1. AASHTO Audits of A & E firms & the NCM (National Compensation Matrix)

2. What is the 2010 AASHTO Audit Guide
An audit guide for State DOT auditors, A & E firms and CPA’s that perform audits of A & E firms
Recently revised in 2010 and we are anticipating another revision this year
The guide covers the A & E firms’ “Statement of Direct Labor, Fringe Benefits and General Overhead”
Also covers the A & E firms’ accounting systems, job-cost systems and labor charging systems

3. What is AASHTO?
AASHTO stands for the American Association of State Highway and Transportation Officials
AASHTO advocates transportation-related policies and provides technical services to support states in their efforts to efficiently and safely move people and goods.
The AASHTO audit subcommittee is comprised of senior audit representatives from each State’s DOT
In 2001 original AASHTO audit guide was approved
In 2010 the revised AASHTO audit guide was approved and updated to address issues uncovered during a 2009 OIG audit and DOT Concerns

4. 2009 OIG Audit What did they find?
The Indirect Cost Rates of 21 of 41 firms selected for audit contained unallowable costs.
Some of the areas found to include unallowable costs were:
Automobile costs – Unallowable luxury leases
Executive Compensation – Unreasonable or Excess compensation
Social & Entertainment costs – Expressly Unallowable
CPA’s were not performing adequate audits

5. What is the “Statement of Direct Labor, Fringe Benefits and General Overhead”
Also referred to as the Overhead Rate or Indirect Cost Rate (ICR)
Used as the basis for determining a firms overhead rate
The overhead rate is generally computed as the ratio of allowable indirect costs to total allocable direct labor costs.
Why is this so important…
A & E firms are awarded contracts based on qualifications and not based on lowest price bid.
The prices/fees they charge are not constrained by market forces
Their billing rates are calculated using the overhead rate
The overhead rate must comply with FAR cost principles and not included unallowable items.

6. Key Areas Covered in an AASHTO Audit
Accounting system & Accounting records
Job-cost system
Labor charging system
Allowable, Allocable & Reasonable
Direct and indirect costs
Allowable and unallowable costs
Compliance with FAR Cost Principles

7. Accounting System & Accounting Records
Management is responsible for maintaining an adequate accounting system
Track Direct and Indirect Costs
Track Allowable and Unallowable costs
Track all labor as direct, indirect, allowable or unallowable
Prepare an overhead schedule that reconciles to the general ledger
Prepare job-cost reports and labor reports that reconcile to the general leger

8. Job-Cost System
Must charge all job related costs to a job if allocable to the job
Include all allowable and unallowable costs
Include all costs whether billable or not
Must reconcile to the general ledger

9. Labor Charging System Labor Charging System should:
Reconcile GL to job cost system and IRS payroll reports
If using Direct Labor (most common) as the base for the indirect cost rate then reconcile Direct Labor to job-cost system – this ensures that the base is correct
The auditor must trace at least 26 direct-charge employees timecards through the system
Payroll records
Cost system
General ledger

10. Is it Allocable…Allowable…& Reasonable?
Allocable ~ Is it allocable to a job?
Incurred specifically for the contract
Benefits both the contract and other work
Is necessary to the overall operation of the business
Allowable ~ Is it in accordance with FAR Cost principles?
First remove anything that has to do with FUN!
Then determine if is it reasonable, allocable to a government contract, in compliance with GAAP, in compliance with the contract and NOT prohibited by the FAR
Reasonable ~ Is it reasonable in its nature and amount?
The nature and amount cannot exceed that which would be incurred by a prudent person in the conduct of competitive business
Burden of proof is on the contractor

11. Reconcile… Reconcile the Overhead Statement to the general ledger
Make sure all costs are accounted for, whether they are allowable or unallowable (show all and remove unallowable)
Reconcile the Job-cost system to the general ledger
Reconcile the Direct Labor to the Job-cost reports
Reconcile all other direct costs to the Job-cost reports
These reconciliations seem simple, but prove to be harder than you might think

