On-Demand: Staying Safe With Government Compliance

Jimmy Mo:Sure. Thank you Tony. Good afternoon everyone or morning if you're still on the west coast. My name is Jimmy Mo. I'm a partner in our Philadelphia office and I over oversee our office's not for profit practice. So yeah, we felt that this was a good opportunity to talk a little bit about grants, just because of all the CARES Act funding that's been coming in all the federal assistance. So I hope everyone will enjoy what we're going to say. Bill.

William Ryan:Thanks Jimmy and Tony, my name's Bill Ryan. I'm also a partner in the private business services group. And along with Tony, I work in the niche for government contractors. Particularly, I focus on construction contractors and engineering firms and provide a range of services from consulting on compliance, maximizing some of the overhead rates for FAR, accounting system audits and other test engagements.

Anthony Faugno:Okay. We want to go over the seminar objectives.

Looks like we have a lot with just small amount of grants, hoping to get more in the future, I suppose. And we have several, I guess, 13% responded with more than 90%. So they are heavy into grants and contracts. Okay. Should we just go over to seminar objectives? Today Jimmy's going to speak about an update on recent grants. He'll be going first. Then Bill is going to talk about government compliant accounting systems. I'll be speaking about basic cost pull structures. Bill will then speak about compliance requirements and then I will finish up with accounting system impact on audits. And I'll turn it over to Jimmy now for the update on recent grants.

Jimmy Mo:Thank you, Tony. So, it's been a crazy, I'm going to say two years, and as a result I think right now there are a lot of, and continues to be a lot of grant opportunities. So, on the federal side, when you look at this website called grants.gov, and there's a feature in there on the top, one of the options you can click search, and when you just click that search without filtering, I think it was over- I know it's definitely over 2,500, but I think when I was looking at it last night, it was over 2,600 grants opportunity. So the federal government right now does have a lot of programs that is available for any organizations that is qualified. In addition, on the federal side, there are a lot of opportunities as well in your state and local governments as well.

What's interesting is here in Pennsylvania, we had some of my clients who are more healthcare oriented. They actually got money from the state of Pennsylvania, literally deposit to them into their bank accounts without asking for it. And in this situation, they got a notification said, "Hey, if you wanted to keep this money, you do have to then fill some reports required." But what's interesting in that situation is that the government gave my client money first, before my client to even ask for it. And those were in the form of the provider relief funds. You also have non-governmental entities, not for profits, for example, foundations that are giving a grant as well. And in those situations and some recent discussions with a few of the foundations around here, and during this time they were actually looking, they had been providing more money in a form of grants than they have in the past, just because they recognize that they want to try to do what they can within their mission to help out others in organizations in times of need.

I do want to note one thing is that even though you get money from a non-federal source, that sometimes when they do it, it's actually passed through from the government. So examples, I mentioned the state of Pennsylvania. While they had their own state funding for the provider relief a lot of it was passed through from the federal government. So in those situations, they are required to notify you of if it is passed through from a federal source. So over the past two years, there has been a lot of money that is been budgeted in the form of the CARES Act and other related laws and regulations out there. So in looking at some of those sources about the CARES Act, looked like it was about $2 trillion, that's a big number and basically resources that the federal agencies were given to provide for need based on their agency, whether that is grants, contracts, loans, assistance programs.

We have heard of some of the programs the big one, the ban in existence two years ago, and tried to figuring out the accounting and recommending to our clients as a paycheck protection program, the PPP, I know a lot of that is now on the backend, trying to get either organizations have gotten the first one, gotten it forgiven, or they've applied for a second one, and it's still going through the process for that. But we all know in that situation, there's a lot of challenges in trying to understand that program. My side, as I'm assisting clients from the audience side, providing them with recommendations on how to properly account for. And for us side as the auditors, how to test it and as the auditor standpoint. But there are some other programs that just to make sure you're aware of, these are the four, in addition to the PPP, which is the largest, there are four other ones, just wanted to call out here.

And the numbers on the right are called assistance listings, AL, they used to call the CFDA numbers, which is basically how the federal government categorizes their grants. I was trying to explain that to a prospect that I was talking to. And I said think of that number as sort of the Dewey decimal system for governmental grants. So just the way that they can categorize and sort the grant into, by agencies. So anyway, these are just some of the ones that are out there in terms of the examples of the bigger ones. So I mentioned the provider relief fund, which is basically to help with a healthcare related expenses, meant to be more to hospitals or other healthcare providers. The education one is meant to go for education. It's for education relief.

So in addition to new federal programs, there are existing programs that is out there, these supplemental nutrition assistance program, the SNAP program. And I know my kids in public school district is getting, any kids in there is getting free meals for the school year. That is actually through the SNAP program. The parents of those students actually got free meals as we were forced to stay at home as well. So, that all ran through the SNAP program. Another one is the, I call it the TANF program, the temporary assistance and needy families program. This one's the one to help through states, but ultimately through my clients help provide assistance to low income families with children.

So the recipients of this CARES Act money, it's actually somewhat unusual at times, because in addition to staying local government that can get it, not for profits can actually get it. But in this situation for profit organizations can actually get the money too. But, here comes a challenge in which that, especially with organizations who have never needed assistance before, who were struggling. Examples are the restaurant. Many of these recipients that have received grant funding over the last two years, they've never ever received it before. So there are several significant challenges that actually arise over the last two years because of the receipt of the funding.

And I think first one is basically unfamiliarity with the rules. So one of the things that I try to do with my clients is if I get wind that they're getting at grants is I say, "Hey, are you sure you know what all the rules are? You know what you're getting yourself into? There's a lot of administrative requirements." So the reference there, the 2 CFR 200 is the federal legislation within the office of management budget that basically provides and governs the rules for the grant in general. You're going to hear the word uniform guidance. That's where all of them. Basically they kind of organize all the very general rules and say, this is a one website era where you have to follow all those. It's actually also the era where, if you need a single audit or uniform guidance audit, this is the rules that have it as well.

So in addition to the general federal rules, each agency will have their own regulatory guidelines. NIH I put in here is a good example, because if you're a for-profit organization that gets funding, this is even before the CARES Act, depending on the amount they do require certain audits known as a program specific audit, that you will need to do under their specific regulations. Many state and cities have their own regulations as well. City of Philadelphia here has a lot of regulations in regards to the administration of their grants. I know in my career as well, I've worked with other organizations and states of Florida.

I know Ohio has them. New Jersey has their own state audit requirements if they get over 750,000 in state funding. So there's a lot of different regulations that's out there. Before I go forward, I did want to mention, I think that Lexi had said as well, is that if you have any questions, please feel free to type them in the Q and A. We'll make sure to stop at certain times to answer them, if there's anything that is relevant to the topic, instead of waiting for the entirety of the program. As everyone saw related, especially with the PPP, there are rules out there, but the problem is a lot of times the rules are changing.

So the PPP in itself changed, I believe three times in one week, just the interest rate alone on the loan. So in addition to not being familiar with what possible regulations are, once you get to know them, there's a chance that they may already have changed. So that's been a challenge and it's extremely important to try to stay up to date as much as possible through various sources; your auditors, your accounts, if they're just reviewing the rules on a regular basis, if you're in some sort of an association group, looking at certain websites may provide the answers.

One of the biggest challenges, and we're working on it now, one of the hot topics now is the sheltered venue operators grant SVOG that's related to, a lot of our cultural, not for profits. So one of the interesting things is they're getting the grant as of July 2021, but the cost can actually go backwards starting in March, 2020. Well, those dollars require a single audit and in doing so, I have to, as an auditor, test controls associated with the period that's applicable to the scope of the expenses. In doing so, organizations may not have the appropriate controls in mind in 2020 for a grant that they got in 2021. So, typically we don't go backwards. The government doesn't go backwards and to allow certain expenses to reimbursed. What's also interesting, it's not interesting but it's an issue is that within 2 CFR 200, there are very specific prescribed rules in terms of how an organization needs to have set procurement standards and policies in mind.

