Overhead Audits Risk and Reward

Surviving Your Upcoming Overhead Audit and Benefitting from It All at the Same Time

www.gma-cpa.com Topics for Today

• Perception of Risk • Cognizant Agency Risk Framework • Financial and Operational Risks in Small Businesses • Mitigating those Risks • Benefits of Risk Mitigation

2 Risks: What do you see as your financial and related business risks?

3 Risk Framework: What Increases Risk to a Cognizant Agency? • Cognizant Agency definition • Factors that increase risk – Audit Report – improper presentation, qualified opinion, ICQ issues – High compensation to executives – Internal control deficiencies noted – Project dollars/exposure – Increase in rate – Increase in components in rate – Lack of experience

4 Risks We Face

• Financial Risks: – Transactions not coded properly (direct but not by contract, direct vs. indirect, improper GL account, lack of consistency) – Transactions not evaluated for unallowables – Transactions not properly documented – Work performed not reviewed – Results not reviewed regularly – Reconciliations not performed timely

5 Risks We Face

• Operational Risks: – Lack of segregation of duties – No written accounting policies – Policies not followed consistently – No written compensation policy – No written bonus policy – Poor computer and physical security – No/non-functioning backup policy

6 Risk Management Components

Interrelated components derived from the way management runs an enterprise and are integrated with the management process:

• Internal Environment • Objective Setting • Event Identification • Risk Assessment • Risk Response • Control Activities • Information and Communication • Monitoring http://www.coso.org/ermupdate.html

7 Financial Risks: What Can be Done To Mitigate Them

• Training (everyone) • Supporting documentation (certain expenses require more than others) and approval • Reviewer has knowledge of accounting and Part 31 of the FAR • Balance Sheet and P&L regularly reviewed • Reconciliations • Budgeting

8 Operational Risks: What Can be Done To Mitigate Them

• Tone at the Top • Segregation of duties when possible • Written accounting policies disseminated • Employee handbook • Feedback • Written compensation and bonus policies (best practice) • Password protection and restricted access • Backup and disaster recovery policy, tested

9 Benefits to Mitigation of Risk*

• Smooth audit review and approval • Less time spent preparing for the audit/scrubbing the books • Better understanding of finances • Better morale and buy-in of employees • Better understanding of expenses and how they impact the overhead rate • Tighter operational control • Company image enhanced • Lower cost audit *Not an all inclusive list

10 Questions?

Diana DeWitt, CPA, CCIFP [email protected] 410.685.5512 www.gma-cpa.com