CERTIFIED PUBLIC ACCOUNTANTS

Transcription

1 The Uniform Audit and Accounting Guide for Audits of Architecture and Engineering (A/E) Consulting Firms CERTIFIED PUBLIC ACCOUNTANTS

2 Today s Presenters James A. DeLeo, CPA, MBA, MST Gray, Gray & Gray, LLP More than a decade of hands on experience and entreprenuerial thinking has given Jim a deep well of insight into what it takes to make a good business better, and a better business great. He brings this practical expertise to bear for his clients. Jim s diverse background make him a key player in our Architect and Engineer Practice Group. His expertise and experience with overhead audits and knowledge of the FAR has proven to be particularly helpful a wide range of architect and engineering firms. A graduate of Bentley College, Jim earned his Masters in Taxation from Suffolk University and his MBA with a concentration in Entrepreneurial Finance from Babson College. He is a member of the Boston Society of Architects, American Council of Engineering Companies of Massachusetts, American Institute of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. Jim also serves as Corporator for the Boston Biomedical Research Institute and is on the Board of editors for the Insights newsletter for ACEC.

3 Today s Presenters Richard A Hirschen, CPA Gray, Gray & Gray, LLP Rich is a partner in our Client Service Department. After beginning his accounting career with a large national firm, Rich joined Gray, Gray & Gray in 1996 and was elected partner in He provides expert guidance for architect and engineering firms in the areas of tax strategy, overhead audits, developing financial systems and internal control procedures. He assists clients with revenue recognition procedures, account payable systems and management reporting and analysis systems as well as with strategic planning. Rich is a key member of our Employee Benefit Plan Audit practice group, and has extensive experience in assessing and implementing 401(k) and other employee benefit plans. He is member of the American Institute of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants.

4 Today s Presenters Julie Garber Jacobs Engineering Group, Inc. As compliance manager, Julie oversees compliance on state and local contracts for Jacobs Engineering Group Inc. Julie facilitates client and 3 rd party audits, prepares Department of Transportation indirect rate reports and serves as a Federal Acquisition Regulation (FAR) subject matter expert. Julie works with more than forty state DOTs and has been with Jacobs for over 15 years. Before joining Jacobs, Julie worked for the May Co. and KPMG in their audit and tax departments. She earned a Bachelor of Science degree in Accountancy from Southern Illinois University at Edwardsville, and has been member of the Missouri Society of CPAs since 1990.

5 Today s Presenters Elizabeth Pellegrini Director of Audit Operations Massachusetts Department of Transportation As the Director of Audit Operations, Beth is responsible for the oversight and management of the Audit Operations Unit which performs internal and external audits for the Department of Transportation Highway Division, the Office of Transportation Planning, the Aeronautics Division and the Registry of Motor Vehicles Division. Beth has been working for the Transportation Department for 27 years, 17 as the Audit Director. Beth has worked with more than 100 various consultant firms, various federal and state agencies including the Armed Service Board of Contract Appeals. She earned a Bachelor of Science degree in Accountancy from Bentley College, is a Certified Government Financial Manager and is a member of the AASHTO subcommittee of Internal and External Audit.

6 Today s Presenters William H. Roark Federal Highway Administration Massachusetts Division Office Mr. Roark, is a financial program specialist with over thirty years of progressive experience and leadership managing all aspects of capital improvements planning, contract administration internal and financial audit planning serving geographical dispersed industrial, defense complexes, and governmental entities. Mr. Roark s career expands over 20 years in the Department of Defense, and US DOT Office of Inspector General where he led efforts to reinvigorate corporate financial performance and rebuild financial management accountability among business units following organization/business transition. Mr. Roark, is a certified acquisition professional with the National Contract Management Association, and a certified financial planner. He holds a Master s degrees in both Taxation and Professional Accounting from the University of Hartford and the University of Iowa. Currently, Mr. Roark is a member of the adjunct faculty at Lesley Graduate School of Management, and tenured teaching fellow at Becker College Graduate School of Professional Development and Accelerated Learning.