12. Main areas of concern to state DOTs
Executive Compensation
Bid & Proposal Costs
Selling & Marketing Costs
Fringe Benefits
Bonus & Incentive Pay Plans
Related Party Transactions
Automobiles – Luxury leases and personal use of vehicles
Consulting Agreements
Taxes
For all audits I have been involved with, the government agency has asked for supporting documentation with at least ½ of the above accounts

13. Compensation
Total compensation includes wages, salaries, bonuses, deferred compensation, and employer contributions to defined contribution plans.
For an element of compensation to be allowable it must meet the FAR requirements specific to that element.
It also must be reasonable in nature~
Similar to other firms of the same size, in the same industry, in the same geographical area and engaged in similar non- government work.

14. Executive Compensation
The current procedure to determine reasonable Executive Compensation is based on two Armed Services Board of Contract Appeals decisions
Techplan Corporation
Information Systems Network Corporation
Engineering firms need to evaluate the reasonableness of executive compensation based on the above rulings and prepare documentation to support the evaluation.
If no analysis is prepared then the state DOTs have been instructed to use the NCM (National Compensation Matrix) to determine reasonableness.
Oh Wait – There is NO NCM, at least not yet!

15. Procedure to perform a compensation analysis
Examine compensation and remove FAR unallowable elements.
Prepare a schedule for each executive listing the amount received for compensation including
Wages, salary, bonuses, incentive compensation, deferred compensation, and employer contributions to a defined contribution plan.
Obtain 3 nationally published compensation surveys
These must represent similar firms in terms of revenue, industry, geographic location, and other relevant factors.

16. Procedure to perform a compensation analysis
From these surveys develop a reasonable compensation range for each executive.
Determine the survey median compensation amounts for each comparable position.
Apply appropriate escalation factors to adjust survey data to a common date of July 1 of the same year.
Develop a composite median amount by averaging the 3 survey’s median compensation amounts.
Increase this composite median by 10% based on DCAA guidance to allow for a 10% ROR (range of reasonableness)
Compare the results to actual to determine if an adjustment is necessary.

17. Flaws related to current method
The procedures previously outlined follow existing DCAA methodologies, which have been recently challenged by the findings of the Taylor case.
Taylor’s expert witness, a statistician, challenged the validity of the DCAA approach and successfully argued for the substitution of alternate statistical methodologies for determining reasonable compensation for his client.
The results of this case continue to cast uncertainty upon the appropriate method for computing defensible overhead rates.

18. NCM
Concurrently, FHWA, State DOTs and representatives from ACEC had been addressing the composition of a National Compensation Matrix, as prescribed in Chapter 7 of the guide.
The resulting matrix diverges substantially from the previous DCAA methodology and utilizes extensive statistical tests and procedures to produce a more accurate and defensible result.  
The NCM draft is available for review on the AASHTO website.

19. Bid & Proposal Costs
B & P costs are expenses incurred in preparing, submitting, and supporting bids and proposals on potential Government or non-government contracts
Generally allowable
Firms are required to identify and accumulate B&P costs by individual contract and treat costs the same as other jobs
Treat directly associated costs the same
Allocate indirect costs the same

20. Selling & Marketing Generally allowable selling efforts
Direct Selling – Person to person contact such as familiarizing a potential customer with your products and services
Brokerage fees, commissions and similar costs – allowable when paid to bona fide employees or agencies for the purpose of securing business
Generally unallowable selling efforts
Open ended advertising
Corporate Image enhancement & Public Relations related to the dissemination of information calling favorable attention to the firm’s products or services
Trade shows/sponsorship of meetings

21. Fringe Benfits
Fringe Benefits include costs for employees perquisites, payroll taxes & employee benefits
~ generally these are allowable
Payroll taxes
Pension plan contributions
Paid time off
Medical insurance
Life Insurance

22. Bonus and Incentive Pay Plans
Bonus Plans (Allowable if properly documented)
Typically applicable to a broad class of employees
Meets basic eligibility requirements
Based on productivity, team or overall company performance
Distributed based on a percent of compensation or available pool of money
Profit-Distribution Plans (Unallowable)
Distributions of net earnings to owners
Based on some factor linked to ownership

23. Related Party Transactions
Must identify and disclose related parties and transactions per GAAP
Also review agreements and transactions for
Where one party pays expenses of the other
Transactions of products and/or services at greater than or less than current market rates
Revenue transactions that lack economic substance
Services or goods purchased at nominal costs
Unusual or high value transactions particularly close to the end of the financial period.

