In the light of recent corporate scandals, DCAA is now required to conduct either a detailed or cursory financial risk assessment of government contractors and as we reported in the first quarter 2004 edition of the GCA DIGEST, DCAA is required to gather financial data to make their determinations.  An August 26 memo to its auditors has eliminated the Z-Score and two cash flow ratios – Cash Flow Return on Assets and Cash Flow Adequacy from the required data accumulation.  The Z-Score bankruptcy prediction model was eliminated because (1) it provided little additional assurance over the key ratio analyses performed (2) results were often misinterpreted or misunderstood by government contract personnel (3) the model was somewhat dated because it did not adequately address more current business practices such as just-in-time inventory and (4) use of the model required additional auditor documentation and working paper explanations that added little value to the financial condition assessment.  The two cash flow ratios were eliminated because they essentially duplicated the results of other calculated ratios (94-PPD-048(R).

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