An important audit and accounting procedural guide produced by a leading transportation trade association is undergoing some changes. The American Association of State Highway and Transportation Officials (AASHTO) started began updating the guide in 2014, and a draft with proposed changes is presented for review on the AASHTO website.
The External Uniform Audit & Accounting Guide, which was last updated in 2012, aims to assist users in understanding terminology, policies, procedures and audit techniques, and sources for applicable federal regulations. It is important that firms are familiar with this guide both from an internal financial operation and an external auditing standpoint. RKL’s Architecture and Engineering advisors reviewed the proposed changes in the current draft and below we break down what each change means for your firm.
Chapter 4 (Cost Principles)
- Section 4.2 was added to this chapter to acknowledge State and Local Cost Principles. This addition was considered necessary in light of the creation by state and local governments of wage caps and other rules regarding cost principles and their application (for example, prescribing a treatment for overtime premium).
- Chapter 4 also noted that the Federal Highway Administration (FHWA) is requiring governments to accept cognizant audits of Federal Acquisition Regulation (FAR) compliant rates. However, if funding is not coming from FHWA then governments can set more restrictive rules regarding cost allowability. Multiple rates may be necessary if you do work on both federal and state funded projects and the state has more restrictive rules.
Chapter 5 (Cost Accounting)
- Section 2 of this chapter again emphasizes the need to analyze uncompensated overtime and reiterates that the burden of proof resides with the consultant firm to prove that uncompensated overtime will not materially impact the overhead rate.
- Section 3 clarifies how to account for overtime premium in compliance with the FAR.
- Chapter 5 also reworded best practice guidance related to bonus policies.
Chapter 7 (Compensation)
- This chapter indicates that the National Compensation Matrix (NCM) has been issued and adopted. The draft notes that additional changes to this chapter may be necessary based on the latest rulings by the Armed Services Board of Contract Appeals (ASBCA). There have been recent discussions about a possible change to the NCM to include a geographical component, but no pending changes have been noted at this time.
- This chapter also indicates that compensation should generally be reviewed for reasonableness in total vs. individual components of compensation (though individual components must be reviewed for allowance).
- This section also re-iterates the guidance in FAR 31.205-6 dealing with compensation, advising that it should be reasonable for firms of the same size, industry, geographic area and engaged in similar non-government work under comparable circumstances. It further re-iterates that the consultant has to document compensation for each employee or job class for work performed.
- With the severe drop in the Building & Construction Authority (BCA) rate (effective June 24, 2014), it could be possible that two rates may need to be calculated (for contract prior to the effective date and for contracts executed after the effective date). We will continue to monitor this possibility.
Chapter 8 (Selected Areas of Cost)
- Edits to this section clarified employee morale, health and welfare costs. In particular, gifts related to service/achievement or related to compensation are the only allowable gifts allowed under the FAR guidelines. The proposed changes also indicate that morale, health and welfare costs are limited to house publications, health clinics, wellness/fitness, and employee counseling service. Food and dormitory services also fall under this guidance.
- This chapter reworded common control with respect to related party rent, and also clarified travel expenses, including owned, leased, or chartered aircrafts and the requirements to constitute an allowable charge as well as personal usage of vehicles and related requirements.
- Legal costs were also addressed in the draft as the use of legal counsel has grown immensely and ranges in use from very simple to very complex issues.
- Given the unique nature of these costs, the guide illustrated several principles to help determine whether or not costs should be considered allowable.
- This chapter also discussed directly related costs and indicated those costs can be eliminated or they can apply a disallowance based on using disallowed labor divided by total labor and multiplying it to those costs to determine a reasonable disallowance.
Chapter 10 (Guidance for Developing Audit Procedures)
- This chapter addressed testing of labor and provided further insight regarding the size of the population and volume of transactions that should be reviewed.
- It also reiterates that total direct and indirect labor costs recorded in the general ledger must be reconciled to the job cost system (direct labor) and the 941’s.
Chapter 11 (Audit Reports and Minimum Disclosures)
- The reports in this section were updated to comply with current AICPA standards.
Chapter 12 (Cognizance and Oversight)
- This chapter provided additional guidance regarding the cognizant approval process, who can perform a cognizant audit, and when a cognizant audited rate must be accepted.
- Further guidance was provided that emphasizes the governmental auditor’s responsibility when utilizing the AASHTO Workpaper Review program discourages any self-imposed higher standard. Going forward, additional independent testing and auditing should only be performed where it is documented and substantiated that the engaged auditor has not met industry standards in performing their audit, workpaper development, and testing standards.