By Bernard Mustafa, PVBS Chief Executive Officer
How the DCAA treats large commercial enterprises that have a significant government contracting business is something that needs addressing.
In previous blogs, I’ve discussed why it makes sense for large commercial enterprises with substantial government contracting operations to move to one corporate-wide ERP solution that meets everyone in the corporation’s needs. Another reason is that the DCAA expects that divisions within a corporation will apply similar cost accounting standards across the enterprise so they will conduct their reviews and audits accordingly. Sometimes these enterprises may have multiple government contracting divisions that report into a home office. This may be due to acquisition activity or random business development efforts over time.
These realities put undue burden on the business managers across the company. How the DCAA treats large commercial enterprises that have a significant government contracting business is something that needs addressing.
What Your DCAA Auditor Expects May Not Be the Case
We have a number of former DCAA auditors on staff at PVBS. They have told me that if the auditor knows that the enterprise has multiple business units, they generally expect that the same cost accounting practices are utilized across business units. In practice, this is not usually the case because the separate business units will be managed differently and may employ different cost accounting practices.
The large enterprises we’ve met with have confirmed this many times. They tell us that often once auditors see a business unit’s cost accounting practices in use for the first time, they put a label on the entire company as if they have one process. This could be the case even though the company may have a dozen entities reporting up to it following different processes.
However, there is a wide-range of CAS-compliant accounting practices which are acceptable and covered in the CASB Disclosure Statement. For example, there are many acceptable ways to account for indirect expenses where Business Unit A can have a Subcontract and Material Handling pool and a G&A pool (G&A allocated over a Value-Added base) but Business Unit B may just have a G&A pool allocated over Total Cost Input base and no Subcontract and Material Handling pool. Now, Microsoft Dynamics AX will allow you to set up different CAS accounting practices within each organization and manage them separately. The system will just allow you to set up same way for every company and you can actually set up different entities different ways to comply with cost-accounting standards and other government regulations. This is very helpful based on how the DCAA audits majors versus non-majors.
In a large organization, the DCAA expects internal controls. Non-major contractors may be able to get away with not implementing a formal internal control system due to the cost restrictions, but for major contractors internal controls are a cost of doing business. This is also a reason why many large companies with government contracting practices are looking at Microsoft Dynamics AX. Microsoft Dynamics AX is targeted for companies with at least a $250 million government contracting business, frequently as a piece of a larger corporate entity. In Microsoft Dynamics AX, you have the flexibility to incorporate this internal control within the system.
Microsoft Dynamics AX accounts for the commercial and all of the government business requirements in one solution
One of the problems that these entities face is that they want to have the flexibility to follow accounting practices that are linked to commercial entities, but also have the flexibility to use the government contracting functionality needed to run their business. The problem is that ERP systems that have been available to them in the past cause a major disconnect. Contractors have historically needed to buy a specialized ERP system that was specifically geared for the government contracting business because standard commercial ERP systems could not account for this business line. In Microsoft Dynamics AX, there is finally a solution that accounts for the commercial and all of the government business requirements in one solution.
One item that will help companies prepare for their audits is the graphical workflow tool in Dynamics AX. It’s a built-in graphical tool where you can create the workflow, decision trees, and approval levels. It’s strong in terminal controls and process management, with documentation to give to the auditors. The system allows you to create the workflow and automate the process of sending it to the people who are critical to the workflow, with much more power than a typical graphical display tool.
The system includes many built-in management reports which may be of benefit to DCAA auditors. Of course there is still strong financial reporting capability, which should be inherent in any accounting system. With the management reporter in Dynamics AX, though, you have the flexibility of developing reports that are targeted to the different audiences within the company. This is not just the financial reports that are good for auditors to demonstrate tax compliance, but also custom reports that can help in managing daily operations.
For example, the system would allow you to design utilization reports that help manage PM bonuses or commissions for sales personnel. You might want to come up with a different, modified gross margin type of report to show this. You could also use this report to incentivize, keep track of how they’re performing and incentivize them if they’re performing at the level that they were expected. You can see if they are they they’re hitting their targets, their goals and objectives?
Commercial enterprises with large government practices did not have an integrated ERP system available to them until PVBS brought government contracting capability to Microsoft Dynamics AX this past spring. This new product introduction will help them efficiency and profitability across their enterprise.