7 Overview of this Session The position of the Massachusetts Department of Transportation relative to the AASHTO Guidelines Synopsis of the Major Changes introduced by the Audit Guide relating to: Chapter 7 of the audit guide on Compensation Chapter 10 of the audit guide on Audit Procedures Chapter 12 of the audit guide on Cognizance and Oversight Impact on your firm - what you need to do now

8 Chapter 7 Compensation Consultants are responsible for preparing their own analysis of comp reasonableness Steps in the analysis of reasonableness are: Identify positions to be analyzed Determine actual allowable compensation for each position Develop benchmarks using survey data Compare actual allowable comp to benchmarks Calculate eliminations for comp in excess of reasonable amounts

9 Compensation Analysis The following steps are numbered as in the Audit Guide, section 7.5 Step 1 Examine elements of compensation and identify unallowable comp You will eliminate unallowable comp from the analysis

10 Compensation Analysis Step 2 Prepare a schedule of actual allowable executive compensation Executives must be examined individually Comp includes but is not limited to salary, bonus, incentive comp, deferred comp, employer contributions to defined contribution retirement plans

11 Compensation Analysis Step 3 Obtain surveys that match your firm in terms of: Industry Revenue Geographic area Executive positions included Few, if any, surveys will provide an exact match

12 Compensation Analysis Best practice is to use three surveys if available Survey should include salary, bonus and other compensation by category based on revenue ranges, number of employees or discipline.

13 Compensation Analysis Step 4 Select comparable survey data Find best match to that survey, typically based on firm size Use survey median if available Step 5 Apply escalation factors to adjust survey data to common July 1 date Escalations need to be supported

14 Compensation Analysis

15 Compensation Analysis Step 6 Develop a composite median amount by averaging medians from all surveys used, after applying escalations Step 7 Increase this composite median by 10% range of reasonableness allowed by DCAA guidance

16 Compensation Analysis

17 Compensation Analysis Step 8 Compare total actual comp for each executive to the estimated reasonable comp developed in Step 7

18 Compensation Analysis

19 Compensation Analysis Step 9 Compensation in excess of the estimated reasonable amount generally should be eliminated from overhead In theory, it could be applied pro-rata rata to direct and indirect cost, but this creates difficulty Some firms may choose to perform one more test

20 Superior Performance If a firm can demonstrate superior financial performance, it is possible to use up to 75 th percentile survey data Performance should be sustained, not a one-year anomaly Financial performance measure must be linked to the executive s performance

21 Superior Performance Examples of financial performance measures: Revenue growth Net income Return on equity, assets, sales or capital Earnings per share Cost savings Market share

22 Superior Performance Complicated series of steps to prove superior performance, using proxy data from SEC filings Section 7.6 provides details In practice, few firms will be able to meet this test Small firms will find it particularly difficult due to lack of proxy data for comparable firms

23 National Compensation Matrix In cases where you don t prepare an analysis, or it is deemed noncompliant, states can determine reasonableness using NCM NCM establishes reasonable compensation amounts by position and size of firm

24 National Compensation Matrix NCM to be maintained by FHWA Will include position descriptions, similar to the sample in section 7.7 of the Guide Important the NCM does not yet exist! The Guide only presents a sample firms should prepare their own analysis; do not rely on the NCM

25 Benchmark Compensation Statutory limit Amount Applies to Senior Executives Defined as 5 highest paid executives in home office and each segment Supplements, does not replace reasonableness test $684,181 for 2009

26 Compensation Surveys Qualities of a good survey: Comparability to your firm Number of data points Position descriptions Concept of title conformance Firms need to participate!