So if you now get a grant that has procured items as an auditor, I would need to make sure that your manual is up to speed. If not, that would result in deficiencies and findings as well. You may have individuals that are just not knowledgeable. As I mentioned, a lot of organizations are getting grants for the first time ever. So they may not be familiar with it. One of the issues and unfortunate challenges during the pandemic is that organizations had to do temporary layoffs, or organizations had to work at home instead of being in the office, which could result in segregation of duties issues, internal controlled variations than what your policy allowed for.

So if that's the case these are issues that challenge will need to be considered. Grants now require additional reporting at all levels. So on the federal side, there's a form called an SF 425, which is a financial information form. Those need to be filled out now. So there is challenges in terms of knowing what to fill out. Then last lead there, could be insufficient record keeping as I mentioned with the layoffs, was there a delay in record keeping because everything was done at home. Could there be records that are misfiled or that may have gotten lost, or I guess in the sense of mind, could the dog have eaten it? We got a dog now, so she could have eaten it possibly like dog ate my homework type thing. So definitely many challenges.

I did mention that, especially with the cash disbursements and receipts policies, and you need someone that be a double signature of a check, well how hard would it be to go to get that double signature? Or are you using other ways to pay like Venmo or ACHs, things that may not have as robust controls as you typically would be used to? Last thing I didn't want to mention from a challenge standpoint is because of this, there is definitely an increased scrutiny of the grants. Google PPP fraud. And you can see all these stories. I think I remember so on and buying like a Lamborghini or something, with the money instead of actually using it for business. So because of this, there's a lot of scrutiny over these funds.

And because, if organizations are doing the uniform guidance audits for the first time, by the way, I can go into a database right now on one of the governmental websites and literally look at every uniform guidance filing since 2015, actually probably earlier than 2015. I can actually download a copy of your financial statements, will also include the findings in like the descriptions of the findings associated with it. So uniform guidance audits are always public records. So just keep that in mind. Sometimes it's, if you don't want to see what, organizations see, you may not have a choice anymore. With the PPP program, you have anything over 2 million, although I don't know if they've enforced it for all of them, but anything over 2 million, SBA said that they're going to require an audit.

In addition, you may reporting requirements from granters. So some of the funds passed through from states, they may require their own reporting. City of Philadelphia definitely has their own reporting requirements. And then lastly, as I mentioned, right now PR is a big deal. It's public relations. Last thing you want to do is to know that there's any kind of misspending, it gets out there, you know how social media travels, especially even if it's not really accurate news. It's definitely out there.

Okay. It's good, so again, if you do get a grant, just be mindful, make sure you ask a question if you've never had an odd before. I think my contact number is in here, I'd be happy to talk to anyone. Just give them some information associated with it, if you wanted to hear. We do have a question, Tony and Bill, since both of you are in New Jersey, I don't know if this is better for you, but not sure if you know, but where is the best place to research slash find available, New Jersey biotechnical or pharmaceutical grants? I can tell you on a federal side grants.gov is a good way you can filter through different the agencies, but Bill or Tony, I'm not sure if you know the answer to that.

Anthony Faugno:Yeah. I don't know the exact answer to that, but what I could say is I could check with one of our partners who is in the life science area. And I can get back to the person who answered that question. if want to share their email with us, and we can certainly get more specifics on that.

Jimmy Mo:Okay. Thank you, Tony. Bill, I'll turn it over to you now.

William Ryan:Great, thanks Jimmy. So when we talk about compliance with government contracting rules, really the starting point is with the accounting. And if we think about accounting in general, so mostly it's based on gap, which is generally accepted accounting principles and that's across the board for both traditional accounting. So when we think about a commercial business, or if we're dealing with a nonprofit organization. And the goal of gap is to have clear statements comparability both between years and between other companies and have some consistency. So try to apply standards across different years and different organizations.

In the last couple years, there's been a lot of recent pronouncements. You've probably dealt with revenue recognition rules that came under ASC 606. And if you're a private company starting with 2022, you should be looking at the least standard. Those are two, probably the bigger standard changes that we've had in the last couple years and both part of gap. So something you may recall talking about.

When we get to government accounting, it starts with gov, but then there's some additional rules related to it. The government contractors are subject to the federal acquisition regulation rules. And we'll cover that in a little bit later section. There's also specific expertise that should be used to ensure compliance with either grants or contract or just government account accounting, in general.

The government publishes different guides and checklists, even their audit manuals are available. So it should be, or it is somewhat easy to find the guidance. It's just difficult to understand it at times. And we work with a range of clients on either doing the consulting side. So we'll work with them to determine if they're in compliance. We've a consulting engagement right now, where we're working with a client to determine what they need to change so they can begin to take on government contract. So we look at their accounting system, we look at the policies or procedures they have in place, and we work with them to adapt five best practices to adopt these different items so that they can take on government contracts.

What we saw with that first poll, it looks like a lot of the folks on the call have a range of between just a few government contracts to a high percentage. And that's calls with a lot of the clients we work with. They have a mix of both commercial and governmental contracts. When we're looking at accounting compliance though, the government trumps everything else, really, you need to make sure you're in compliance with government requirements overall because they're the ones that will come in and audit. They will look at the grant. They will look at the contract. There's much more scrutiny on a government contract than you'd have with just a commercial engagement.

The two primary ways for you to receive funds from the government are either through a grant or a contract. And so when we think about a grant, the technical definition is it's a mechanism used for the primary purpose to transfer an IMO value to the recipient, to carry out a public purpose of support re stimulation. When I think a government grant, this is usually for nonprofit organization. This could be health services. This could be a possibly a program through like the national institute of health. We've worked with a client that had one of those programs doing medical research.

And so we look at that as something that helps usually the public. A government contract, this could be either for profit or commercial organization. And this is used when the primary purpose is to acquire goods. So the government is either purchasing items from companies, or to provide services to benefit the government. In this case, I've construction clients and engineering firms that provide services to the government. This could be building roads, perform engineering work. We have a company that's working on a lot of projects around New York City, whether it's at the airports, which is publicly owned or doing work on what's hopefully going to be a tunnel between New York and New Jersey in the next somewhere 10 to 20 years.

So with government grants, the ultimate goal is to accomplish a task set, such as provide a service. I volunteer on the organization for an autism school in New Jersey. And so their goal is to really help individuals with autism. They have a school, they have different services that they provide. And a lot of the funding comes from government grants. It could also be R and D efforts or research and development. This could be researching a health need, or it could be looking at different ways to improve certain services that the government uses. When it's a government grant, it's unlikely to have a fear of profit. And this ties in nicely with nonprofit organizations. And this is something that you'll see with a nonprofit using fundraising to cover any shortfalls that the government funding does not cover. And then that fundraising is used either to supplement the grants for certain programs or to provide things that are outside of the scope of the normal grants and contracts.

For a grant, you do have to comply with certain section of the FAR, which we'll go into detail on the FAR a little bit later on, but just some of the key things are allowable versus unallowable expenses. And it also covers the proper accounting records, some best practices and some minimum requirements on what should be maintained for good accounting records. When we talk about cost sharing, that's when a portion of the program is not covered by the grant. And so those funds do need to come from either a fundraising program or possibly from, for work with a commercial business or something else.

A compliant accounting system is required. We'll talk about that in a little bit later in this presentation. As a government contractor, you really should be prepared to be audited by the government or a representative of the government, you are receiving significant funds. As a government agency, it is up to them to make sure that the funds are utilized per for the proper purposes. And so you should expect to have some sort of oversight from the government agencies that you work for. If you're a nonprofit and you're receiving funds in excess of $750,000, you do get to choose which audit firm you use. So hopefully you're working with Jimmy on these to get the audit completed for that program.

