Government contractors beware: 2012 may be the year of the government audit.
Financial scrutiny of contractors is expected to rise as the government expands its auditing workforce and the contracting pie shrinks. Agencies are coming under greater congressional scrutiny, and public pressure is mounting to ensure the taxpayer is getting the best deal.
One indicator came in a Nov.15 directive from Office of Management and Budget Director Jacob J. Lew, who ordered federal agencies to put more resources and emphasis into their suspension and disbarment programs.
Lew referenced a recent Government Accountability Office study which, he said, found that “more than half of the 10 agencies it [GAO] reviewed lacked the characteristics common among active and effective suspension and debarment programs: dedicated staff resources, well-developed internal guidance and processes for referring cases to officials for action.”
Government contractors have always faced an abundance of potential audits. The Defense Contract Audit Agency alone conducts several dozen different types of audits, including: pre-award reviews; incurred cost examinations; purchasing system reviews; billing system reviews; disclosure statement reviews; and provisional rate reviews.
Moreover, the number of rules and procedures to follow is mind-numbing. The Federal Acquisition Regulation, which is comprised of more than 1,700 pages of rules and regulations, is just one set of federal regulations pertaining to government contracts.
While no two audits are the same, government auditors are likely to place a greater emphasis on internal controls during 2012.
They will review your stated policies and procedures to determine the strength of your control environment, then typically make a random selection of transactions (for example, vendor invoices, employee time cards, travel vouchers) and scrutinize supporting documentation.
The auditors are looking to determine if the contractor’s policies and procedures were followed, approvals documented and internal controls enforced.
In addition, there are now many prospective government contracts that will be awarded only after rigorous assessments of the adequacy of the contractor’s business systems and internal controls. Contractors now will simply pass or fail, rather than possibly passing with certain deficiencies. All deficiencies must be addressed successfully before the contractor’s system is deemed adequate, and the contract awarded.
Many companies now are being proactive, seeking a third party to make an initial assessment as to whether their systems can meet Defense Contract Audit Agency requirements before being notified of a pending agency review. Such a review prior to bidding on a contract can provide the confidence to bid for all types of government contracts without business system constraints.
By implementing corrective measures that might be identified during the review, contractors can improve overall operations while staying ahead of the competition and helping ensure they will not be behind the DCAA eight ball.
Having the black mark of a failed government audit is a difficult position from which to recover, and amounts to a “scarlet A” in the world of government contracting. But the moniker can be avoided with prudent planning and taking proactive measures to shore up your systems in advance.
As we go into 2012 and face whatever budgetary cuts the government may implement, positioning your company to take advantage of every opportunity is more important than ever.
Michael Tinsley is founder and chief executive of NeoSystems , a Tysons Corner-based firm that provides back-office services for government contractors, nonprofit organizations and commercial entities.