27 Related Parties Auditors must review compensation of all employees related to company executives Provide a list of: Employee names / employee IDs Name / ID of related executive Position Job duties Wages, salaries, bonuses, fringe benefits

28 Closely-Held Firms Comp of owners and principals in small, closely- held firms considered a risk area Must not be a distribution of profits

29 Bonus and Incentive Plans Put them in writing Include: Eligibility criteria Period Performance criteria Form of payment Distribution timeline

30 Fringe Benefits Deferred compensation Pensions ESOPs Severance pay All are complicated and require review to determine FAR allowability

31 Supplemental Benefits Executive benefits not available to majority of employees Review on a case-by-case basis Examine for reasonableness and allowability

32 Substantive Changes Chapter 10-Guidance for Developing Audit Procedures Before accepting a FAR audit report or examination- level attestation report, the Home State DOT or other reviewing State DOT must determine whether the auditor has adequately complied with the procedures described in Chapter 9 (General Audit Considerations) and performed adequate testing in compliance with the recommended minimum audit testing procedures discussed in the Guide.

33 Substantive Changes Chapter 10, continued: When employing a CPA firm (or other service provider/auditor) to audit a proposed overhead rate, the engineering consultant must inform the CPA that: The audit should comply with AASHTO s minimum recommended audit procedures, as discussed in the Guide.

34 Substantive Changes Chapter 10, continued: The CPA should consider meeting with representatives of the reviewing State DOT to discuss the audit process.

35 Substantive Changes Chapter 10, continued: Planning and General Procedures Audit work must meet professional standards (Government Auditing Standards and either Generally Accepted Auditing Standards or Attestation Standards), and the audit must be planned and performed to provide reasonable assurance that the overhead rate presented on the overhead schedule complies with the Cost Principles of FAR Part 31.2.

36 Substantive Changes Chapter 10, continued: Audit Sampling is discussed and the Chapter presents some basics to be considered in designing an audit sample.

37 Chapter 10, continued: Substantive Changes Note: : Before selecting a statistical audit sample using variable sampling techniques to test for unallowable cost items, auditors are expected to scan the engineering consultant s general ledger so that large dollar or sensitive (LDS) transactions can be removed/stratified for complete examination, including verification to source documents. The sampling universe should be limited to the group of items that remain after the LDS items have been removed.

38 Substantive Changes Chapter 10, continued: The auditor should determine an appropriate sample size after considering the size of the firm, the auditor s previous experience with the firm, the number of transactions and high-risk accounts in the indirect cost pool, and the assessed level of control risk. The test sample of an account balance or line item must be sufficient to comply with GAGAS Additionally, in accordance with SAS No. 111, the auditor should document the sampling plan, including factors used in the determination of sample sizes.

39 Substantive Changes Chapter 10, continued: Auditors are encouraged to apply sampling methods using a 95-percent confidence level with a precision level in the range of 2 to 5 percent. All unallowable costs uncovered through audit testing must be removed from the overhead schedule, regardless of amount, as FAR Part 31 does not establish a tolerance level to permit any amount of unallowable costs to remain in the indirect cost pool.

40 Chapter 10, continued: Substantive Changes Based on the assessed level of control risk, the auditor should determine an appropriate labor sample with a minimum of 26 timesheets chosen for testing across an appropriate mix of direct-charge charge employees, including supervisors and/or project managers. In this context, direct-charge charge employees means any employees, supervisors, and/or principals who spend a portion of their time working on A/E projects.

41 Substantive Changes Chapter 10, continued: In situations where the auditor determines that additional testing beyond the LDS items is required, the remaining indirect costs in the high-risk accounts (the sampling universe) should be tested on a sample basis. A minimum random sample in the range of 2 to 20 transactions is recommended for each high-risk account. This requires transactions to have been verified from the overhead schedule back to the general ledger and requires that the transactions be vouched from the general ledger to source documents.

42 Chapter 10, continued: Substantive Changes Note: State DOTs generally will deem an overhead audit insufficient due to: Failure to comply with the recommended minimum testing procedures as established in this chapter (unless deviations from the minimum testing requirements are adequately identified and justified in the auditor s workpapers). Failure to apply properly the FAR Subpart 31.2 cost principles. Failure of a CPA or other audit group to provide access to all audit workpapers used to determine the audited overhead rate.

43 Substantive Changes Chapter 12-Cognizance and Oversight The underlying guidance concerning cognizant audits is contained in 23 CFR 172 and 23 U.S.C. 112 and supporting documents published by FHWA. Section 174 of the 2006 Transportation Appropriations Act and the implementation guidance issued by FHWA served to re-emphasize emphasize the importance of cognizant audits, while not actually changing the underlying regulations specific to issuance or acceptance of cognizant audits.