When we think about government contracts, it's similar, but the end goal is really a service or a product. And so back to my example of the contractors I work with, they're working on road paving, they're working on large projects for public works. So new terminals at JFK airport, as an example, that's that I have a few clients working on currently. There usually is a fear or profit associated with the government contract. This could be built into the award. Sometimes it's a cost plus, or there's an overhead rate that's applied so that it covers not just the direct costs, but also some of the additional costs, including a profit component. Again, there is compliance required with of the FAR standards.

There is compliance required with the FAR standards. Cost sharing does occur with government contracts, but it's not always required. The approved accounting system also is important for a government contract.

There is with the cost submissions, and so this is what's submitted to the government agency to get reimbursement or funds from the government contract. And it does vary based on the government contract, but it's usually some version of reporting, and it's subject to the FAR rules. This actually brings up something that really any government contractor should be aware of. You should read and review your contract to understand what the compliance requirements are, what the reporting requirements are, the funding mechanisms, how often you need to report with the agency or with a contract officer. It's really part of just general good business practice.

And again, you will most likely be subject to some type of government oversight, whether it's just inquiries, or they're looking for specific reports, or they could do a full blown audit of either your accounting system or of different operations in the company. So a government compliant accounting system, the goal is to maximize cost recovery. As a client of ours, as a contractor or not-for-profit agency, the goal is to really get every dollar that you're entitled to under the terms of the grant of the contract. You want to read and understand the contract. You need to have accounting policies in place and procedures to ensure that you're capturing costs properly, and they're properly recorded in your accounting system.

Your accounting policies and procedures should help you avoid losses and what could result in penalties for having unsupported bid proposal estimates or overcharging on the invoices, unallowable costs. These would all be identified as part of a government audit, and really should be something that the accounting team and management of the organization is focused on. The accounting system should allow for tracking of contract costs, budget versus actual would be important, and also it should identify issues. And then the management team and the accounting team can use the identified issues to work towards a solution. Overall, a good accounting system that's in compliance with the requirements. It should reduce future audit issues, reduce findings from the governmental agencies, and really, you just want to run the organization properly so that there's no questions about the way that you've expended the funds received from the government.

That was a good response. Almost everybody got it completely right, so that was good. Just to recap some of the consequences of a non-compliant accounting system. All of these are negative to the organization, so if your award is delayed or canceled/terminated, it really impacts the overall operations of the organization. The audit frequency could increase as a government agency identifies concerns with the way that your accounting system functions and the way that you're managing your grants or contracts. It could increase the number of times they will review something with the organization. They may require additional reporting. It could go from an annual review and maybe they look at you quarterly or more frequently. Payments could be delayed as they need to certify that what you've submitted is actually appropriate and correct. The contract could be temporarily halted, and disallowed costs may need to be repaid on completed contracts. Also, there could be penalties and fines related to this, so as you come across errors and issues with the accounting system, it's important to correct these and to identify the problems, and really implement a good system up front.

Just to jump into one of the questions that I see in the Q&A. So the question came through. Government contracts seem very similar to government grants. Is there a definitive way to tell them apart?

My opinion, it's really the wording of the award that you receive from the government agency. It would generally be titled either a grant or a contract. If Jimmy or Tony want to jump in if they have a different idea or something that's more definitive, but the way I distinguish the two is really the agency it's coming from, and the way it's defined. And across the types of organizations that receive these awards, the accounting is pretty similar. The compliance requirements are dependent upon each contractor grant. So it's not so important whether it's a grant or a contract, it's really complying with the requirements of the award.

Anthony Faugno:Yeah, and I'll just jump in real quick here, Bill. From my experience, the grants tend to be more for research grants, or to solve a problem that the government might have in a particular area, or possibly provide some sort of service to a group, such as education grants and things like that. I look at contracts, and most of the ones I see are from Department of Defense, and it's usually to purchase either goods or services. They could be cost-plus-fixed-fee-time-and-material type contracts. There's other types, too, but those are the most common. But usually, the contracts are for the government to buy something, so that's kind of what my experience has been with that.

William Ryan:Thanks, Tony. As we went through the previous slides, we did make reference to the Federal Acquisition Regulations, or FAR. The FAR dictates all of the requirements for an accounting system. Just some background on the FAR first. The FAR is jointly issued by the Department of Defense, the General Services Administration, and NASA, and it's the primary regulation for agencies in their acquisition of supplies and services. It's available online, it has 53 parts and subparts, and it covers the acquisition rules, bidding, the different types of contracts that you may be awarded, taxes, unallowable versus allowable expenses, allocation of expenses, really everything related to government contracting and how to account for it. We spent a lot of time in part 31 of the FAR, which is contract cost principles and procedures, and we referred back to this because it defines direct versus indirect costs, cost allocation guidelines, allowable costs and unallowable costs.

Jimmy Mo: Sorry. Sorry, Bill. Sorry, if I could jump in one second.

William Ryan:Sure.

Jimmy Mo:I was just trying to find my unmute button for a while there. I did want to just say one comment to that question as well, especially as it impacts not-for-profits. As Tony mentioned, with grant and not-for-profit accounting, right now, a lot of it under the new standards, they're kind of treated a lot similar to more like contributions, although it doesn't feel that way. But then from a governmental side, the contract side, this is where the government may be benefiting directly so that it most likely is not treated as a contribution or as an exchange transaction. But each of them are. As you mentioned, Bill, you have to look at them individually, look at the terms and all the regs and all that stuff as well. So sorry for interrupting.

William Ryan:No, I'm glad you jumped in with that. I primarily am on the commercial side, so government contracts are more my area, so it was great that you were able to jump in Jimmy. Thanks. I appreciate that. As you look at compliance requirements for the grants of the contracts, you do need to even look through to see where did the funds ultimately come from? Was it a federal contract that funded a local or state grant? And then you need to see what the compliance requirements are for that. And ultimately, you want to determine who funded the award and what their compliance requirements are. We've started to go into a little bit of the accounting requirements for a government compliant accounting system.

A compliant accounting system really has two components. One is the ability of the software to be compliant, and most off the shelf programs have this. Some are more complex and some have different features, or they're focused on different industries, but most off the shelf accounting programs I've come across have the ability to be compliant with government requirements. But really the more important pieces, the implementation of the accounting software, and then policies and procedures when using the software, and that's what falls on the organization. And so some of the areas that are covered by the government rules, they're looking to see that the system can accurately capture transactions by cost objective, and so this would be looking at cost by contract and also breaking down between direct and indirect costs. The accounting reports should reconcile back to the general ledger. The general ledger is a record in your accounting system of all the transactions that have occurred.

The accounting system should reconcile to your payroll documents. More and more, I see the timekeeping systems, or even the payroll systems maybe integrated as part of the accounting software. So when we look at a basic accounting system, like QuickBooks, that's good for general ledger accounting. But if I look at a more advanced program, like an ERP system, that stands for enterprise resource planning, that really integrates budgeting, estimating the entire general ledger package, financial reporting, as well as the timekeeping. And it's an entire system that's not just for accounting, but that's what keeps everything reconciled between the different systems.

As far as the allocation of expenses, sometimes this is done either outside of the accounting system, or it can be done within the system using different methods. If the timekeeping system is integrated, you can allocate costs based on labor hours. We see that sometimes with rent or even with payroll costs, direct versus indirect payroll is done by the timekeeping system. And really, the more integrated the system is, this would reduce the chance for errors. So the more schedules you're maintaining in Excel, the more things that you're doing outside of the accounting system just introduces a greater chance of having an error occur.

