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Avoiding Problems with Verifying an “Adequate Accounting System”

Guest Blog with Berenzweig Leonard LLP

(Original article found on the Berenzweig Law Website.)

One golden rule for contractors trying to win a government contract is “Carefully read the solicitation’s fine print.” This is especially true for an offeror trying to win contracts other than firm-fixed-price contracts. To win cost-reimbursement contracts and task orders, an offeror generally must provide the agency with “verification” that the offeror has an accounting system that can adequately determine those costs. (FAR 16.104(i), 16.301-3(a)(3)). Two recent decisions of the Government Accountability Office (GAO) as well as GAO decisions going back several years, show several ways that offerors have lost contracts because they did not comply with a  solicitation’s requirements for verification of an adequate accounting system.

Because a major pending solicitation requires the same verification, these decisions are especially important. The solicitation in most of these decisions was NITAAC’s Chief INformation Officer-Solutions and Partners 3 (CIO-SP3) small business governmentwide acquisition contract (GWAC). The solicitation of CIO-SP4 is scheduled to be released any day. The (draft) CIO-SP4 solicitation includes the same requirement that the offerors in these decisions involving CIO-SP3 failed to meet. Offerors for CIO-SP4 should, therefore, be ready to avoid the mistakes the offerors in these decisions made.

The Solicitation’s Requirement

As mentioned above, the solicitation for CIO-SP3 included a requirement that an offeror provide a verification that it had an adequate accounting system. Because winners of the GWAC could be awarded a task order (TO) that would be cost-reimbursement, offerors had to provide NITAAC with a verification that the offeror had an adequate accounting system in accordance with FAR 16.301-3(a)(1).

The CIO-SP3 RFP precisely described what the agency solicitation required:

Offerors must have verification from the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency (DCMA), any federal civilian audit agency, or a third-party Certified Public Accounting (CPA) firm of an accounting system that has been audited and determined adequate for determining costs applicable to this contract in accordance with FAR 16.301-3(a)(1).

GAO takes the position that “clearly stated solicitation requirements” like the above are considered “material.” And a proposal that fails to comply with a material requirement cannot get the award. So strict compliance with a clearly stated solicitation requirement is essential.

Here are some examples of unsuccessful proposals that did not comply with the solicitation’s fine print on verification of an adequate accounting system.

A DCAA approved incurred cost submission is not a verification of an adequate accounting system.  

To try to prove it had an adequate accounting system in a CIO-SP3 competition, InterImage Inc. submitted a 2014 letter containing the results of DCAA’s most recent “adequacy” evaluation completed for purposes of getting paid under FAR 52.216-7, Allowable Cost and Payment.  InterImage also claimed that it had performed cost-plus type contracts from 2005 to 2012 and that DCAA “audited or reviewed” its annual cost submissions which reflect the proper allocation of costs to contracts in each of those years.

The agency concluded, however, that InterImage had not complied with the solicitation. First, InterImage did not actually say that its accounting system had been audited and determined to be adequate by DCAA; an “adequacy” evaluation showing compliance with FAR 52.216-7 “does not constitute an audit or attestation engagement under generally accepted government auditing standards.” Review of FAR 52.216-7 shows that the clause has a more limited purpose and allows and does not require a description of the contractor’s accounting system.

Also, DCAA’s review of InterImage’s 2012 incurred cost proposal was not “dispositive proof that the contractor had cost-reimbursement contracts,” because incurred cost submissions could be required for both time-and-material and cost-reimbursement contracts. NITAAC eliminated InterImage from the competition.

InterImage protested to GAO, but GAO agreed with the agency that InterImage had not complied with the solicitation. The 2014 DCAA document reviewing InterImage’s 2012 incurred cost proposal on its face stated that it was neither an audit nor a determination that InterImage had an adequate cost accounting system. InterImage, Inc., B-413104.47 (Jan.  21, 2021).

Offeror had a completed DCAA Audit Report but did not submit adequate proof of it. 

Other GAO decisions highlight one of the saddest ways to be eliminated from the competition – offerors that had audit reports done on their accounting system verifying their adequacy, but who were eliminated because they failed to submit that verification from DCAA or DCMA part of their proposal. This failure to provide “independent” verification left the offerors making a “self-verification” that did not comply with the solicitation.

For example, getting back to the InterImage case discussed above, self-verification was another reason InterImage was eliminated from that competition. Specifically, InterImage told the agency that DCAA had audited its accounting/cost accumulation systems in 2002 and they were deemed adequate at the time. However, although InterImage gave the agency the title and date of the DCAA audit report, it did not submit a copy of it with its proposal. The agency referred to this as “self-certification” and said it was not the independent verification of an adequate accounting system that the solicitation required.

