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AASHTO‘s New Uniform Audit and Accounting Guide for Audits of Architect and Engineering Firms

The American Association of State Highway and Transportation Officials (AASHTO) have released a New Uniform Audit and Accounting Guide.  These guidelines, although not finalized, are expected to be effective retroactively to January 1, 2010.  This release has considerably changed the way Architects and Engineering firms are audited and how they conduct their day to day business operations.   It is imperative that your accounting firm has the knowledge necessary for a smooth transition to the new procedures.  Feeley & Driscoll would like to inform you about a few of the changes to take note of.

INCREASED RESPONSIBILITES

The Massachusetts Department of Transportation (DOT) is going to be responsible for more than it has been in the past.  There was a major consolidation and they moved the Mass Turnpike Authority under DOT as well as several other agencies.

100% ADOPTION IN MASSACHUSETTS

Massachusetts has adopted 100% of the AASHTO standards.  The new AASHTO standards are specific to federal funding, so there will be one consistent work plan for contracts with federal funding.  In situations where state funding involved, individual states will have their own discretion and will be able to add additional restriction on allowable costs.

THREE FOCUS AREAS OF THE NEW PLAN

1. Compensation
   You will be responsible for preparing your own analysis of compensation and the steps in the process are as follows:
   • Determining allowable compensation.  Senior Executives will determine what unallowable compensation is.  Examples of an allowable compensation could include; distribution of profits, lobbying activity time, any labor related to M&A, and marketing and business development.
   • Using a benchmark survey data to compare to the allowable labor rate.  This will be done by matching up benchmark surveys in your company’s specific industry.  Important metrics to consider include revenue size, graphic area and number of executive positions. Survey data will be used to compare against total compensation for a person, anything not included in the survey will be disallowed for the labor rate. Adjustments will be made for unreasonable compensation and excess compensation rates.
   • Including bonuses. It is important to have any incentive or bonus plan documented. Bonuses will be included in overall compensation under the new plan. The implemented compensation structure must consistently be applied.
   • Superior Performance. If your company can demonstrate superior performance (through a combination of profitability, revenue growth and return on equity) beyond the median, then an argument can be made to use the data in the upper quartile.  There are both pros and cons to taking this approach.
2. Audit Procedures
   Using a CPA Firm that has had successful experience with overhead audits is imperative under this new plan as it is a unique type of service.  Failure on the part of your accounting firm could lead to a redo of all rates and significant changes to the audit.  Notable changes that will have an impact on audit procedures include:
   • Audit work plans.  There are new checklists that must be used under the new AASHTO standards that will be used by state auditors.
   • Audit sampling.  This is now used under these new guidelines. Large dollar selections will be removed from the populations and the remainder will be sampled.
   • Labor testing. The minimum of time sheets that should be assessed should be increased. The number depends on the level of assessed risk within the organization.
   • Transactions on cash disbursement testing. There is a new recommended number of transactions to assess for high risk account. 
3. Cognizant and oversight
   This concept allows each company to choose one agency that will approve their rate and receive a letter upon approval from the State Department of Transportation. Having consistency in all states is a goal of the new AASHTO.  Cognizant letters will be used in the event that that company is going to work with other DOT’s.  This concept is favored by Massachusetts but it may take time to get rolled out internationally. 
   • Determination of home state. Home state is based on where the firm’s financial records are kept.  The goal of this new plan is for a cognizant letter to be approved in the home state so company can take the letter to other states in which it is doing business and their rates would be accepted without having to reassess. 
   • Eligible parties. There are 3 eligible parties who will perform the cognizant review:
     • A federal agency (not likely to happen often)
     • The home state. (this is the most common case)
     • A non-home state.  Non-home state would be in certain situations where the home state has transferred cognizance in writing for the particular indirect costs audit of a consulting firm. 
   • Substantive changes in the AASHTO Standards. The guidelines also summarize the following:
     • How a cognizant approved cost rate is established.
     • Guidelines for reviewing CPA indirect cost rates
     • Discussion of attestation engagements.
     • Risk analysis/accepting Overhead Rates without a work paper review.

summary

In summary, it is as important for your company to stay up to date on these pending changes as it is for your accounting firm.  We will keep you up to date as news progresses.  The set of standards will both impact the way architect and engineering firms are audited and how they conduct their day to day business operations. Contact a Feeley & Driscoll accountant by email or at 1- 888-875-9770 for more information about our overhead audit procedures.

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