Just to give some examples of some of the clients we work with. I have two very similar clients. They both get annual audits. One client's been working with government contractors for a number of years, and their system, it's a full ERP system. It's integrated across the accounting, the timekeeping, financial reporting, their budgeting and estimating. Everything ties together well. The reports they generate are good. They're in compliance with the government requirements for the accounting system and with their government reporting.

And then we have a consulting engagement with a similar client that has the exact same accounting system, but has not implemented the policies and procedures that they need. And so, they're not fully utilizing the system to maintain government compliance. They have timekeeping, but it's only used for some of the employees, so they're not properly capturing all the labor hours. They are not using the job costing appropriately to track cost by contract. And so, we're working with them to identify where their shortfalls are, what they can do to fix them, and help them document and improve their systems so that they can be government compliant and start to take on more contracts.

The system should have accurate and timely transaction posting, and most modern systems have this. It's not like things are going through once a month or anything like that. Most of its real time. Also, timely financial data should be available if there is a budget module that's helpful, and most accounting systems really do provide this at this point. And then as far as the policies and procedures in the chart of accounts, that's where the management team comes in from the organization. They need to identify what the policies and procedures are, they need to document these in writing, and there are some best practices out there. There are some minimum requirements on what should be documented, and we'll cover that a little bit more later in the presentation.

There are two checklists that the government has out that allow you to review what's required for a prospective contractor, and what's required of their accounting system. We have links in the presentation here. So the one checklist, it's only two pages. It really just covers about 15 or so items looking at the way the system is used. Are costs properly segregated? Is their timekeeping being utilized? That's a good starting point. That's actually the second link. The first link is a 10-page document that goes into a lot more detail. Now, if you were to be reviewed by a government agency, they would most likely give you the longer version to fill out so that they could determine that you truly are in compliance with government accounting compliance requirements. So we use that as a starting point when we work with our clients. We give them the checklist, we go through it with them, we can help decipher some of the wording, it helps explain what's required by some of these things, and it really should be the first starting point to see if you can take on government contracts.

Something that we've learned about recently, and we're starting to hear about from some of our contacts in government agencies. There's an increased focus on cybersecurity responsibilities. This slide mostly refers to Department of Defense contractors, but this will apply to more contractors and government agencies as we continue with cybersecurity issues. This applies to all federal government contractors, and I think it's really focused on DOD, their Department of Defense. But regardless of what level of service they're providing, they really need to be responsible for the cybersecurity, with anything dealing with the government, and so they risk not maintaining their government contracts or their clearance if they can't keep this in place. There is a checklist that's been put out, the NIST 800-171, which they perform a self-assessment. They need to upload that to the government system to prove that they're in compliance. And if they cannot maintain the compliance, they're at risk for losing their contract status. And now, Tony's going to take you through some of the basic cost pool structure that ties into the compliant accounting system.

Anthony Faugno:Okay. Thanks, Bill. Before I get started on that, just a couple of quick comments here. The things that you've heard so far, it doesn't matter what size your company is. You have to meet the compliance requirements. The forms that Bill just talked about, the pre-award accounting system, checklists. It doesn't matter if it's your first grant. If you're just starting out, if you're getting audited on an accounting system, there's no short form. You basically get the same questionnaires that a larger contractor might get, so just be aware of that.

Just a quick story I had. This is going back a number of years. I was trying to help out a company and they were already doing work with the government, but things were a real mess. Their accounting system was a mess when they called us in, and the complaint that the owner kept giving me was, "Well, we're just a small company. Why do we have to do this?" And it just went on and on, and he just spent more time complaining about it than just doing it, so it's something you really need to prepare for up front. It makes things a lot easier later, and it also helps on the audit side, which we'll talk about in a little bit, too. I wanted to just make that point.

It doesn't matter the size of the company. The other comment is, as we all know, the government spends a lot of money, so there's a lot of business to be had out there from the government if you're in the right space and you know where to go to get it. So we all know what's going on in the world right now. My opinion is we're going to see an uptick in defense spending, so our defense contractors are going to probably be seeing more work. In the past couple years with the pandemic, there's been a lot of spending by the National Institutes of Health with various research grants, trying to get answers to the problems we have. So this is going to continue. Those are big problems we've all recently seen, but there's going to be future things that have to be solved, and the government is always spending. That's just my comment on there. So if you're looking to do business with the government, I have clients that just strictly do business with the government and have no commercial work, and they do great.

But there's a lot of compliance work, as you're hearing today. Okay, so let's talk about some of the more compliance areas. All right. Basic cost pool types. These are the general types. Your direct cost, which I'll define in a minute, and your indirect cost pools, and your unallowable costs. Bill just talked about setting up your accounting system, and if your accounting system is set up correctly, these costs should be easy to track. Identifying them and where to post them might be another issue, but once they're posted, they should be easy to track in the general ledger. So this all comes with setting up things properly from the beginning.

Okay. So direct costs are any costs that can be identified with a final cost objective. A final cost objective is, where does the money end up? Is it directly on the grant? Where does the cost end up? Is it directly on a contract or grant? Okay? It's not limited to items incorporated in products such as material or labor. It can be things like travel costs. The question you need to ask yourself when you're trying to identify direct versus indirect cost is, if you didn't have the grant or contract, would you still have the cost? Okay? So that could help you determine if it's direct or indirect.

Some examples I've listed there. There's many more, but these are the more common ones I've seen. Labor is usually a big one that I see, and subcontractors probably second. Most of the grants that I see, personally, are research grants, and those tend to be heavy on the labor side, which is really important with the timekeeping system, which Bill mentioned and we'll talk a little more about. But subcontractors, very often, are a big number when you're partnering with say, a university, or another company that's part of the cost proposal. And then, materials is another big one, but there could be others. But these are the more common ones that I usually see. Okay? And what we like to do with direct costs in the accounting system is we like to group them in one area so the whole cost pool is kept together for classification purposes.

Okay. And then indirect costs is a cost that is not identified with a final cost objective that benefits the company as a whole. It's not associated with a specific job. With the comment here that says based on simple math, I need to explain that a little bit, because it's not very clear there. What that means is, indirect costs are calculated based on a rate. When you do your cost proposals, you would have your direct cost, and your indirect cost would be proposed based on a percentage of a cost base, which is usually, doesn't have to be, but direct labor is a common cost base. When I say simple math, it's just a percentage of the direct cost, but you have to calculate that percentage based on your total indirect cost.

We're not really going to go into the calculation today of indirect cost, but it could be set up on an Excel model, which we have templates for that we use. There's also a template out on the agency's website that you're working for. NIH has a sample out there on their website. The DCAA, Defense Contract Audit Agency, they have samples out there on their website. So you need to develop your indirect rate structure based on your cost pools.

It can be conceptually perplexing, as I say there, as to where a cost falls, and it can be some ambiguity in that, so you really have to look at each cost separately. Most are simple. You can identify them quickly. Rent is usually an indirect cost, but rent could be a direct cost if you were renting a lab, for instance, that was only needed for a specific grant or contract. So it can go back and forth. Rent doesn't always have to be direct. It depends on the situation, and no two companies are the same, so you really have to look at your own situation.

Here's some examples of indirect costs. Health insurance usually is an indirect cost as part of fringe benefits, rent I just mentioned, and professional fees usually are indirect costs to legal accounting and other types of professional consulting assistance you might be getting. Okay?

So we want to segregate indirect costs into different cost pools. The most common are the fringe benefit pool, which would be things like payroll taxes, pension costs, health insurance. Vacation, holiday, and sick pay would all fall in a fringe benefit pool. Very often in a lot of cost proposals, you need to propose your fringe rate. The overhead has different names, sometimes. NIH calls it F&A, which is Facilities and Administration. Usually, most of the time, I see a fringe rate and one overhead rate, or one F&A rate. However, you can get into multiple cost pool structure.

