Various Chapters. Various sections of the DCAM are amended to reflect DCAA’s responsibility to ensure relevant contractors are registered in the Central Registration database when they do business with the Defense Department or NASA. Auditors are instructed to ensure the contractors are registered when they are performing reviews of billing system internal controls (Chapter 5-1103), reimbursement claims (Chapter 6-1006) and proposals (Chapter 9-102.2.3).

Chapter 5, Internal controls. Section 5-1209.3, Review of Subcontract Proposals is amended to instruct auditors they need to ensure that contractors’ policies and procedures require them to (1) conduct cost or price analysis of subcontractors’ proposals to establish reasonableness of proposed subcontractor prices (2) include the results of these analyses in the price proposal and (3) when required by FAR 15.404-3(c) – when the subcontract price is either $10 million or more than 10 percent of the prime contractor’s proposed price - submit subcontractor cost or pricing data to the government as part of its own cost or pricing data.

Chapter 6, Incurred cost audit procedures. Section 6-705 is revised to ensure that billing rates for interim payments on cost type work are adjusted for (1) accrued indirect costs the contractor is delinquent in paying in the ordinary course of business per FAR 52.216-7 (2) accrued costs of pensions, post-retirement benefits and profit-sharing or employee stock ownership plans that have not been paid at least quarterly (within 30 days of the end of the quarter) (3) amortized restructuring costs that have not been certified per DFAS 231.205-70 and (4) costs covered by advanced agreements.

Chapter 7, Selected costs. Section 7-1202.2 does not extend after December 31, 2002 an earlier DOD deviation allowing contractor employees’ donations of leave time (e.g. vacation leave but not sick leave) for charitable purposes in the wake of the September 11 attack.

Chapter 7-1702, Business combinations, has been amended to reflect the impact of Financial Accounting Standards Board No. 141. The guidance states a business combination occurs when an entity acquires net assets that constitute a business or acquires equity interests of one or more businesses to obtain control over them and the new entity carries on the activities of the previously separate, independent enterprises. It also restates the lengthy prescription for how to value acquired assets under the purchase method. Under FASB No. 141 all business combinations concluded after June 30, 2001 must be accounted for using the purchase method where any excess of the fair value of the identifiable assets purchased over the fair value of liabilities assumed will be recorded as goodwill which is expressly unallowable as both a cost and an element of the facilities capital employed used to compute cost of money. Simply put, the government will not recognize for cost allowability purposes any costs resulting from the increase in value of acquitted assets (or creation of new assets) as a result of a business combination. The guidance also seeks to reconcile FAR 31.203(c) that requires the full amount of assets be included in the allocation bases (e.g. total cost input base, three factor formula for allocating home office expenses) so as to cause the unallowable portion of costs to absorb a portion of indirect costs and a class deviation issued by DOD in 1999 and effective through September 2005 which provides that indirect costs allocable to the stepped-up asset value following a business combination will not be disallowed.

Chapter 7-2105. A new section on Professional and Consulting Services has bee added. Auditors are reminded to carefully consider such factors of allowability as to the nature and scope of services rendered in relation to the services required, whether the service can be performed in-house more economically and whether retainer agreements are reasonable and customary and are reasonable in comparison with in-house capability. They also need to be alert for "irregularities" such as concealment of unallowable political donations or bribes disguised as consulting costs. The new guidance states that professional and consulting costs are addressed primarily in FAR 31.205-33 but also related activities are addressed in other cost principles and that properly supported costs are generally allowable unless they are for otherwise unallowable activities. Unallowable activities identified in FAR 31.205-33 include (1) services to obtain and distribute or use information or data protected by law or regulations (2) services intended to improperly influence the content of a solicitation, evaluation of proposals or selection of sources for contract award (3) violation of statute or regulations for improper business practices or conflicts of interest (4) services performed that are not consistent with services contracted for or (5) costs that are contingent on recovery from the government. Unallowable activities covered by other cost principles are (1) costs of planning or executing an organization or reorganization (2) cost of resisting or planning to resist a reorganization (3) costs of raising capital (4) cost of financing and refinancing operations, preparation of prospectuses and preparation of stock rights (5) costs related to bad debts (6) costs related to legal and other proceedings (7) unreasonableness of costs (31.201-3) or (8) costs not allocable to government contracts (31.201-4).

Also auditors are reminded that in addition to supporting evidence of consulting costs such as invoices/billings and consultant’s work products a third area of review is to compare all agreements (e.g. work requirements, rate of compensation and nature of other expenses) with actual services performed. Where failure of providing work product was often considered sole grounds for disallowing consulting and professional services costs in the past, the new guidance softens this strict requirement by stating "other evidence may also suffice." Auditors are told not to insist on a work product if other evidence provided is sufficient to determine the nature and scope of actual work performed. But if the contractor refuses to provide work product and the auditor cannot determine the nature and scope of work, auditors are told to still question the costs.

Chapter 14, Other Audits. Chapter 14.301 is amended to emphasize the need of auditors to be alert to conditions indicating unfavorable or adverse financial conditions that impede the contractor’s ability to perform on government contracts. Rather than wait to be requested by the CO or other agencies, auditors will now self-initiate an annual assessment of contractors’ financial condition to see if there is the need to perform a financial capability audit. These risk assessments, which we will discuss in the next issue, can be conducted either as a separate audit assignment or as part of another assignment such as a preaward review, adequacy of accounting system survey or audits of advanced or progress payments.

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