Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

Volume 3 of 3 | January 2019

Streamlining and Improving Compliance Volume 3

Recommendation 72: Replace 18 system criteria from DFARS 252.242-7006, 

Accounting System Administration, with an internal control audit to assess the 

adequacy of contractors’ accounting systems based on seven system criteria.

Problem

DoD is not obtaining timely assurance that internal controls for defense contractors’ accounting 

systems are properly designed and functioning.1 Ensuring effective internal controls is one of the most 

efficient ways to protect the government’s interest, reduce risk, and improve performance.

Background

Accounting business systems make up much of the business systems in DoD’s Contractor Business 

Analysis Repository (CBAR). In addition to being the most prevalent contractor system, it is a critical 

system for ensuring the government’s interests are protected when doing business through flexibly 

priced contracts. 

FAR 16.301-3, Limitations, recognizes the criticality of the accounting system by requiring contractors

to maintain an adequate accounting system for determining cost applicable to contracts awarded on the 

basis of cost.In addition, FAR subpart 32.5, Progress Payments Based on Costs, and FAR 32.503, Post 

Award Matters, contain multiple provisions requiring an adequate accounting system and controls. 

Even prospective contractors wanting to do business with the federal government must have the 

necessary accounting and operational control structure to be deemed responsible in accordance with 

FAR 9.104-1, General Standards.

To do business with the government, contractors must demonstrate capability to meet the requirements 

outlined in the Standard Form 1408, Pre-Award Survey of a Prospective Contractor Accounting 

System. This preaward system review should not be confused with the reviews required by the 

DFARS Business System rule that tests the design and capability of the system, as well as whether 

controls are in place and functioning properly.

Discussion

In its Volume 1 Report, the Section 809 Panel recommended that DoD replace the system criteria in 

DFARS 252.242-7006, Accounting System Administration, with an internal control audit to assess the 

adequacy of contractors’ accounting systems. The panel chartered a working group to develop a PPG 

and asked the working group to review and refine the panel’s previously recommended accounting 

system criteria and the internal controls framework for assessment of contractor accounting systems.

Conclusions

As recommended in the Section 809 Panel’s original recommendation in its Volume 1 Report, DoD 

should embrace an internal control framework for accounting system audits and has refined the 

framework necessary to implement the recommendation. An internal control audit framework based 

on a body of professional standards developed to address SOX 404(b) serves as a foundation to help 

 

1 DCAA, email to Section 809 Panel Staff, December 18, 2017. The email indicated that DCAA completed eight accounting system audits in 

FY 2016.
Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

Volume 3 of 3 | January 2019

Streamlining and Improving Compliance Volume 3

meet the government’s objectives to obtain assurance that contractors have effective internal controls 

for their business systems. Starting with this framework eliminates the need to develop uniquely 

defined criteria and terminology, which in turn reduces the time needed to make this framework 

operational.

Using the private-sector-established internal control audit framework will resolve a consistent 

complaint expressed in Section 809 Panel meetings with stakeholders that the DFARS accounting 

system criteria were not objective and measurable because of the current terminology used in the 

business system rule. Internal control audits should be performed as the basis for assessing the 

adequacy of defense contractors’ accounting systems because these audits provide the following:

§ An engagement framework used in the private sector that is well established and understood.

§ More useful and relevant information to the acquisition team, contracting officer, and 

contractor.

§ Clear and objective criteria for accounting system requirements.

The framework’s standards and criteria also satisfy the requirement at Section 893 (a) of the FY 2017 

NDAA to develop “clear and specific business system requirements that are identifiable and made 

publicly available.”2

Implementation

Legislative Branch

§ There are no statutory changes required for this recommendation.

Executive Branch

§ Amend the DFARs to replace the system criteria from DFARS 252.242-7006, Accounting System 

Administration, with an internal control audit framework to assess the adequacy of contractors’ 

accounting systems. The envisioned internal control audits will focus on assessing the key 

controls that ensure government objectives are being met. Auditors’ conclusions on the 

effectiveness of the key controls are essential information for contracting officers and 

contractors to evaluate whether the government’s interests are adequately protected. 

Specifically, auditors will evaluate whether key internal controls are in place and operating to

provide reasonable assurance of the following: 

- Direct costs and indirect costs are classified in accordance with contract terms, FAR, Cost 

Accounting Standards (CAS) and other regulations, as applicable.

- Direct costs are identified and accumulated by contract in accordance with contract terms, 

FAR, CAS and other regulations, as applicable.

 

2 Section 893 of FY 2017 NDAA, Pub. L. No. 114–AS328 (2016).
Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

Volume 3 of 3 | January 2019

Streamlining and Improving Compliance Volume 3

- Methods are established to accumulate and allocate indirect costs to contracts in accordance 

with contract terms, FAR, CAS and other regulations, as applicable.

- General ledger control accounts accurately reflect all transactions recorded in subsidiary 

ledgers and/or other information systems that either integrate or interface with the general 

ledger including, but not limited to, timekeeping, labor cost distribution, fixed assets, 

accounts payable, project costs, and inventory.

- Adjustments to the general ledger, subsidiary ledgers, or other information systems bearing 

on the determination of contract costs (e.g. adjusting journal entries, reclassification journal 

entries, cost transfers, etc.) are done for reasons that do not violate contract terms, FAR, 

CAS, and other regulations, as applicable.

- Identification and treatment of unallowable costs are accomplished in accordance with 

contract terms, FAR, CAS, and other regulations, as applicable.

- Billings are prepared in accordance with contract terms, FAR, CAS, and other regulations, as 

applicable.

Implications for Other Agencies

§ There are no cross-agency implications for this recommendation.