For example, engineering firms might have an overhead company site rate and a company onsite rate and a company offsite rate. That's pretty common with engineering firms. Also, you can have a pool and separate your G&A expenses from your overhead expenses. An example that might be G&A you consider your accounting office, the office of the president, maybe some legal expenses and things like that, whereas the overhead might be factory overhead, or if you're construction, yard overhead or something like that. Another cost pool that we see from time to time is subcontractor or material handling. If a company is heavy into subcontractors or heavy into materials, you might segregate some costs just to manage the subcontractors and material handling into a separate cost pool. And why would you want to have all these cost pools? Sometimes, what it would do is make a company more competitive when bidding.

So if you see an overhead rate that's 150%, for instance, well, if you start breaking that down into a G&A pool and into a subcontractor pool, you can drive your overhead rate down, but you'll have these other pools that will pick up those costs. So your G&A rate will pick up some costs, and your subcontractor handling rate would pick up some costs. Those are generally going to be lower than the overhead rate, but it would separate it so that your company would look more competitive in bidding.

This is another cost pool that's important, unallowable costs. Bill mentioned it once. We'll talk about it a little bit more later, but the unallowable costs are actually carved out in the Federal Acquisition Regulations into a separate section. There are certain costs that you cannot bill the government, either direct or indirect, so you have to make sure that those costs don't end up in your indirect rate somehow. That's why it's important to demonstrate to the government that you have the ability to track these costs. And the way we do that is we set up separate general ledger accounts to track and post unallowable costs.

The trick is also to know what they are and to post them accurately, so that's an education process that whoever is doing the accounting has to know. So we have a few examples of unallowable costs later on. That's the FAR section for unallowable costs, 31.205, and it'll list all the unallowable costs with detailed explanations. The contractor, as I said, they must be properly segregated in the accounting system. Okay? So they cannot be confused and get charged to the government. There are stiff penalties for charging unallowable costs, even if it's unintentional. So, the accounting system has to have controls in there to make sure this doesn't happen.

Anthony Faugno:Okay, that was good. 80% with bad debt, that's the correct answer. Everything else would most likely be indirect costs, all the other three choices.

Okay. This is just a piece of a chart that we have that if someone wants to ask for it, they could email us and I can provide it. But basically, it's a reference guide to the unallowables and with the FAR section and whether it's allowable, unallowable, or maybe unallowable. So some sections, it could be allowable under certain circumstances. One example, I know it's not on this list, but- oh, it's on the top- Advertising. I can give you a quick example, if you're advertising for a new employee position in some publication, that would be allowable. If you're advertising for just general corporate advertising of your company, your logo, or whatever, that's not. So there could be situations where it may go either way, but you have to know the rules. You can refer to the FAR.

Okay. And I believe I turn it back over to Bill here for compliance requirements.

William Ryan:Yep. Thanks, Tony.

So some more discussion on the FAR Part 31 rules. We talked about FAR in my previous section and Tony had mentioned FAR a bit. So Part 31 is the part that we spend a lot of time looking at for guidance when it comes to compliance and the accounting compliance system, because this section goes into what the requirements are for government contractors, for their cost accounting system, which is really their accounting system. It also identifies what findings and recommendations there could be related to the accounting system. And then it also looks at- And Tony had mentioned this too- unallowable and allowable costs, allocation of costs.

And so as we look at that section, and we've mentioned this a few times I think, but we really want to stress the differences between direct and indirect costs. And we look at it as a direct cost is really specific to a particular cost objective. And that for me, for a construction contractor, would be a direct material or subcontractors, things that you'd normally think about as cost of sales. When I look at indirect costs, it can't be directly identified with a single final cost objective. And that's really what I think about as overhead and that's accounting services, or could be the fringe benefits which could get allocated between direct and indirect. But these are items that you can't specifically put to just one contract.

When we look at allocation and the allocability guidelines, the FAR talks about capturing all the costs and using common approaches when you're doing job cost allocation and determining if it's allowable. So they want it to be consistent across periods if you can use similar cost pool, like Tony had mentioned some of the different cost pool methods, that's what they're looking for. They want consistency in that approach.

It should be reasonable. The FAR Part 31 actually has, I looked at it earlier, it has 70 references to reasonableness throughout the guidance. And it's not reasonable to me or you, it's reasonable to the government. It's what the government thinks is a reasonable expense. And one example that we'll go into a little bit more, travel's a really good one that you can pick apart. We'll look at that I think on the next slide in a little bit more detail.

As far as unallowable items, some of the more common examples, and we saw the chart that Tony put up, but something that comes up frequently is meals. And so food can be an allowable cost, but liquor or alcohol is not. So if you have drinks with your meal, that needs to be excluded as an unallowable item. Entertainment expenses, interest, bad debt, there's a list of specific items that are in the guidance. And then there's some that are a little bit open to interpretation and that we can look at and try to help you make some determinations on.

And it's really, this is the contractor's responsibility or the organization's responsibility to being compliant with this. They're supposed to make sure the costs are allowable. They're supposed to review the expenses that they incur and make sure that they're properly reported. And if they fail to maintain the documentation to substantiate the allowability, this could result in a disallowance of the cost, because if you can't prove it's allowable, then it must be disallowed, or it must be an unallowable. Some of the examples that we've seen that clients have had difficulty for supporting, a credit card bill may not be adequate to substantiate if an expense is allowable, because the credit card bill doesn't break down what the items were that incurred for the costs. It might just say the name of the vendor and have a dollar amount, but really the government wants to determine what specific items were acquired, or purchases.

And so you really need to keep good records for your accounting system to maintain compliance. You want to have not just the check that paid it, or just the credit card receipt, you want the detail behind it. You want to have support. And that documentation is what's used by the government, or even for your organization to determine if the direct or indirect expense item is reasonable, allocable and allowable. And when we think about reasonable, one way to support reasonable costs, if you're a contractor, you might look for competitive bids from other subcontractors. And you can look at that to provide support that what you're paying is a reasonable expense. If you can get different quotes for a particular item you need to purchase whether it's material or something else, you can look at some sort of comparability to show that the costs incurred are reasonable.

Allocable, there's no specific method to allocate costs, but some of the more common ones could be based on payroll hours or payroll dollars. You could use that to allocate rent between different cost pools. You could use that to allocate labor between direct and indirect. And you could also use, if you're looking at rent, you could look at square footage, square footage for some of the indirect versus some of the direct costs.

When we look at allowable expenses, this goes back to you need to kind of put your government hat on and think how would a government agency look at this? So travel, for example, first class tickets usually aren't allowable expenses. They expect you to go on coach. An airport lounge, while it's really helpful to sit there and spend a few hours before your flight, that's not an allowable expense. They feel that, that's excessive. So it's really trying to keep costs low and not going into excessive or overly comfortable things, would keep you easily in compliance.

And your source documents and the key items that need to be documented, so this is what should be in your records. And it could be electronic, it could be paper-based or some combination of that. But the type of the expense, the purpose of the cost, if it's direct, what project was it coded to? If it's indirect, what indirect accounts has it been allocated across? Who approved it and the dollar amount? And these are all important.

William Ryan: So, for the documentation of these expenses, it can either be done electronically or manually. So probably some combination of the two would work best. The general ledger covers a lot of the coding and where the cost is reported in their accounting system. But then also you're looking for probably a paper document or a scan of a document that backs up the actual expense.

Some of the areas that are frequently looked at closely to determine if allowability was appropriately determined, legal and other professional expenses for certain companies. If there's just one or two owners, sometimes they'll have some personal expenses go through the professional accounts, whether it's tax return preparation or legal costs. So that's something that's easily reviewed to see if it includes allowable expenses.

