Six Essential Steps for Conducting an Effective Compliance Audit for Government Contractors

In celebration of the recent release of the 6th Edition of the Government Contracts Compliance Handbook, we’re offering six essential steps for conducting compliance audits designed specifically for government contractors. A robust compliance audit identifies risks, reinforces internal controls, and helps government contractors align with federal regulations. Here’s a guide to conducting a successful audit that ensures ongoing compliance and demonstrates accountability to federal stakeholders.

1. Assemble a Competent and Well-Balanced Audit Team

The first step in an effective compliance audit is assembling an audit team with the right mix of skills, independence, and experience. Government contractors should consider forming a steering committee to oversee the audit, which typically includes key organizational leaders, such as the chief compliance officer, in-house counsel, and chief financial officer. Including external consultants, such as legal or accounting professionals with specialized expertise, can also provide objectivity and industry-specific insights. 

Whether the audit team comprises internal personnel, external consultants, or a blend of both, it’s essential that all members understand the unique demands of federal contracts and compliance requirements. Independence, objectivity, and familiarity with the contractor’s operations are critical to achieving audit success.

2. Clearly Define the Scope of the Audit

Defining the audit’s scope is crucial to ensure that resources are allocated efficiently, and high-risk areas are prioritized. Factors influencing scope include the contractor’s size, the complexity of its federal contracts, and any previous issues identified during internal or external audits. Specific audit areas often include compliance with contract terms, cost allocation, time and expense reporting, subcontracting, cybersecurity controls, and adherence to Cost Accounting Standards. 

Contractors may also consider input from legal advisors or the board of directors when defining the scope, particularly in industries or contract types that face rigorous oversight. A well-defined audit scope not only focuses resources on high-risk areas but also provides a roadmap for ensuring comprehensive coverage of compliance requirements.

3. Develop a Detailed Audit Work Program

A structured audit work program outlines the objectives of each audit area and specifies the procedures required to assess compliance. Work programs should include adequate detail to ensure that audit teams address all potential compliance risks. For government contractors, resources such as the Defense Contract Audit Agency (DCAA) guidelines and Office of Inspector General (OIG) work plans provide useful templates and insights into common areas of risk in federal contracting. 

 Creating a work program enables auditors to systematically evaluate each compliance area, document findings, and recommend improvements where needed. This framework not only standardizes the audit process but also ensures that all team members follow a consistent approach to identifying and addressing potential compliance gaps.

4. Conduct Interviews and Test Controls

Conducting interviews with key personnel and testing controls are integral parts of the audit. Interviews allow auditors to verify that policies and procedures are functioning as intended and identify any informal practices that may deviate from established guidelines. For instance, interviews may reveal whether employees are following contract-specific requirements or if there are unrecognized discrepancies in billing practices. 

Control testing is also vital to ensure that compliance measures effectively mitigate risk. This involves reviewing a sample of transactions to verify that controls are working as designed. By testing compliance controls, auditors can pinpoint any weaknesses in processes, which helps prevent potential non-compliance issues from escalating. Regular testing of controls instills confidence in both internal and external stakeholders, affirming the contractor’s commitment to maintaining compliance.

5. Document Findings and Develop Corrective Action Plans

Documenting audit findings is essential for transparency and accountability. This documentation typically includes process flows, system write-ups, and test results, providing a thorough record of the audit’s findings and conclusions. Comprehensive documentation not only supports internal review but also serves as a foundation for any future government inquiries. 

Once the audit is complete, developing a corrective action plan helps address any deficiencies identified. Each recommendation should outline the issue, assess its compliance risk, and propose corrective measures. Establishing timelines and assigning responsibility for each corrective action facilitates accountability and ensures that improvements are implemented promptly. Clear documentation and follow-up actions demonstrate a contractor’s proactive approach to compliance.

6. Implement Follow-Up Mechanisms to Monitor Progress

A compliance audit is not complete until all corrective actions are implemented and validated. Contractors should establish a follow-up review, typically scheduled three to six months after the initial audit, to confirm that corrective measures have been applied effectively. This follow-up ensures that any issues identified during the audit are resolved and that compliance improvements are sustained over time. 

For government contractors, well-documented follow-up procedures reinforce a commitment to continuous improvement. In cases where audit results may be shared with federal agencies, a documented follow-up enhances credibility by demonstrating that the contractor is taking concrete steps to address compliance risks proactively. 

By following these six essential steps, government contractors can conduct effective compliance audits that reinforce their internal controls, minimize compliance risks, and meet the rigorous standards expected in federal contracting. These guidelines, drawn from the newly published *Government Contracts Compliance Handbook*, offer a blueprint for conducting thorough and effective audits.