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Mr. Gomersall January 10, 2011 Page 4 of 7 clause or part of the terms in our contracts. This criterion will effectively eliminate a contractor’s prerogative or ability to establish the level of appropriate accounting for transactions without the consent of the regulators. The proposed rule has established contractor estimating systems as one of the six business systems that would be subject to withholds. The criteria in that portion of the rule have been established to insure estimating systems are working correctly. Inserting this criterion within the accounting system in our view is redundant and should be deleted. We view inclusion of this criterion as inequitable as it could lead to potentially a double counting of a single condition as two deficiencies first in the Accounting and then second in the Estimating system effectively doubling up of withholds for that single condition. Furthermore the rule does not allow for the adjudication of disputes prior to the implementation of withholds. Accounting system criteria number 18 requires contractor accounting practices to be in accordance with CAS (Cost Accounting Standards) and GAAP (Generally Accepted Accounting Principles). Most major contractors that are subject to CAS and DCAA oversight have ongoing disagreements or disputes regarding the interpretation and implementation of the CAS in their practices. It is not unusual for the DCAA in their audit reports to cite a contractor for an inadequacy in their systems, due to the contractor implementing CAS in a fashion that is not in agreement with the DCAA view. In certain circumstances even reasonable people cannot come to an agreement, which in the case of Government contracting leads to the courts for a decision. Contractors should not be subject to the undesirable effects of contract withholds on matters of disputed interpretation which await the decision of the judiciary. In the event of an adverse decision to a contractor, the Government’s position is protected through an interest assessment that would be applied to the matter at hand. In the case of these withholds in the event of an adverse decision to the Government, contractors would have suffered the undesirable effects of limited cash flow, throughout what is typically a lengthy litigation process. Comments on Risk and Materiality Considerations within Accounting systems DoD in the response to public commentary stressed the importance of materiality (item 33). “DoD disagrees with the assertion that business systems will be deemed inadequate and payments held for minor deficiencies.” DoD also asserted (item 4) that it is the policy of DCAA to report only deficiencies determined to be significant deficiencies or material weaknesses. However, in actual practice that assertion conflicts with published guidance issued by the DCAA, (reference December 19, 2008 MRD titled audit Guidance on Significant Deficiencies/material Weaknesses and Audit opinions on Internal Control Systems). This guidance instructs the auditor in clear terms that anything which is subject to DCAA review should be considered significant. The guidance states: “It is not necessary to demonstrate actual questioned cost to report a significant deficiency/material weakness. In addition, by limiting internal control audits to major contractors, DCAA only performs audits of contractor systems that are material to Government contract costs. As a result, internal control deficiencies identified in DCAA audits will generally have an impact or potential impact
Mr. Gomersall January 10, 2011 Page 5 of 7 to Government contract costs that is material. Therefore, a contractor’s failure to accomplish any applicable control objective should be reported as a significant deficiency/material weakness.” The Internal Control — Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) is the most widely used framework in the U.S. for designing and implementing effective internal controls. COSO recognizes that “resources always have constraints, and entities must consider the relative costs and benefits of establishing controls.” COSO also acknowledges that “an internal control system, no matter how well conceived and operated, can provide only reasonable — not absolute — assurance to management and the board…” The clear record as published by the DCAA headquarters guidance is an expectation of perfection, which is contrary to not only the COSO internal control framework, but also to the commentary from DoD in the proposed rule and existing language in FAR Part 1.102- 2(c)(2). This divergence of interpretation between good business practice, the published policy of DoD and the DCAA will create inefficiency in the process and add unnecessary cost to contractor systems not commensurate with the risk associated with deficiencies as they are perceived by the DCAA. Therefore we recommend that materiality and significant deficiency be defined in the proposed rule to avoid unintended consequences in implementation. Comments on punitive remedies within Subpart 242.7502(g) Mitigating the risk of accounting system deficiencies on specific proposals Within the commentary in the Federal register on this proposed rule (item 32) regarding the Legality of Withholds, the point is made that: “DoD is relying on the temporary percentage withholds, not as a penalty for a deficiency, but as representing a good-faith estimate sufficient to mitigate the Government’s risk, where the actual amounts are difficult to estimate or quantify.” However Subpart 242.7502(g) in this proposed rule introduces a punitive step whereby contracting officers can permanently decrement profit or fee on a proposal. A Contracting Officer could also unilaterally adjust contract prices where reopener clauses have been mandated on proposals under this new regime. Given the subjective nature and the application of judgment that will be applied in the Contracting Officers decisions for this rule, there should be additional language inserted into this subpart that would require the auditor’s or functional specialist’s report to the contracting officer to describe the deficiencies in sufficient detail to allow a full understanding of the deficiencies and the potential adverse impact to the Government. This report should estimate a discrete potential dollar impact of each cited deficiency, so the risk to the government can be quantified and assessed on an individual basis. The auditor should be required to list the criteria on which he based his conclusions. In the absence of this further requirement on the auditor or functional specialist, this subpart should be deleted from the final rule as it will lead to unnecessary disputes and is punitive to contractors beyond other measures already included in this rule.
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