When a company is dealing with the DoD or NASA, it is usually very clear that their accounting systems are required to not only be compliant with FAR regulations but must be capable of passing a DCAA audit. When dealing with other agencies, such as the NSF, DOE or HHS (mainly the NIH division) it may not be as demanding that the system be capable of meeting these difficult regulations. It may even be less risky as to whether or not the agency will monitor the accounting system in the form of an audit. The agency usually requires audits for awards over $500,000 or $750,000 but they normally put the burden of audit on the awardee. Sometimes the agency may not have time to follow-up to make sure that the awardee is getting the independent audits done and the awardee may come away with a “false sense of security” that they are doing things in a correct manner and within the guidelines allowed by the agency. In fact, the awardee may be violating terms of the award and just does not know it. I have heard of instances where small companies went many years with awards that required the independent “Yellowbook” audits but did not perform them and thought they were in compliance. In one instance I saw one of these companies receive a letter finally from the DOE stating they did not have records of the audits from the previous 8 years and they were requesting these documents be sent to the agency within 30 days or face termination of current funding. Imagine the panic within this organization as they had not done any audits for the last 8 years!
One of the key issues when dealing with these agencies is planning ahead. The required independent audits are an allowable expense so they can be reimbursed under the indirect billing rates used in determining pricing for these agencies (and subsequently used in billing). This requires that this expense must be anticipated prior to preparing a proposal and included in the cost section of the proposal. Also, if the company wants to ensure compliance during these audits, they should prepare for a way to perform the normal day-to-day accounting in a compliant manner to help minimize the CPA firm’s efforts when doing the annual audit. This can be accomplished by establishing a FAR compliant accounting system up-front and then establishing procedures for operation of this system to meet FAR regulations in day-to-day entries. This may seem like an unnecessary expense for dealing with these agencies since they don’t necessarily require this type of “regimented” discipline. In actuality, setting up and operating a FAR compliant system can be beneficial to the small firm. The following are just a few of the benefits of operating such a system:
- The YellowBook audit will go smoother and ultimately be less expensive
- The company will be able to track expenses per project in accordance with government regulations
- The company will be able to measure profitability on a project by project basis
- The company will be able to manage projects on a project basis to make sure they are completing on time, on budget and within scope
- The company will have an accounting structure that is acceptable, straightforward and easy to understand by other funding channels should they begin to raise capital (Venture Capital Firms, Angel Investors, Investment Banks, Commercial Lending Institutions, etc).
- The owners will be able to divert their attention more to their core competency and the needs of business development, rather than mundane back office tasks – this will result in more success for the company
So I think there are many reasons to consider setting up and operating a FAR compliant accounting system, even though the agency may not require it specifically or they are not diligent in enforcing it. ReliAscent has done this for many firms and could help you with this as well. In fact, outsourcing this to ReliAscent will allow you to focus more on the growth of the company and will ultimately lead to your success.
Oh, the firm I mentioned above with the DoE requirement to report their 8 missing audit reports in 30 days? We were able to work with the DoE and they just required a plan turned into them within the 30 days. The plan needed to detail how they were going to complete the missing audits and get the reports turned in. The plan was constructed quickly for installing a compliant system and then employing a CPA firm to come in and perform the missing audits. It turned out to be a large expense that could have, and should have, been spread out over 8 years.