(Editor’s Note. Whether it be from higher frequency of floor checks or more scrutiny of accounting practices since the eruption of recent financial scandals, we are seeing a significant increase in audit reports asserting contractors’ “timekeeping system is inadequate” and “related internal control policies and procedures are inadequate”. These assertions are usually based on identification of numerous “errors” observed on timesheets (e.g. failure to complete hours worked daily, improper correction of mistakes, absence of supervisor’s signature, etc.). In this environment contractors need to ensue their timekeeping practices are well designed and properly implemented. Significant harm can result from auditors’ negative opinions such as conclusions of inadequate accounting practices resulting in not winning awards, suspension of payments on flexibly priced contracts, etc. Given the increased audit attention on proper timekeeping procedures we decided to discuss proper completion of timesheets (used interchangeably with time cards) and update attention we gave this matter several years ago.)
In spite of increasing use of electronic timekeeping, contractors should be aware that the government’s main criteria for adequate practices are grounded in manual timekeeping practices that were used years ago. The guidance has not changed and when auditors discuss adoption of new electronic means with contractors they invariably allude to the guidance set forth in the DCAA Contract Audit Manual, Chapter 5-900. All government agencies consider the following timekeeping steps acceptable practices:
Use of electronic procedures have increased substantially. When we work with clients who are faced with auditors reviewing their new electronic timekeeping practices, we generally find auditors focus on the contractor’s ability to prevent unauthorized changes to labor hours previously recorded. In our attempt to find more authoritative guidelines, we examined DCAA’s Contract Audit Manual (DCAM) and their audit programs and asked numerous auditors and consultants if there is any detailed guidance on using electronic timesheets. We were quite surprised to see the lack of guidelines established for contractors as well as guidance for auditors.
We did not find any official or unofficial guidelines for contractors but did find a brief section in DCAM Chapter 5-909.2, “Automated Timekeepting Systems” that makes a general statement that auditors should make sure automated systems provide for accurate and timely recording of labor hours by authorized employees and that there are sufficient internal controls in place to ensure corrections to labor charges are accurate and appropriately authorized. The only specific guidance in the section is that the system should provide that (1) only employees have access to the labor system (2) when badges are used, there is no duplication of badge numbers, they are not issued to unauthorized persons and procedures are in place to quickly report lost badges (3) changes are initialed and dated by the employee and supervisor and include a description of the reason for the change and (4) a “verifiable audit trail process is in place that collects all initial entries and subsequent changes”.
The absence of clear guidelines in either implementing automated timekeeping or auditing it means that auditors’ responses can vary widely. Before buying a commercial system or customizing one we would recommend a prior meeting with DCAA with, at least the supervisor and auditors present (we find attendance of the branch manager is also helpful to help resolve any future problems). Though they are likely to limit their responses to generalities (e.g. “good internal controls over access”, “sufficient audit trail”) it is a good idea to discuss the characteristics of the systems you are considering and specify as much as possible what they will be concerned with when evaluating the system.
Automated systems (e.g. spreadsheets, “wand” systems, etc.) have become accepted by government auditors but they must demonstrate they include the internal controls discussed above such as only the employee has access, changes are initialed and dated, supervisory approval is in place to verify accuracy, etc. If an automated system is planned, it is wise to communicate with your cognizant auditors before purchasing and implementing it.
We should note there is one feature of electronic systems that generates varied responses by the government. Though most electronic systems either prevent changes or provide audit verification of changes after “posting,” few systems allow visibility of changes made by the employee before the timesheet is posted. We have seen varied responses by DCAA to this lack of visibility. Some auditors, alluding to the strong controls of manual timekeeping where all entries are made in ink and changes shown by cross-outs and initials, will challenge the acceptability of not being able to observe changes before the timesheet is posted or electronically sent for approval. Others will accept the system as long as there is an audit trail of changes after postings.
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