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The pitfalls of bad accounting practices for government contractors
Bad accounting practices are like bad habits – most start unintentionally and then become hard to break. Whether it’s a lack of segregation of duties, inadequate training, or the wrong accounting system, the results are the same – inaccurate and untimely financial statements. Practices that worked in the recent past may now be antiquated. Growth, acquisitions, new business lines, or new contract types all may be triggers to re-thinking your current accounting practices.
A lack of segregation of duties leaves you vulnerable to fraud. This also leads to missed information or duplication of effort because the left hand doesn’t know what the right hand is doing.
Risks can be mitigated by making sure you have the right setup within your accounting systems, and by ensuring you have the right checks and balances within your policies and procedures. Access rights within your accounting system should be given to those needed to perform daily duties, while posting rights should be limited to those with suitable knowledge. Limiting check signing privileges based on amount, and requiring a second signature for other pre-determined amounts is a great example of segregation of duties and control for cash. Procurement is a third area to ensure you have pre-set amounts to prevent the company from being obligated beyond its capability.
By having the controls and segregations of duties you will create efficiencies.
When bringing on new personnel, you should make sure they get the proper training on the accounting system, and your company’s specific policies and procedures. Refresher training should be considered annually or when significant changes are made to current operations. This ensures consistency.
Policies and procedures are the backbone of the accounting department. It’s the first review request when going through any kind of audit or examination. Undocumented policies and procedures leads to inconsistencies. When you’re a government contractor consistency is key. As a government contractor, it’s important to ensure your policies and procedures clearly document how you handle direct, indirect, and unallowable costs.
Indicators to look for include, creating a lot of excel schedules outside the system, inability to track costs by contract, and untimely financial statements which prevent you from making real-time decisions. Government contractors should make sure their accounting system can meet all the criteria of the Defense FAR Supplement (DFARS) BSR clause 252.242-7006(c) to ensure the contractor is following their established policies and procedures, and that they’re compliant with all applicable guidelines and regulations. Our business system applicability rules tool also may help.
Growth, acquisitions, new business lines, or new contract types can be another prompt that you need to review your current accounting system to determine if it’s meeting your current needs.
The biggest pitfall of all is not asking for help. The first step in planning for a DCAA audit includes a walk though of internal control, an understanding of segregation of duties, and a review of policies and procedures. These items set the tone for the rest of the audit. By addressing segregation of duties, having documented policies and procedures, and making sure you’re using the right accounting system, you can place increased reliance on the data within your financial statements and ensure a smooth DCAA audit.
Growth, acquisitions, new business lines, or new contract types can be another prompt that you need to review your current accounting system to determine if it’s meeting your current needs.
The biggest pitfall of all is not asking for help. The first step in planning for a DCAA audit includes a walk though of internal control, an understanding of segregation of duties, and a review of policies and procedures. These items set the tone for the rest of the audit. By addressing segregation of duties, having documented policies and procedures, and making sure you’re using the right accounting system, you can place increased reliance on the data within your financial statements and ensure a smooth DCAA audit.
For more information about how to avoid the pitfalls of bad accounting practices, please contact Susan Longo, Senior, Government Contracting Industry at susan.longo@cohnreznick.com or (703) 847-4437 or Christine Williamson, Partner, Government Contracting Industry at christine.williamson@cohnreznick.com or (703) 847-4412.
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For over 40 years, CohnReznick has provided comprehensive services to assist government contractors with a full life cycle approach to winning and managing contracts. We ensure your financial and procurement processes are compliant, efficient and effective - so you can focus on what matters most, profitable growth.
This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.