Executive compensation, and incentive plans and bonuses, it's important that these are properly tracked. Certain agencies or certain types of organizations will use salary surveys. So, engineering and construction companies usually rely on- It's a salary survey put out by the AASHTO organization. It's a compensation matrix. And it determines, based on the revenue of the company, what the allowable salary should be based on different levels. That's relied upon to support the salaries are reasonable, including bonuses and any other incentive plans. Now, for that, if you exceed the allowable compensation, usually that's an adjustment when you calculate your overhead rates for reimbursement from a government agency.

You're bidding and proposal costs. There are some question about how that should be handled because it's generally indirect, even if you win the award. But you need to look at what the particular costs were. There's a chance that there's some unallowable items incurred in there, whether it's marketing or some sort of entertainment that was done in order to win the award.

And then research and development, using an independent agency, you do want to make sure that it's actually focused on an award that you're working towards and to see that the service they've provided is allowable.

Some other examples, non-recurring, pre-production manufacturing costs. Now with the pre-production costs, those should be evaluated for possible capitalization and then depreciate it. So you're not looking at to see the treatment of the expense anymore once it's capitalized, now you're looking to see if the depreciation is properly calculated and if it's allowable.

Business meetings, technical seminars, we've mentioned before the distinction between food versus liquor and how liquor is an unallowable item, this would be checked for the technical seminars. Generally, there should be a policy about the seminars that they're allowable and can be included in the indirect expenses. It should not be one-off, it should really be kind of throughout the organization that technical seminars are considered appropriate.

The rental costs where related party transactions are involved, really any related party transaction needs to be very well documented. I would try to minimize related party transactions for what affects the government contract, because it will get scrutinized.

Travel and relocation. On the travel side, we did talk about avoiding first class travel. You really should be in the coach class. Airports, you really need to just sit with the rest of the folks. And relocation costs for employees could be allowable, but should be looked at and reviewed in relation to the guidance in FAR.

Now, some of the written and accounting policies that are expected or mandated, a lot of this is really just good business practice. This is something that's required and expected by government agencies, but this is something that most companies should have implemented.

Time keeping and labor distribution, this would go back to their time keeping system, make sure that time is entered accurately and timely. It should be done by all levels of employees within the organization. And there should be something that specifies how frequently they use the system, whether it's at least every day or every month.

The job cost segregation of direct or indirect costs, this should identify in the policies who's doing the review process, the approval for these costs. Who's determining what job they relate to and how it's documented?

For incentive compensation and bonuses, you do need to be specific about how the bonuses are recorded and how they're allocated, whether they go to the same split used between direct and indirect, or if they're put more into one side. There needs to be a policy that the organization has in place, so it's properly accounted for.

The purchasing functions, who is responsible for starting the purchasing process? Is there a bidding process? Who's the ultimate approver? How are the checks signed? Were the payments initiated. For indirect costs, what are they doing to identify what the Chart of Accounts are? How are indirect costs allocated.

The billing process, who's responsible? How often is it done? Is it monthly? Is it every two weeks? When is AR reviewed? When is AR followed up on? All of these items should be documented in not really a company manual, but something that the company keeps and can share with anyone that's reviewing the organization.

As far as assessing financial capability, this should be done- Generally, the compliance with the accounting system should be done at least annually. Review one of the checklists I'd mentioned earlier to see that they're still in compliance and that they're properly using their accounting system.

The travel and relocation costs, because there is high risk for unallowable items to be included in there, there should be documentation about what travel is expected, what type of travel that you would expect your employees to purchase and how it should be accounted for and reviewed.

Unallowable costs, this would be very important to document how they're identified. Is there a specific Chart of Accounts that are used for segregation of the unallowable costs?

And then for capitalization and depreciation of tangible assets, you should set a capitalization threshold. We've seen anywhere from a few thousand dollars up to several thousand dollars. As a minimum, you could really determine what's best based on the size of your company and the type of assets you're acquiring. And then for depreciable life, we can help assess what the depreciable life could be with you. We could work with you on that. We have examples from other companies and other agencies.

And this last one, allocation of home office costs, this initially looks like it would be talking about, especially during COVID, people working from home and how those office costs would be allocated. This is actually something different, this is related to how the allocation of indirect costs between cost pools is accounted for. So when we think about a home office, it's really the operation of the company and how they use the cost pools to track indirect costs or other cost pools. And this should be documented.

Jimmy Mo:Bill?

William Ryan:Yes.

Jimmy Mo:Sorry.Okay. Good, now you can hear me. Before we move on to this polling question, there is one question, but I did have a few other things I wanted to just say. Number one is a question, so especially with the IRS and the substantiation for receipts, most companies have sort of like a de minimis, whether it's $25 or $75, if you do- Like if you go to a meal and it's under $25, you don't have to provide a receipt. So, what is your thought in having a de minimis for certain reimbursable employee expenses, especially when companies are trying to get those reimbursed through a governmental contract?

William Ryan:So, when I have clients, let's say their employees are at a meal- The meal's a great example, so a $25 meal- The employee is probably getting reimbursed for that. And so while there may not be a government requirement for it, I would hope that the company has a requirement for that, that they're requiring a receipt to reimburse the employee. And I think that I would lean back on that as an example of documentation for an expense that was incurred. Now, if there are other de minimis items that are incurred, I would think that they're running through the accounting system in some way and I would document it when I'm meeting with the government auditor that these are de minimis, they're below our threshold. It's part of our company policy. And I would show them the company policy that states that $25 or below is considered de minimis.

Jimmy Mo:I guess, from the audit standpoint, there is one finding that we do get a lot of in regards to the procurement policy. One of the things also as part of the procurement when you're looking at bids, is also looking to ensure that the department check is also done. So, I did want to stress that as well that that's been very frequent, that while companies may have bidding processes, the regulations do require a company to document their evidence at a department check, whether or not- I call it the governmental blacklist- but whether there's a check to ensure that the company that is submitting a bid is not on the department list.                                               

There's one other question-

Sorry. There's one other question that came in, can you please provide the reference for determining the executive comp caps?

William Ryan:Sure. So if you'd like to give us your email address, I'm happy to send you a link to what we use for my construction engineering clients. At other times, I've used labor reports from a consulting agency and from some internal valuation firm that we use. So I'll certainly be happy to send you the links to the ones that I use for my construction and engineering clients.

Anthony Faugno:Yeah. Also, NIH does publish a cap. And their cap for 2022, it's $203,700. So that's for NIH.

William Ryan:All right, good answers. Good response rate, 94%. And so yes, D, all of the above is the appropriate answer.

So one of the easier ways to keep your costs separated is to have the proper Chart of Accounts. And when I talk about the Chart of Accounts, that's in your accounting system. And so you should have separate accounts for direct costs and for indirect costs. So you can break down, when you record a transaction, you can record the expense to the appropriate account, and you don't have to maintain separate schedules or use Excel files to try to break these things down after the fact.

So really, I would expect to see for direct, you could even go so of far as to have different direct costs for each contract, or maybe subaccounts for each contract. On the indirect side, I would look for your fringe expenses. And the other items listed here should each have their own separate account. And then for unallowable items, I think it's also a best practice to have separate accounts for unallowable items, so you can easily look at your Chart of Accounts and then run financial statements from your accounting system. And it'll separately identify what's allowable versus unallowable.

This was just a chart that kind of breaks down the way expenses should be broken down. So at the top you've got expenses, and then the first split is between two direct and indirect. On the direct side, we're really looking for detail by contract. And so the accounting system should provide enough detail where I can run or anyone can run a report that shows expenses by contract, and they can then work back to see what's been billed on that contract, what expenses have been incurred, how the costs have been recorded, whether it's through direct expenses or allocated expenses?

And then on the indirect side, these are some of the categories. Fringe is dealing with the employee benefits. Overhead could be rent and other costs. Same with G & A. And then you want a separate breakdown for the unallowable expenses.

