How to Prepare for a DCAA Audit

It is surprising to me how the word audit can create such fear in people.  I think either a previous bad experience or just hearing of someone else having a bad experience in an audit probably fuel that fear.  Also, the conventional wisdom about IRS audits don’t help give the word a positive feel.  I don’t think that an audit needs to be such an anxiety problem, if properly prepared for.  Specifically, I want to talk about a DCAA Audit here.  We have talked about this in the past in some of our blogs, and even have several tools on the website to help people prepare for this.  I thought today we can expound on this to try and resolve or reduce some of the fear associated with the word itself. 

The place to start to get ready for an audit is with Standard Form 1408 (or SF 1408 as it is affectionately known).  This checklist is what the government uses for a pre-award survey itself.  The form appears to be somewhat innocuous and simple.  Don’t be fooled as each of the points in the SF 1408 have much behind each one to become compliant.  For instance, when the SF 1408 says “Accounting System Provides for a logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives”, it sounds rather simple.  This statement implies a calculation method of indirect billing rates that is much more detailed than this simple statement implies.  The point I’m making here is while the SF 1408 is a good starting point, it only tells you the top level topics that the auditor will be concerned with.  To find out what is required, there are two sources of information to tell you what the auditor will be looking at: 1) the Federal Acquisition Regulations, mainly part 31, and 2) the DCAA Contract Audit Manual

The contractor should review their system with the applicable parts of the requirements for sure.  The other main issue in an audit is “objective evidence”.  The auditor will request to see documentation showing compliance to the requirements.  Using explanations like “we always do that” won’t work.  The auditor will want to see documents that support the fact that “you always do it that way”.  This means records.  That is one of the best ways to prepare for an audit, to do some random examining of your records.  You can start with one requirement and then trace the documents backward to see that the document trail is complete.  For instance, when the auditor checks labor in the Profit & Loss statement they may want to go back and see the timecard that supports that labor entry for that project.  You should be able to trace this back to the actual timecard to show the auditor. 

Once you have reviewed the specifications and then checked your records you may want to have a meeting with all personnel to cover what I call “audit etiquette”.   For instance, everyone should be nice to the auditor.  Like my dad always said, “you catch more flies with honey than with vinegar”.  That doesn’t mean that you have to succumb to every request.  If you think the request is out of line, you have the right to question it and there is protocol for that.  All I’m saying is that you should be professional and courteous about it.  Be nice.  The second advice for personnel during an audit is to only answer direct questions and only provide a succinct answer to the question posed.  Many auditors pick up on additional information that is offered by the person being audited that they didn’t need to provide.  This additional information, while you may think is helpful in explaining why you do something, can often lead the auditor to question something they normally would not have questioned.  Many times this is an area that may be compliant but the comment raises doubt in the mind of the auditor and they will search extra hard to find underlying problems.  So the bottom line is be courteous & professional, answer the questions and don’t offer additional information.