InterImage made an interesting but unsuccessful argument to GAO. During the protest, InterImage explained why it had not submitted the 2002 DCAA audit report: InterImage had never received a copy of it and DCAA told InterImage that the audit report had been lost and that DCAA would not create a new one. GAO, however, could not help InterImage at this late (protest) stage, because GAO’s role is to evaluate the reasonableness of the agency’s decision at the time it made the decision. The implication is that future offerors in the same bind should put in their proposal an explanation of why the audit report is missing.

There are several other examples of offerors failing to provide “independent” verifications that the solicitation required.

In Graham Technologies LLC, B-413104.25 (Feb. 25, 2019), Graham did not include in its CIO-SP3 proposal the audit report DCAA had completed on Graham nor any information from DCAA regarding the verification. Instead, Graham’s proposal included a document it created citing the DCAA audit report number and date of a DCAA audit of its company and DCAA contact information as proof that DCAA had audited and approved its accounting system. In excluding Graham from the competition, the agency said that Graham’s proposal would have been adequate if it had only submitted the audit report as part of its proposal. But Graham’s self-verification did not comply with the solicitation.

In Leader Commc’ns, Inc., B-413104.9 (March 17, 2017), GAO denied a protest from an offeror in another CIO-SP3 competition whose proposal also had simply stated that DCAA had audited its accounting system and found it acceptable and cited the DCAA audit report number, but provided no independent verification.

In a more recent GAO decision involving an Alliant 2 procurement, the solicitation required evidence of an adequate accounting system for all prime and subcontractors. That evidence:

shall include a written opinion or other statement from the cognizant federal auditor (CFA) or the cognizant federal agency official (CFAO) that the system is approved or has been determined to be adequate, or if the contractor or subcontractor provides a review by a public accounting firm, the approval shall state that the accounting system complies with the requirements applicable to the contract type….”

The offeror submitted citations to a Defense Contract Management Agency (DCMA) letter approving the offeror’s accounting system as well as the most recent DCAA audit report for its accounting system. GAO agreed with the agency’s exclusion of the offeror from the competition based on the offeror’s failure to comply with the solicitation: “the solicitation did not contemplate that an offeror could simply attest and cite to a document presumably on file elsewhere in lieu of providing a “written opinion or other statement.” NCI Info. Sys., Inc., B-419322 (Jan. 12, 2021).

An independent financial audit is not a verification of an adequate accounting system. 

Not any kind of audit will satisfy an RFP requirement for a verified accounting system. In an earlier GAO decision also involving CIO-SP3, the offeror’s problem revolved around the specific type of audit the solicitation required: an audit establishing that the offeror’s accounting system has been “audited and determined adequate for determining costs applicable to this contract in accordance with FAR [§]16.301–3(a)(1).” An audit of a company’s financial statements would not do.

Shivoy Inc. submitted an independent auditors’ report on the consolidated financial statements of its parent company and subsidiaries. The report on its face said that the report addressed “consolidated financial statements” and focused in part on “whether the consolidated financial statements are free from material misstatement.” The report also gave the auditor’s opinion that “the consolidated financial statements … present fairly, in all material respects, the financial position of [DELETED] and its subsidiaries … and the results of their operations and their cash flows for each of the years in the three-year period … in accordance with U.S. generally accepted accounting principles.”

NITAAC concluded that this material did not meet the solicitation’s requirements of a verification of the adequacy of an offeror’s accounting system.

GAO agreed. The offeror submitted “an auditor’s report expressing an opinion of the validity of the consolidated financial statements for the …parent company (and subsidiaries) and did not provide any verification of the adequacy of the accounting system for determining costs applicable to a cost-reimbursement contract.” The audit gave “no indication that the auditors determined that these entities’ accounting systems” were adequate for determining costs. Shivoy, Inc., B-413104.36 (April 8, 2019).

Conclusion

It’s sad for a contractor to lose a competition because of an easily-correctible mistake, a mistake like not submitting the DCAA audit report expressly required by the words of the solicitation and in the offeror’s possession. If the agency focused on the word “full” in the phrase “full and open competition,” perhaps the agency would give non-compliant offerors a chance to correct these mistakes, to stay in the competition, and to perhaps become a best-value contractor.  But when an overwhelming number of proposals must be reviewed by an increasingly smaller number of procurement staff, that will not happen.

 

About the Author: Terry O’Connor is a Partner and Director of Government Contracts at Berenzweig Leonard LLP, a law firm in McLean, VA.