When it comes to the allocation factors, anything related to payroll, I would usually look at the TimeKeeper software to make sure that that's being allocated based on labor hours. And if it's all linked together within one accounting or ERP system, now you've really got a good hold on recording the proper expenses and making sure that everything ties back to each other.

As far as accumulating and segregating those direct costs, it's not enough to just say this is direct or indirect. You really need to go on a contract by contract basis. And at sometimes it even requires you to look at the different lines of a contract. And this helps you look at what the actual costs versus the limitations on any costs are. It will help you with the billing, for billing purposes and when you're closing out the contract. So it's not just required for government purposes, it also helps you maintain proper accounting records and allows you to bill timely, bill for the proper amounts, not exceed contract limitations.

As far as the allocation of costs, it should be done by something that's logical and consistent. Something that you can do at a top level just to see if it's really being done consistently is look at year over year. And in the example here, we talked about rent. So if rent is allocated as an indirect overhead expense in year one, then we expect the same treatment going forward, but I would take it a step further and then look back to see how much rent expense did I have year over year. How much of it was direct, how much was indirect, or how much was in a certain cost pool? And I would do that with some of my other large expense categories. To me, analytics are important. When you're reviewing your financial information, you should have an expectation and then compare that expectation to the actual. And then try to document why it's different, because it may come up as part of a government review of either an audit, or if they just have a request for some additional information.

It's really good, as an organization, for review of expenses, look at budget verse actual, look at year over year variances, and then document why there's differences.

And then for the job cost accounting system, all of these items should really be part of your accounting software. You should then have the backup in either electronic records or paper records. But when it comes to job costs, you need to identify both the direct and indirect cost by the customer, by the contract. And ultimately, what that cost objective relates to. You need to look at what's in the General Ledger system, and it should all be linked. And you shouldn't have to reconcile multiple schedules to a General Ledger. Your General Ledger should be part of the accounting system, and it should all be linked together.

Looking at the individual contracts, you can verify that the costs have all been incurred to the proper contract. One check that we do with some of our clients' accounting systems, they can run a report that shows all the direct costs that have been allocated to jobs. And then if there's any that haven't been allocated, as a check, to make sure that everything's been properly categorized. That's something that most accounting systems allow. And it's really important to overall look at your accounting records. Look, as I mentioned before, do some analytics. Look at budget verse actual, look at your expected balances and relate it back to what you actually have in your accounting records.

And now, I'm going to pass it back to Tony to go into the impact of an audit.

Anthony Faugno:Okay. So everything we talked about so far, hopefully, is going to prepare you for an audit.

So first, we'll talk about some of the agencies that do the audits. And then the main one is the Defense Contract Audit Agency, also known as DCAA. The government, especially DoD, contracts with this agency to perform their audits. The other agencies also use the Defense Contract Audit Agency. And most recently, in the last week actually, I have a client I'm working with that received the Department of Energy grant. And it's actually their first grant, and they're going through an adequate account system audit, and the DCAA is going to be performing the audit. So what we've helped that company with is, prepare for the audit. So, and because they are new to the government or arena, it was a lot to prepare for up front and they needed to get educated on. So, that's the most common one I see.

Sometimes the government contracts with CPA firms that do this work. I have another client actually going through that now. So they can form it out to CPA firms that are qualified to do this. Some federal agencies have their own auditors. A lot of times those are like desk audit type things. And then the state and local agencies also have their own auditors for oversight. For instance, in New Jersey where I'm located, the Department of Transportation would be one, but others have them too. So, those are generally where the audits from the government side come from.

So the Defense Contract Audit Agency is like the IRS to government contractors. So you need to be ready with any kind of audit from anywhere, IRS or DCA. You'll always need to be prepared and know the rules before you get to the audit, because that's going to make it go much, much smoother with less repercussions for the company. Generally, DCA does perform all the audits for the Department of Defense, which I mentioned. There's different types of audits, which we'll get into a little bit too. And I also mentioned, they contract out with other agencies also. They provide accounting, financial advisory services connected to the negotiation, administration and settlement of contracts and subcontracts, and primary overseers for the accounting system requirements. It's important to remember that the DCAA is advisory to the agencies only. But generally, the agencies do take the recommendations and findings of the DCAA seriously and they look to get any issues resolved either before or after a contract is received. So, they try to do these pre-award audits that Bill mentioned before with these form SF1408 to try to head off any issues before they become problems. So they try to make sure that companies have a good system in place that meets the requirements so that there's not issues later. So, that makes a lot of sense to do all this up front.

All right, these are some of the requirements and a lot of this we mentioned already today and we keep repeating a lot of this stuff a little bit because it is so important. These bullets here are part of SF1408. When you look at SF1408 the longer form, Bill gave you two links before, the longer form. The first several pages, probably the first three pages or so, they're not going to apply to most companies because they talk about cost accounting standard compliance, known as cash compliance. That's for large companies. So if you see that, unless you have contracts over seven-and-a-half million in some cases, but generally it's over $50 million in cast covered contracts. It's not going to apply, so you can skip a lot of that. That gets very involved.

 But all of these points here, this is for every company. We talked about the segregation and the accumulation. I'm not going to repeat everything again, but this is all important for every government contractor. The last bullet to me especially is a big point. The time keeping system has to be compliant. These are just more points. On SF1408, we talked about most of these already, so I'm going to go quickly through this slide. I'll just leave it there a second for you to read, but you have the materials also.

All right, what to expect from the DCAA? What they do is they come in and they do an entrance conference. That's the first thing they do. But what do you need to do ahead of time? You need to prepare well in advance and you need to even go through mock audits for yourself, either do it yourself or contract it out. We've done that for clients where we basically come in and do the audit, maybe not a full audit, but at least review things to see that things are generally in compliance. So that's what you as a company or your organization should be doing to prepare.

What to expect from the DCAA or other agencies too that do the audits or even CPA firms is you're going to have an entrance conference call. They're going to get basic information. They are going to have you fill out the SF1408, the one I mentioned earlier that receive the Department of Energy grant. That was the first thing they got. They got the SF1408 to complete. You have to completed it accurately, sign it, and it gets sent in before they plan. That helps them plan for the audit. And then from there, you'll be contacted with document requests. They'll pick sample selections and et cetera from there. They'll perform their audit. And then they'll have an exit conference call to go over any findings or any issues that came up, and issue a report.

These things, by the way, could drag out over a long period of time. So, depending on the type of audit, these audits can be a lot of time in between steps, but-

Okay, these are the types of audits that generally you'll see. These are more common ones. The most common ones that I see, or the pre-award audits, the provisional indirect rate audits, and the incurred cost proposals. On this screen on this slide, those are the most common. The one I'm dealing with presently is the pre-award audit. I have another client going through and incurred cost audit. So those are more common from my experience. And here's a few more on this screen. Cost accounting standards probably doesn't apply to most people on this call.

Financial is another type of audit that comes up quite frequently. This happens a lot with smaller companies. If the companies are about to win a larger grant or contract, the government wants to make sure that the company has the resources to perform on the contract. And whether it be through financing, whether it be through capital earning, the company or through the ability of owners to support the company. So they want to make sure there's resources there. That's kind of what the financial capability is really for.

So Post-award audits are generally, they review the costs after the contracts are done to make sure everything's worth allowable. And the audits, by the way, are really for cost plus type contracts for time and material, anything that's cost reimbursable. Generally, fixed price awards are not really auditable because those are all decided upfront and the risk is with the contractors or the companies on those type of awards.

These are the major audit areas. Time keeping is usually a lot of focus in an audit on the time keeping and time sheets. How time is allocated between direct and indirect, maybe unallowable costs and looking at the labor rates, et cetera. The compensation to, especially to the higher compensated people, they look for reasonableness. Bill mentioned that, and we'll talk a little bit more about that. And the billing system area of how they're billing their costs out to the government.

