Pass, Fail, or Adapt?

How to Respond to Changing DCAA Audit Rules

The Defense Contract Audit Agency (DCAA), the agency which audits Department of Defense (DoD) contracts, changed the rules last year to make its audits very simple: you pass, or you fail. Pass and your invoices are paid. Fail and your invoices may be suspended or disallowed, and you may be prevented from bidding on future contracts.

Oh, and this is no kinder, gentler DCAA: whereas auditors in the past would have helped with the information needed to become DCAA compliant, now they give the same feedback as ancient Romans in the Coliseum: thumbs up or thumbs down.

So, what is a government contractor to do to avoid a failing review or bounce back from one? Your options are:

  • Make sure your accounting system is DCAA compliant from the outset. General accounting software, such as QuickBooks and Peachtree, isn't DCAA compliant out of the box, but can be modified to satisfy the DCAA. (Templates and software add-ons are available from a variety of sources.) Other programs such as Jamis, Deltek and Costpoint have been built for government contractors and come pre-customized with all the functions necessary to meet compliance. However, since they're expensive (and require significant extra time to maintain), they're probably not advisable unless a company is doing, or planning to do, a lot of government work.

  • Hire a consultant to set up QuickBooks or Peachtree and train your internal accounting staff.

  • Outsource your bookkeeping to an accountant or accounting firm knowledgeable in DCAA regulations.

Once you think your accounting system is DCAA compliant, give it the torture test: have an outsider who is well versed in DCAA regulations conduct a mock DCAA audit and highlight the problems in your current accounting system.

It must be pointed out however, that whether you choose a customized accounting program or modify your existing QuickBooks or Peachtree program, if you are not inputting the right information into the right G/L accounts, no accounting software will magically make you compliant.

DCAA rules and regulations are constantly evolving, and all government contractors should take the time to become familiar with DCAA regulations or hire a professional accountant who already is.

One final caveat: there is no such thing as "DCAA approved" software. DCAA does not evaluate or approve software; beware of anyone who tells you otherwise.