What is a FAR Audit?

What Does “FAR” Stand For?

FAR stands for Federal Acquisition Regulations, which is a set of rules that outline how government agencies acquire goods and services. The purpose of these regulations is to ensure that federal funds are spent responsibly and that contractors adhere to uniform standards. Businesses that provide goods or services to the government are required to meet FAR requirements as part of the contracting process.

What Is a FAR Audit?

A FAR audit takes a look at and determines if your business complies with FAR’s accounting and financial requirements. Specifically, it evaluates your accounting system, cost allocations, and practices to ensure they meet federal standards. These audits are conducted by agencies like the Defense Contract Audit Agency (DCAA) or independent auditors authorized by federal agencies.

Key Objectives of a FAR Audit

The primary goals of a FAR audit are:

1. Verifying compliance with government contracting requirements.
2. Ensuring that costs are properly tracked, recorded, and allocated.
3. Confirming that no unallowable costs are billed to the government.
4. Assessing the adequacy of your accounting systems to manage government contracts.

Common Areas Reviewed in a FAR Audit

A FAR audit often involves a detailed examination of several areas, such as:

1. Direct and Indirect Costs
   • Are direct costs (those directly tied to a project) separated from indirect costs (overhead or administrative expenses)?
   • Are indirect costs allocated using an approved methodology?
2. Unallowable Costs
   • Costs such as entertainment, lobbying, or personal expenses are unallowable under FAR. The audit ensures these are excluded from invoices submitted to the government.
3. Timekeeping Practices
   • Employees working on government contracts must follow accurate timekeeping methods. FAR audits check for time-tracking integrity and ensure that labor costs are assigned correctly.
4. Internal Controls
   • Your internal controls and policies are reviewed to ensure that financial reporting and cost management comply with federal requirements.
5. Accounting System Adequacy
   • Is your accounting system robust and reliable enough to track contract-specific financial activities? Auditors assess whether it meets government standards.

Who Needs a FAR Audit?

If your business works with federal contracts or subcontracts—particularly those subject to the Cost Accounting Standards (CAS)—you are likely required to undergo a FAR audit. This includes industries such as:

• Construction
• Manufacturing
• Professional services (e.g., consulting, engineering)

If your company is looking to expand into government contracting, it would be wise to proactively undergo a FAR audit to confirm you are ready.

What Happens If You Fail a FAR Audit?

Failing a FAR audit can have serious consequences, such as:

• Reimbursement demands: Repayment of improperly billed costs.
• Contract termination: Cancellation of your government contracts.
• Loss of eligibility: Being barred from future federal contract opportunities.

It’s crucial to prepare and ensure compliance before undergoing a FAR audit.

How to Prepare for a FAR Audit

1. Understand Allowable Costs: Review FAR guidelines to distinguish allowable and unallowable expenses.
2. Implement Strong Internal Controls: Maintain policies for accounting, record-keeping, and time tracking.
3. Seek Professional Support: Partnering with accounting experts who specialize in FAR compliance can streamline the process and mitigate risks.
4. Conduct a Pre-Audit Review: Periodically review your financial records and processes to identify and address potential issues before an official audit.

Why Partner with an Expert?

FAR audits can be complex, requiring a deep understanding of both FAR regulations and government accounting standards. When you work with an experienced accounting services provider, you can rest assured that your business is fully prepared to navigate the audit process successfully.

At Cooper Norman, we specialize in helping businesses achieve FAR compliance, whether it’s through pre-audit preparation, system evaluations, or addressing specific compliance challenges. Ready to simplify your FAR audit journey? Contact us today to learn more about our comprehensive accounting services tailored for government contractors.