Legal Fees and the Government Contractor

Years ago when I first began my work in finance and accounting I came to hate suspense accounts. For those not familiar with the term, they are accounts you book transactions to get half the entry done (usually the credit is to Cash/Checking) when you have no idea what the other side of the entry is. QuickBooks even formalized this with an account called “Ask My Accountant” (sigh).

I always wondered “If I cannot figure this out today, what are the odds I am going to figure it out six months from now?” I spent all of my career making hundreds of millions of dollars of entries without utilizing suspense accounts and feel like a better accountant for doing so.

Naturally, government contracting makes an argument for an exception to the suspense account rules: Legal Fees.

I am not a lawyer and the statutes, regulations, and even a Supreme Court ruling regarding the allowability of legal costs are extremely complex and I will not address them here.

But in the broadest sense, in many cases the allowability of legal costs cannot be determined until months or even years after GAAP and usual business practices require the expenses to be booked (not to mention the DCAA current fascination with paying accounts payable quickly). For example, many legal costs are only allowable if the contractor wins, some are allowable regardless of if the contractor wins, and some unallowable regardless of the outcome. There is even a requirement, in a few cases, to segregate the costs or reach an advance agreement with the ACO about how the costs will be handled.

All of this is a potential accounting nightmare and a legitimate argument for the use of suspense accounts.

What I recommend to clients is the following steps:

1. As part of the normal AP process the legal expenses are reviewed to determine if there is an easy allocation issue (reviewing new Human Resource policies is an easy example). Bring in outside help if required (CEO, CFO, General Counsel).
2. Those costs that cannot be easily identified should be booked to an unclaimed/unallowable account.
   1. As part of year-end procedures, these transactions should be analyzed for reconciliation. They can be:
      1. Left as unclaimed
      2. Moved to claimed
      3. Capitalized as a possible future recovery
      4. Capitalized as a possible future liability
3. Obviously professional judgement will need to be exercised.

The reason for using an unclaimed account is in case you forget to review them (Hopefully you will catch it when doing your incurred cost submission).

Go ahead, call it a suspense account.