What Happens If Your Organization Fails A DCAA Audit? (2024)

A failed DCAA audit can have disastrous consequences for your organization, which is why ensuring that you follow all DCAA compliance requirements is crucial. This review provides a general overview of what a DCAA audit is, the potential consequences of a failed audit, and what your organization can do to help ensure compliance.

What Is A DCAA Audit?

The Defense Contract Audit Agency (DCAA) is in charge of auditing government contractors who work for government agencies. A DCAA audit is the actual audit that is ordered before, during, or after being awarded a government contract.

The purpose of a DCAA audit is to ensure that the government contractor is following all DCAA compliance requirements, such as timekeeping requirements for employees and cost accounting standards. The ultimate goal is to verify that the government agency is being charged the appropriate price for the goods and/or services that are provided.

What Are The Risks Of Failing A DCAA Audit?

There are certainly consequences to a failed DCAA audit. In essence, a failed audit suggests to government agencies that you are not as trustworthy due to inconsistencies, disorganization, or fabrications of your cost accounting and timekeeping systems. This can lead to an inability to procure future government contracts, issues with receiving payments to which you would otherwise be entitled, damaged organizational reputation, and possible legal trouble in more severe instances.

Inability To Procure Future Government Contracts

As mentioned, the purpose of a DCAA audit is to verify that the contractor is properly recording the amount of hours their employees work, recording all costs that are incurred for the contract, and properly separating direct and indirect costs. A failure to check these boxes during a DCAA audit could mean that other government agencies simply choose other contractors instead of your contracting business in the future, which could lead to less work overall for your contracting business.

Issues With Receiving Payments Due To Accounting Errors

Another common issue that results from a failed DCAA audit is an inability to receive compensation for all that you are owed. It is not the DCAA’s aim to cheat you out of any money that you have earned, and working with government agencies can be one of the most reliable clients a contractor can have.

However, they only pay for what is recorded in your accounting systems. Therefore, if your employees fail to log hours or if costs are not recorded, then it may be hard to receive those payments without complications.

Possible Legal Trouble If Fraud Is Detected

In more severe cases, it is possible to end up in legal trouble from a failed DCAA audit. This is particularly the case if the DCAA detects fraudulent behavior in an effort to get government agencies to pay more for contracts.

For example, if your organization logged far more hours than what was actually worked or recorded charges that were not actually necessary or purchased by you, and the government agency paid you for them, then it could lead to legal issues if detected by the DCAA. This is not an issue for most people and only reserved for extreme cases in which fraud is fairly evident, but this potential consequence is important for government contractors to keep in mind.

A Damaged Organizational Reputation

Not only can a failed DCAA audit affect your ability to procure contracts with government agencies, but it may affect your overall organizational reputation. This could lead to issues getting contracts on the private market as well, particularly if the issues with accounting are public and not resolved.

What Makes An Organization DCAA Compliant?

The DCAA simply wants to verify that the guidelines the contractor is required to follow are being followed. This should include proper timekeeping, recording incurred costs in an organized and responsible manner, separating direct and indirect costs, informing employees of their role with DCAA compliance, and using a reliable accounting system, whether it is electronic or in written format.

How Can I Help Ensure DCAA Compliance?

Your organization can avoid a DCAA failed audit by following the recommended guidance. Be sure to inform all of your employees of their responsibilities and ensure that they properly record their time each workday at a minimum. Ideally, your employees should record their time worked as the work is being performed. Companies should also maintain up to date policies and procedures, and the policies and procedures should be reflected in the accounting system, in addition to ensuring all members of the company are well-informed of the policies and procedures.

The Importance Of A CPA Professional And Mock DCAA Audit

A CPA professional can help you ensure DCAA compliance by advising you on proper accounting practices and systems as well as conducting a mock DCAA audit. A mock DCAA audit includes the same processes that the DCAA will use during an audit, such as floor checks, accounting systems review, and more.

If your government contracting business is in search of support with DCAA compliance and auditing, it is advised to speak with a certified public accountant that specializes in government contract consulting and mock DCAA audits. Reach out to a CPA professional at Diener and Associates today!