal control environment that incorporates appropriate accounting frameworks.
- Segregation of Costs: Properly segregate direct costs from indirect costs.
- Direct Cost Identification: Identify and accumulate direct costs by contract.
- Indirect Cost Allocation: Develop a logical and consistent method for allocating indirect costs to intermediate and final cost objectives.
- General Ledger Control: Accumulate costs under general ledger control.
- Reconciliation: Reconcile subsidiary cost ledgers and cost objectives to the general ledger.
- Adjusting Entries: Document and approve adjusting entries.
- Management Reviews: Conduct management reviews or internal audits to ensure compliance with established policies and procedures.
- Timekeeping and Labor Distribution: Implement a timekeeping system that identifies labor by cost objectives and a labor distribution system for charging direct and indirect labor.
- Routine Cost Determination: Determine costs charged to contracts at least monthly through routine posting of books of account.
- Exclusion of Unallowable Costs: Exclude costs not allowable under Federal Acquisition Regulation (FAR) part 31 and other contract provisions.
Many organizations struggle to fully understand the DFARS requirements for an acceptable accounting system. Interpreting and implementing internal controls correctly are crucial for compliance. Additionally, determining the most appropriate method to allocate indirect cost can be tricky. A logical and consistent approach that aligns with business practices and contract requirements is a must. Additionally, as the organization grows, the accounting system should be scalable. Ensuring scalability without compromising compliance can be a balancing act.
Consequences of Non-Compliance
Failure to maintain an acceptable accounting system may result in:
- Withholding of Payments: If the contractor's accounting system fails to meet requirements, the government may withhold payments, which can disrupt cash flow and impact the financial stability of the contractor.
- System Disapproval: The system may be disapproved, affecting the contractor's ability to rely on the information produced by the system for management purposes, which will affect the contractor's ability to pursue contracts.
- Increased monitoring: Contractors that fail an audit may face additional scrutiny from the government, which can lead to additional audits, documentation requirements for vouchers, reviews, and oversight.
- Legal and financial penalties: Non-compliance may lead to legal actions, claims, fines, and penalties.
Best practices for compliance:
- Regular audits and assessments: The contract should routinely perform risk assessments and internal control audits.
- Training and education: Provide continual training to employees on the organization's policies and procedures, regulations, and best practices.
- Cybersecurity: Implement cybersecurity measures to safeguard proprietary and sensitive information.
- Document, Document, Document: Maintain records that will allow the traceability of transactions back to source documentation.
- Collaborate with experts: Seek guidance from DFARS compliance experts or legal professionals.
Conclusion
DFARS accounting systems are critical for accurate financial reporting, risk mitigation, and compliance. Contractors must establish and maintain robust systems to meet the specified criteria and ensure transparency and reliability in their financial data.
Remember that adherence to DFARS requirements not only benefits the contractor but also contributes to the overall effectiveness of defense acquisition processes.
Contact Us
For more information on this topic, please contact a member of Withum’s Government Contractors Services Team.
