If you are the owner of a start-up company, you may be exploring the possibility of applying for Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) funding. These programs for U.S. owned and operated businesses are among the largest sources of early-stage capital to engage in research and development. There are numerous federal agencies that provide funding for start-up and high-tech businesses, including the National Science Foundation (NSF), the National Institutes of Health (NIH) and U.S. Department of Defense (DoD).

Setting up your business to comply with the federal requirements can be a daunting task, as federal compliance and reporting is unique and can be complex for a new small business. Still, you don’t want to miss out on the opportunity. We can help you from setting up the appropriate accounting system to policies and procedures to federal audit.

While each federal agency’s reporting requirements and rules vary, the Federal Acquisition Regulation (FAR) is a set of federal regulations that apply to all for-profit organizations. In our experience, audit is the most common concern and reason for inquiries.

We’ll specifically touch on Defense Contract Audit Agency (DCAA) audits and areas of emphasis because they have the most rigorous accounting system audit requirements.

DCAA performs the audits of DoD contracts and subcontracts. It evaluates the accounting system that is in place, which includes policies and procedures, internal controls, and contract compliance. The agency is interested in assessing items that impact proposed or incurred costs and identifying ways to reduce costs.

If you are applying for federal funding, you will need compliant systems in place to satisfy pre-award or other audit requirements. If DoD SBIR/STTR funding is received, you won’t likely be audited for the first phase, but you may face a pre-award audit. However, if you proceed to the second phase of funding, the possibility of an audit is much more likely.

DCAA’s timing of audit and focus depends on the type of contract. Firm-fixed price contracts face more DCAA pre-award scrutiny to make sure the costing is correct while cost reimbursable contracts receive more post-award scrutiny as funds are expended. We have experience assisting clients with setting up accounting systems to be compliant with federal rules and regulations and to be successful in these types of audits.

While the rules that apply to federal grants and contracts vary from agency to agency, the basic cost principles do not vary. To be compliant, an accounting system must be functional and have adequate controls in place to safeguard assets and meet the grant and contract requirements. The following are just a few of the items DCAA would look for:

  • System for collecting and processing financial data
    • Ability to generate meaningful reports
    • Tracking and classifying costs
      • Costs must be reasonable, allocable, and allowable
      • Unallowable costs must be identified and segregated
      • Identify direct vs. indirect costs
      • Enable the calculation of indirect cost rate(s)
      • An audit trail must be established
    • Segregation of duties
    • Management approval

It is worth the time upfront and the initial investment to become federal grant/contract compliant and establish an appropriate accounting system. If you need any assistance, please contact us for more information.

By Megan Bradley, CPA