This section of the guidance is intended to identify any other indicators that raise questions about contractors’ financial distress. The guidance stresses that the auditors may become aware of significant indicators in their analysis of financial statements and accompanying notes, audit leads during prior audits, discussions with contractor personnel and other government representatives. Significant events and conditions to be alert to include:
defaults on loan/line of credit agreements
denial of usual trade credit from suppliers
restructuring of debt resulting in paying higher interest rates
noncompliance with loan/line of credit covenants
contracts in significant loss positions
legal proceedings/pending claims
loss of principal customers or suppliers
uninsured or underinsured catastrophes
labor strikes
(10) unpaid taxes
(11) contingent liabilities
(12) deteriorating bond ratings
(13) significant dollar amounts of accounts receivable
(14) material defective pricing findings from post award audits
(15) contract termination for default
(16) deferral of payments to suppliers
(17) failure to fund pension plans
(18) loans from employees or issuing of stock to employees in lieu of salary
(19) environmental clean-up impact
(20) significant unpaid contractor debts
(21) unusual progress payment or other billing concerns
(22) parent company undergoing financial distress
(23) physical condition of facilities
(24) unpaid insurance liabilities.
In addition, the auditor and supervisors should discuss with the contractor any plans to enter into significant leases, make significant capital expenditures, liquidate assets, borrow significant cash or restructure debt, reduce or delay expenditures and increase ownership equity. Also, any unusual compensation packages or outstanding loans to other company operations or offices that would drain financial resources from operating units having government contracts should be identified.
Once the applicable risk assessment procedures have been performed the conclusions should form the basis to decide to perform a financial capability audit. When the risk assessment is initiated by DCAA and no significant risk is identified then the results should be summarized in a memo for the record; when no significant risk is found for risk assessments requested by others (e.g. contracting officers) then the conclusions should be communicated to the requestor and the conclusion that no further analysis is warranted should be confirmed in a memo. If the requestor still desires performance of a financial capability audit or DCAA has decided that sufficient risk exists then a financial capability audit should proceed.
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