Do You Know the 18 Criteria for an “Adequate” Accounting System?

Here is a quick overview:

DFARS 252.242-7006 Accounting System Administration

The Contractor shall establish and maintain an acceptable accounting system. Failure to maintain an acceptable accounting system, as defined, shall result in the withholding of payments if the contract includes the clause at DFARS 252.242-7005, Contractor Business Systems, and also may result in disapproval of the system.

Part I – Definitions

As used in this clause–

Acceptable accounting system means a system that complies with the system criteria in of this clause to provide reasonable assurance that–

• Applicable laws and regulations are complied with;
• The accounting system and cost data are reliable;
• Risk of misallocations and mischarges are minimized; and
• Contract allocations and charges are consistent with billing procedures.

Accounting system means the Contractor’s system or systems for accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting in compliance with applicable laws, regulations, and management decisions, and may include subsystems for specific areas such as indirect and other direct costs, compensation, billing, labor, and general information technology.

Significant deficiency means a shortcoming in the system that materially affects the ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes.

Part II – System Criteria

The Contractor’s accounting system shall provide for—

1. A sound internal control environment, accounting framework, and organizational structure;
2. Proper segregation of direct costs from indirect costs;
3. Identification and accumulation of direct costs by contract;
4. A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives;
5. Accumulation of costs under general ledger control;
6. Reconciliation of subsidiary cost ledgers and cost objectives to general ledger;
7. Approval and documentation of adjusting entries;
8. Periodic monitoring of the system;
9. A timekeeping system that identifies employees’ labor by intermediate or final cost objectives;
10. A labor distribution system that charges direct and indirect labor to the appropriate cost objectives;
11. Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account;
12. Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of Federal Acquisition Regulation (FAR) part 31, Contract Cost Principles and Procedures, and other contract provisions;
13. Identification of costs by contract line item and by units (as if each unit or line item were a separate contract), if required by the contract;
14. Segregation of preproduction costs from production costs, as applicable;
15. Cost accounting information, as required—
    • By contract clauses concerning limitation of cost (FAR 52.232-20), limitation of funds (FAR 52.232-22), or allowable cost and payment (FAR 52.216-7); and
    • To readily calculate indirect cost rates from the books of accounts;
16. Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms;
17. Adequate, reliable data for use in pricing follow-on acquisitions; and
18. Accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles.

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