So a little more on time keeping. So they're going to look for a time keeping policy. We talked a few times about policies and procedures and documentation of written policies. So they're going to want to look at a policy then they're going to make sure you're following the policy procedures for entering time sheets, they want to look at your system. They probably do a walk through the system. Having you go through from the time sheet entry of an employee all the way through when they get paid. Employees are responsible for preparing their own time sheet, and it should be done daily really, but some companies have a hard time with that and do maybe weekly or every pay period, which is acceptable. But really daily is the way to go for.

Adequate management overview, which means that their supervisors are reviewing their time sheets and approving them. The written policies for employees, they should all have a signed off that they read the policies or were trained on the policies. So that's a very good document to have on an audit so that you can show that you're following your policies. Traceability for changes. So, if there's an error made on a time sheet and it's corrected subsequently there has to be a process for that, a sign off, or a subsequent change on a- because errors do happen. And when you're caught, they need to be corrected, there needs to be an audit trail.

Okay. And also some sort of systems that will direct errors and require changes. Now a lot of times in the systems today, it can be still manual, but a lot of them now are electronic, which is really the way to go. And a lot of these features will be in there in the electronic timekeeping systems.

Timekeeping system has to identify the labor by cost objective, which means direct by job, indirect by paid time off, by holiday. All of that has to be segregated on the time sheet because ultimately the time sheet is going to dictate how the payroll gets posted to the general ledger and how it goes into general ledger is how the government's going to get charged. So it's important that it's identified properly on the time sheets. There tends to be a lot of errors in this area. I think it's less now with electronic time sheets, and education to the employees helps a lot.

All right. I say daily here, which is really, as I said, the way to go. If charges are too indirect, they must be allocated in a logical consistent manner, which means basically you should be doing things the same all the time, the correct way, the same all the time. So there should be no guessing really with entering of time. Also, on the time sheets, as I've already mentioned, the first bullet there.

Signed and dated by employee, that's for paper time sheets, which you still can use, but electronic time sheet systems have electronic signatures in there for both employee and also an approval signature by a supervisor.

I think that's pretty much it. The government goes on a 2,080 work year, 40 hours a week. So full-time employees should be filling out 40 hours a week. You could have overtime hours too. Generally, they like to go with actual hours worked, but full-time employees should be completing a time sheet for 40 hours a week. So they should make sure all holidays included and be paid time off.

This is just some record retention for time sheets three years after final payment on the contract. For time sheets, it's two years after the end of the fiscal year for all pay periods within that fiscal year. So this would be either for paper or electronic. Compensation-

Jimmy Mo:Tony?

Anthony Faugno:Yeah.

Jimmy Mo:Sorry to interrupt. We have a question related to time sheet controls. Should the time sheet assignment happen by the PI or the Direct Supervisor, if it's different?

Anthony FaugnoSo the time sheet sign off for a federal grant happened. It should happen from the Principal Investigator. He should be the one signing off on employees. I guess it really, it doesn't matter as long as it's a supervisor that's overseeing that employee that knows what they're doing. So if the PI is the one that's overseeing the employee, I think that would be fine. If it's Direct Supervisor, I think that would be fine also. I think what matters is that it's someone that's supervisory to that person.

Jimmy Mo:Yeah. And Tony, if I could add a few cents from my auditor standpoint, as an auditor, what I'm testing is for the compliance side of it. So the purpose of the time sheet is to make sure that it captures the time accurately for an individual working on a grant if it's one. Or if they're working on multiple grants, then that the time sheet accurately captures the amount of time that the person is working on multiple grants.

The supervisor or whoever is knowledgeable about what the individual's working on and can approve that that time sheet is accurate based on his or her knowledge of the employee's effort, I would think that that would be appropriate for the approver of this time sheet.

Anthony Faugno:Okay, thanks Jimmy. So compensation, this slide shows typical types of things that are included as compensation. So, pension 401k, it's part of compensation, but it's being the fringe of benefit area. So some of these are fringe benefits that is an add-on to base compensation.

So compensation in a particular year or time period has to be for current work. That's if it's charged at a government, it can't be retroactive type adjustments or for future like deferred compensation. And compensation should be reasonable. We talked about salary surveys a little bit earlier. We talked a little bit about government salary caps. On an audit, they would look at the credentials of particular employee and look at reasonable salaries in that geography that you're in for someone with those credentials, what the market is, they'll use salary surveys. And also consistent with company policies. So your company should have compensation guides or ranges for different categories. We have a polling question.

Okay. The answer is actually not the floor checks. The floor checks a 55%. Floor checks is a separate audit procedure. And I'll explain floor checks actually on the next slide. I'll explain that in a second. It's actually the first one. When you say call, use an ADP survey- So anyway, let's go to the next slide and talk about floor checks.

Floor checks, that's actually a government audit procedure for seeing how an employee in a company, if they're charging their time to the proper cost objective. So with the floor check, what they'll do is interview employees. And they used to go before a pandemic, they would go to the company with very little notice or even unannounced and ask to talk to employees and actually see their time sheets for that day. And they would ask them certain questions about what their job is, things like, "Were you ever asked to move time from one contract to another or one grant to another?"

So you can't you can't do things like that. If you're running over budget on one job and under budget on another job, you can't just move hours from one to the other. That would be fraudulent. So these are floor checks. They used to happen a lot more years ago. What I've seen happen recently is the floor checks are being done via Zoom or some sort of video. And one client just go through this last month where the DCAA scheduled a time. Now, at least you get notice, I guess. So she had time to actually speak with the employees about what the process is.

So this is focused on really the time charged properly, not necessarily what the employee's compensation is. It's really, are they charging properly? That last bullet there, there's a DoD hotline that's supposed to be posted. They'll look for that on a floor check if they come in person. I guess on these Zoom meetings, they're asking about it, but that's there so if an employee suspects that there's inappropriate time charging, they could actually make a call. All right, so that's floor checks.

I just went over this, we got about just about five minutes left. So we talked about this. For compensation, reasonableness is the overriding principle here, and we mentioned it a few times already. So looking at your salary surveys, looking at your credentials of employees, what you're paying them, et cetera, and what's allowable, the charging of their costs to direct and indirect, et cetera.

All right. I mentioned this already. Comparing to similar size in the industry would be another way of looking at compensation. The government auditors, they have access to all kinds of interest industry data to compare to.

Compliance with the company policies, any labor agreements. So we mentioned this already. And then I mentioned ADP has salary surveys that can be used. The government can use that. There are other published surveys too, that they might subscribe to.

Okay. We have two minutes left. There was a couple more slides. I'll just go through those quickly.

Okay. So a couple more quick thoughts here. The billing system is critical because that's- and your accounting system is critical for supporting your billing so you're not overcharging the government and also an adequate accounting system. You can have audit oversight there, and the DCAA will actually issue a letter that says you're a low risk once you've gone through an audit. And that could make your life or should make your life a lot easier going forward as long as you continue to follow those procedures. So you want to get those low risk letters if you can.

Billing system should allow, or your accounting system should allow you to calculate your loaded labor rates. It's usually for cost-plus type arrangements or time and material. Your loaded labor rates are calculated with your base rate, plus your fringe rate, plus your indirect cost rates on top of your labor, possibly a fee or profit rate. So your accounting system, a calculation of all of those costs and those indirect rates, need to support the labor rates that you're charging the government. That's what they're going to audit when they come in.

So we're at the two hour mark. So we're in the summary. You need to follow the FAR. You need to know what's in there. You need to know what's in your contracts. What FAR clauses are in there. The compliant accounting system's critical. You can bet you're going to get some kind of visit from the government either to review your accounting system. And remember if you follow the rules, you'll keep your awards and continue to do business with the government. Thank you. Have a good day.

^{Transcribed by Rev.com}