c. Accounting Systems
The following comments were submitted regarding accounting systems:
Comment: The respondent recommended deleting the phrase "or functional specialist" from 242.7502(d)(2)(ii)(C). The respondent recommended that the 45 day period be extended to a 60 day period for a contractor to correct a deficiency or submit a corrective action plan as is currently in the DFARS. The policy at 242.7502(d)(2)(ii)(A) should include a requirement that the contracting officer's notification to the contractor include "sufficient detail to allow the contractor to understand the deficiencies and the potential impact to the Government" as is required in other system deficiency notifications. Finally, the respondent recommended that DCAA focus on the adequacy of a contractor's accounting system rather than the adequacy of the contractor's control environment and overall accounting system controls.
Response: The term functional specialist needs to be retained. When specialized expertise is required, the interim rule requires contracting officers to consult with auditors and other individuals with specialized experience, as necessary, to ensure a full understanding of issues. For example, certain issues relating to forecasted costs may require the expertise of engineers, price analysts, and others, to understand or evaluate the contractor's business system. It is not necessary to extend the 45 day period to 60 days. The contractor will be notified formally of deficiencies at the completion of the audit, and will be allowed 30 days to respond to the contracting officer's initial determination. The contractor will be well aware that a deficiency may need to be corrected and a corrective action plan may be needed well before that 45 day period begins. For clarity, the language pertaining to "sufficient detail" in a contracting officer's notification has been revised to state that a contracting officer's notification will provide "a description of each significant deficiency in sufficient detail to allow the contractor to understand the deficiency." DCAA will be reporting significant deficiencies in accordance with the new business systems rule.
Comment: The rule requires periodic monitoring of the accounting system but does not provide a definition of what the expectation or frequency of the accounting system reviews should be. Furthermore, the rule fails to recognize leading practices implemented in industry through continuous monitoring and exception reporting.
Response: The size and complexity of companies and their processes, operations, and accounting systems capabilities vary. Therefore, it is not feasible to establish specific requirements regarding the extent or frequency of periodic monitoring.
Comment: The respondent expressed concern that immaterial audit issues resulting from CAS 405 noncompliance audit reports will be considered significant, resulting in payment withholding and disputes. The respondent recommended eliminating accounting system criterion number 12 from the rule since remedies already exist through the application of the CAS administration clause as well as the Allowable Cost and Payment clause at FAR 52.216-7.
Response: The rule establishes criteria for an acceptable accounting system to provide reasonable assurance that applicable laws and regulations are complied with, accounting system and cost data are reliable, risk of misallocations and mischarges are minimized, and contract allocations and charges are consistent with billing procedures. An essential characteristic of an adequate accounting system for Government contract costing is the ability of the system to identify and exclude unallowable costs from costs charged to Government contracts. The remedies provided in the CAS administration clause and the Allowable Cost and Payment clause at FAR 52.216-7 do not replace the need for this essential control within a contractor's accounting system.
Comment: Accounting system criterion number 17 introduces the subjective and undefined terms "adequate" and "reliable" with regard to accounting systems providing data to be used to support follow-on acquisitions. It is not appropriate to tie the basis of estimates for proposals to the accounting system. Including this criterion in the accounting system and estimating system criteria is redundant.
Response: The variation and complexity of business systems is such that it is not practical to eliminate subjective terms entirely. While the terms "adequate" and "reliable" imply a degree of subjectivity, they are sufficiently common to enable reasonable parties to agree on the set of necessary characteristics to meet each threshold given the unique set of circumstances. It is not inappropriate to draw a connection between the basis of estimates for proposals and the accounting system. Achieving consistent and accurate estimates is dependent on obtaining accurate and reliable information, which often includes reported information about past results produced by the accounting system. The weight assigned to past results in developing estimates will vary depending on a variety of factors, including the similarity of past circumstances and the anticipated circumstances for which the estimate is being developed. In the case of a follow-on acquisition, as noted by the respondent, the circumstances are often similar, and thus actual results produced by the accounting system are likely to play a prominent role in developing the estimate. Estimators will likely improve accuracy when they consider the accounting system results during the development of their bases of estimates whether or not the acquisition is a follow-on acquisition.
Comment: Referencing 242.7502(g)(2)(v), which identifies reducing the negotiation objective for profit or fee as a means to mitigate risk of accounting system deficiencies, the respondent expressed concern that such reductions would be punitive to contractors beyond other measures in the rule. The respondent recommended removal of this paragraph.
Response: This interim rule does not limit the contracting officer's discretion to apply any and all regulatory measures, as warranted by the circumstances, including mitigating the risk of accounting system deficiencies by reducing the negotiation objective for profit or fee.