Eliminates “Inadequate in Part” Opinion

In a very significant departure from traditional practice, DCAA will no longer allow “inadequate in part” opinions on internal controls related to system reviews. In the past, when DCAA conducted a system review (e.g. accounting system, estimating, billing, purchasing) it would commonly assess the internal controls practices related to that system (e.g. written policies and procedures, training, division of responsibilities and authority) and would then express one of three opinions on the system – “adequate”, “inadequate in part” or “inadequate.” Now that second opinion will no longer be issued. From a practical standpoint, the “inadequate in part” opinion was not considered nearly as bad as “inadequate” and generally offered opportunities to make necessary fixes quickly and soon receive an adequate opinion. Now, internal controls and evaluation of the system will receive only one of two opinions – adequate or inadequate. (Editor’s Note. We were uncertain whether the inadequate opinion is to apply only to internal controls of a system or the system as a whole so we made several inquiries to authoritative sources who all indicated that a negative assessment of internal controls during a system audit would result in an opinion of inadequate to the system itself, not just specific internal controls.) Once a system is deemed inadequate, the audit report will recommend to the contracting officer they disapprove the system and pursue suspension of either a percentage of progress payments or reimbursement of costs. (In our experience, even worse consequences result from inadequate opinions such as failure to win new awards.) The guidance also states an opinion of inadequate internal controls does not have to have a direct relationship to charging unallowable costs to government contracts but can be any significant internal control where poor ethics and integrity controls are cited as an example. In addition, DCAA will no longer report on minor discrepancies that were entitled “Suggestion to Improve the System” because these practices caused “confusions.” For now, the guidance appears to be applicable to only major contractors (08-PAS-043(R)).

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