Government Contracting Industry Alert: Proposed Amendment to Business Systems Rule

The Government Accountability Office (GAO) recently issued a report that found the Defense Contract Audit Agency’s (DCAA) inability to complete business systems audits was negatively impacting the Defense Contract Management Agency’s (DCMA) ability to evaluate Department of Defense (DOD) business systems.

In response, the DOD released a proposed amendment to the business systems rule on July 15. The DOD is moving quickly and has asked for comments from contractors by September 15.

If adopted, the amendment would impose the following mandatory requirements on DOD contractors (covered contractors):

  • Contractors would be required to conduct annual internal assessments of covered business systems. Results would be provided to the Contracting Officer (CO) and DCAA auditors. These internal assessments would be required within six months of the fiscal year end with a signature of approval from a level no lower than VP or CFO of the reporting business segment. The DCAA would then perform an “overview” of these self-evaluations.
  • Evaluations would need to include statements regarding:
    • The contractor’s evaluation of whether the system complies with the Defense Acquisition Regulations System (DFARS) criteria.
    • Noted significant system deficiencies.
    • Corrective actions to address significant deficiencies.
  • For the first year of a covered contractor and every three years thereafter, a CPA report would need to be submitted to the DCAA auditor for review and assessment.
    • CPAs retained by contractors to perform these audits would be required to have certain qualifications and retain independence.
    • An “out-of-cycle” CPA audit report may also be required by the CO, based on a risk assessment of contractor experience and “vulnerability.”
  • Covered contractors would need to submit an annual audit plan to the CO and DCAA auditor for review and comment. The plan would include an audit strategy and risk assessment.
  • Certain working papers, including CPA working papers, would need to be retained and made available to the government.

If the amendment is adopted, failure to comply with these requirements could result in withholding of payments.

If you have comments about the proposed amendment, make sure you contact the DOD by September 15.

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If you have any questions or comments about this topic, please contact Thomas C. Yankanich, Director, Government Contracting Industry Group, at Email or 215-441-4600.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.