24. Automobiles
The cost of personal use of company vehicles is strictly unallowable
Mileage logs should be maintained
An adjustment to credit overhead for the portion of this cost is necessary
Costs associated with luxury vehicles warrant additional attention to ensure costs are reasonable, allowable, and allocable.

25. Consulting Agreements
Outside Engineering & Technical Consultants generally allowable
Specific Documentation Required
Details of all agreements
Details of time expended and nature of the actual services provided.
Consultant work products and related documents

26. Taxes Taxes Federal income taxes are unallowable
Taxes on income passed thru to shareholders are unallowable
Penalties and interest assessed on late payments are unallowable
State and local income taxes are allowable

27. Other Labor Related Concerns
Uncompensated Overtime for Salaries direct charge employees
Incorrect recording of direct labor to the wrong project or to indirect labor
Moving direct labor charges from one project to another –Audit Flag!
Incorrectly recording B & P labor hours and/or selling effort hours

28. Expressly Unallowable Costs
Interest Expense
Bad Debt Expense
Entertainment
Alcohol
Gifts
Fines & Penalties
Lobbying and Political Activity Costs
Donations and Contributions
Directly Associated Costs (must be allocated to job and not included in overhead)
For all audits I have been involved with, the government agency has asked for supporting documentation with at least ½ of the above accounts

29. Selected Areas of Cost Determine high risk accounts
Printing/ Reproduction
Dues and Subscriptions
Travel
Seminars and Conventions
Insurance
Professional and Consultant Services
Rent
Depreciation
Employee Morale
“Miscellaneous” and “Other” Type Accounts
Subconsultants / outside consultants
Gain/Loss on Sale of Assets
For all audits I have been involved with, the government agency has asked for supporting documentation with at least ½ of the above accounts

30. Facilities Capital Cost of Money (FCCM)
Facilities Capital Cost of Money (FCCM) is an imputed cost related to the firm’s investment in fixed assets/facilities
It is charged as a rate in a manner similar to overhead
Must be shown as a separate line item or disclosed in the footnotes
If the firm wants to claim FCCM it must be specifically identified in the cost proposal on a per contract basis
No fee or profit on FCCM

31. Cognizant Agency What is a cognizant agency?
A federal agency, The Home State DOT, or a Non-Home State DOT granted cognizance in writing from the Home State
Cognizant approved rates may be established by
Cognizant Agency performs, or directs the work of a CPA, who performs audit
Indirect Cost audit performed by an independent CPA and home state reviews the CPA report and workpapers and issues a letter of concurrence
Non-Home State reviews the CPA report and workpapers and issues a letter of concurrence with the CPA report (Home state has 180 days to concur, modify or reject)

32. Auditor Selection The CPA selected to perform the audit should:
Meet GAGAS Requirements & have adequate GAGAS experience
Have Favorable Peer Reviews
Have Experience and knowledge of A & E industry
Knowledge of accounting practices and systems used by A/E firms
Have experience performing FAR audits and understand Government procurement contracts
Design and execute an audit program that meets professional standards and the requirements of the AASHTO Audit guide

33. Informational Links 2010 AASHTO Audit Guide 2009 OIG Audit
2009 OIG Audit
OIG Audit
2012 National Compensation Matrix Draft
2012 ASBCA Taylor Case Decision

34. Jennifer D. Rios, CPA Goodsell & Company Inc
Jennifer D. Rios, CPA Goodsell & Company Inc., CPAs