DCAA released a memorandum for regional directors (MRD) dated May 13, 2025 to provide revised audit guidance related to contractor business system audits. The primary focus of the MRD is to align audit procedures with the January 17, 2025 final rule to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to implement Section 806 of the National Defense Authorization Act for FY 2021 (i.e., define material weakness and replace “significant deficiency” with “material weakness”). Notably, the MRD instructs auditors to assess materiality and pervasiveness, along with the following factors, when evaluating whether a deficiency (or deficiencies) results in a material weakness:

• Nature and frequency of the noncompliance with the DFARS criteria identified;
• Root cause of the noncompliance;
• Effect of compensating controls; and
• Potential impact of the noncompliance if not corrected.

The MRD also addresses terminology for noncompliances that do not rise to the level of material weaknesses (i.e., system deficiency and less than material noncompliance that warrants the attention of those charged with governance).

Lastly, the MRD references recent new and revised estimating system audit programs. In terms of new audit programs, the MRD details new “follow-up” audit programs for accounting, estimating, and Material Management and Accounting Systems to examine corrective actions related to previously reported material weaknesses/significant deficiencies. Notably, the MRD states that the Field Audit Office may select either the new audit program (aligned by 17 DFARS 252.215-7002 criteria) or the existing audit program (aligned by cost element).

In terms of revised audit programs, the MRD reminds auditors that the accounting system audit program was revised to provide more detailed risk assessment procedures and remove the audit step to test executive compensation.

The May 13 MRD can be found here.