In Recommendation 72 of Volume One of the Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations (“the Section 809 Panel”), the Panel recommended that the Department of Defense (“DoD”) replace the system criteria in Defense Federal Acquisition Regulation Supplement (“DFARS”) 252.242-7006, Accounting System Administration, with a review of internal controls to assess the adequacy of contractors’ accounting systems. According to Volume Three of the Report, the Panel defined the framework necessary to implement the recommendation as a body of professional standards developed to address Section 404(b) of the Sarbanes-Oxley Act of 2002 (“SOX”).
The change in focus from system criteria found in DFARS 252.242-7006 and listed as a checklist in SF1408 to internal controls occurred because of complaints that the criteria were not objective or measurable. The Panel believes that use of the SOX 404(b) framework in the conduct of audits of internal control will provide:
- An engagement framework used in the private sector that is well established and understood;
- More useful and relevant information to the acquisition team, contracting officer and contractor; and
- Clear and objective criteria for accounting system requirements.
Use of the SOX framework eliminates the need to develop defined criteria and terminology which in turn reduces the time needed to implement the framework in accounting system adequacy checks. In addition, the framework also satisfies the requirement at Section 893 (a) of the FY 2017 NDAA to develop “clear and specific business system requirements that are identifiable and made publicly available.”
Per the Panel’s recommendations, auditors will evaluate whether key internal controls are in place and operating to provide reasonable assurance that:
- Direct costs and indirect costs are classified in accordance with contract terms, Federal Acquisition Regulations (“FAR”), Cost Accounting Standards (“CAS”) and other regulations.
- Direct costs are identified and accumulated by contract in accordance with contract terms, FAR, CAS and other regulations.
- Methods are established to accumulate and allocate indirect costs to contracts in accordance with contract terms, FAR, CAS and other regulations.
- General ledger control accounts accurately reflect all transactions recorded in subsidiary ledgers and/or other information systems that either integrate or interface with the general ledger including, but not limited to, timekeeping, labor cost distribution, fixed assets, accounts payable, project costs and inventory.
- Adjustments to the general ledger, subsidiary ledgers, or other information systems bearing on the determination of contract costs (e.g., adjusting journal entries, reclassification journal entries, cost transfers, etc.) are done for reasons that do not violate contract terms, FAR, CAS and other regulations.
- Identification and treatment of unallowable costs are accomplished in accordance with contract terms, FAR, CAS and other regulations.
- Billings are prepared in accordance with contract terms, FAR, CAS and other regulations.
Cherry Bekaert has a great deal of experience assisting contractors with accounting system reviews using the criteria in DFARS 252.242-7006 and SF1408 and with internal control reviews using the SOX framework. Please contact Cherry Bekaert with any questions about the current criteria, the new framework and preparation for accounting system reviews.