44 Substantive Changes Chapter 12, continued: 23 U.S.C. 112 provides definitive guidance on indirect rates and the acceptance of cognizant audits. 23 U.S.C. 112 (b)(2), Contracting for engineering and design services, as follows:

45 Substantive Changes Chapter 12, continued: (A) General Rule Subject to paragraph (3), each contract for program management, construction management, feasibility studies, preliminary engineering, design, engineering, surveying, mapping, or architectural related services with respect to a project... shall be awarded in the same manner as a contract for architectural and engineering services is negotiated under Chapter 11 of Title 40. (B) Performance and audits Any contract or subcontract awarded in accordance with subparagraph (A), whether funded in whole or in part with Federal-aid aid highway funds, shall be performed and audited in compliance with cost principles contained in the Federal Acquisition Regulation of part 31 of title 48, Code of Federal Regulations.

46 Substantive Changes Chapter 12, continued: (C) Indirect cost rates Instead of performing its own audits, a recipient of funds under a contract or subcontract awarded in accordance with subparagraph (A) shall accept indirect cost rates established in accordance with the Federal Acquisition Regulation for 1-year applicable accounting periods by a cognizant Federal or State government agency, if such rates are not currently under dispute. (D) Application of rates Once a firm s indirect cost rates are accepted under this paragraph, the recipient of the funds shall apply such rates for the purposes of contract estimation, negotiation, administration, reporting and contract payment and shall not be limited by administrative or de facto ceilings of any kind.

47 Substantive Changes Chapter 12, continued: The AASHTO Audit Subcommittee and ACEC Transportation Committee worked together to develop the following guidance, which was later incorporated by FHWA into the Administration of Engineering and Design Related Services Contracts Questions and Answers prepared by the FHWA and available on the Internet at

48 Substantive Changes Chapter 12, continued: What is a Cognizant Agency? A cognizant agency can be any of the following: A Federal agency. The Home State Transportation or Highway Department (the State where the consulting firm s accounting and financial records are located). A Non-Home State Transportation or Highway Department to whom the Home State has transferred cognizance in writing for the particular indirect cost audit of a consulting firm.

49 Substantive Changes Chapter 12, continued: How a Cognizant Approved Indirect Cost Rate is Established. Guidelines for Reviewing CPA Indirect Cost Audits. Discussion of Attestation Engagements. Risk Analysis and Accepting Overhead Rates Without a Workpaper Review.

50 Substantive Changes Chapter 12, continued: Revisions include: An example cognizant letter. Questions and answers relating to cognizance and FAR compliant audits. Includes Q&A relative to steps that may be included in dispute resolution processes.

51 FHWA Involvement FHWA will be paying closer attention to FAR cost principles and closely aligning to what s in the Audit Guide We are in a state of transition current state to future state will take some time Roles and responsibilities as laid out in the Audit Guide Home State/Non-Home State, etc. will be followed May look at cognizance clarification in proposed rulemaking, if needed

52 Implementation Move toward consistency State-specific rules should go away Increased role of FHWA Numerous issues yet to be resolved

53 Resource References The Guide: 20Accounting%20Guide% %20%28No%20Markup%29.pdf OIG Audit: DCAA Audit Manual: 23 CFR Part 172: bin/cfrassemble.cgi?title= CFR Part 31: bin/cfrassemble.cgi?title= Benchmark Compensation Amount:

54 Contributors Thank you to all of those who contributed to the information presented today: David Bruce Program Analyst Federal-Aid Financial Management Division Office of the Chief Financial Officer Federal Highway Administration Jerry J. Jones, CPA Commission Auditor Michigan Department of Transportation Office of Commission Audits Dan Purvine VP of Finance and Accounting Kimley-Horn and Associates, Inc.

55 Sharing a vision and providing direction so that our clients can achieve success. CERTIFIED PUBLIC ACCOUNTANTS VISION DIRECTION SUCCESS Westwood, MA Framingham, MA