DCAA’s March 28, 2012 memorandum summarizes DCAA’s approach to the new DFARS Contractor Business Systems rules. As we discussed in our earlier entries, the DFARS regulations and clauses call for a determination of the adequacy of a contractor’s business systems—accounting, estimating, purchasing, material management—and allow a contracting officer to withhold five percent of contract payments if a system has a “significant deficiency.”

The accounting systems clause, DFARS 252.242-7006, and the other business systems clauses say that it is the contracting officer who will decide whether the contractor’s accounting or other system has a “significant deficiency.” The question is the extent to which DCAA’s auditors will influence the contracting officer in this determination. DCAA’s Memorandum provides some insight on this point.

DCAA’s memorandum says that DCAA will “opine on the contractor’s compliance with the system criteria in DFARS” but that the contracting officer decides whether a deficiency is a “significant deficiency.” The DFARS clauses define a significant deficiency as 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.”

In the past, DCAA’s approach to the adequacy of a contractor’s accounting system had been to label almost any deficiency “significant.” DCAA audits had rated accounting systems as either “acceptable” or “unacceptable.” DCAA once had a middle rating of “acceptable with deficiencies,” but DCAA eliminated that rating several years ago. That change resulted in a situation in which almost any deficiency was significant and therefore llimiting the availability of “acceptable” ratings. Indeed, even minor deficiencies were deemed significant. Since the rating “acceptable with deficiencies” was eliminated, at least some DCAA auditors reasoned that a system with any deficiencies at all could not be rated acceptable.

When DCAA “opine(s) on the contractor’s compliance with the system criteria in DFARS,” the question is whether the DCAA will comment upon the ultimate question:  Whether the contractor’s business system has a “significant deficiency.” As a practical matter, DCAA’s opinion on this question may limit the contracting officer’s ability to make the determination. We encourage readers who have recently undergone DCAA system audits to share their comments on DCAA’s approach.