Upload
kreischer-miller
View
341
Download
0
Tags:
Embed Size (px)
Citation preview
Credit/Collection Controls for Professional Design Firms
A challenge facing design firms is the credit and collection function and its impact on the
property and financial well-being of their firms. This program will introduce credit and collection
procedures, how to deal with difficult clients, in-house training and periodic progress audits.
Presented by: Andy Harmelin, AI Consulting LLC1
Definition of Key Terms Extension of Credit:
Extending credit to your clients can make the difference between a firm that’s holding on and one that is prospering.
It is always better to chase the dollar, not the sale!
2
Cash Flow:
Focuses on operational cash flow from the firm’s core business activities
Measure of a firm’s liquidity or ability to meet payroll and pay vendors
Firm can be profitable but still have trouble remaining liquid or solvent if it does not collect its receivables in a timely manner
Definition of Key Terms
3
Accounts Receivable:
Accumulation of billing to clients of an organization who have been provided goods or services
Firm’s over-investment in accounts receivable can create significant cash flow problems
Definition of Key Terms
4
Credit Approval Process Purpose: to establish a policy
to provide credit for contracts and new client invoicing to protect company Accounts Receivable
5
Credit Approval Process Procedure
Standard Credit Terms When do you expect to be paid? What is the business structure?
Corporation/LLC Partnership
6
Credit Approval Process Procedure
Establishment of Credit Client Name and Address Dollar value of project Length of project Project address Contact person: phone/Fax Bank references Trade reference
Find out how a company pays its bills
7
Policy to Review for Contract Compliance Purpose
Contract compliance review is designed to ensure that all contracts contain the requirements necessary to support financial performance, cash flow and financial systems, and the legal and operational integrity of each project.
9
Policy to Review for Contract Compliance
An Engagement Register Form (ER) is developed by Accounting which includes all pertinent data such as:
Type of contract: lump sum or time and materials Total contract amount Estimated length of job Estimated profitability
10
Contract Compliance Procedure Contract Compliance Board
Contract Compliance oversight is the responsibility of YOUR OVERSIGHT REVIEW BOARD. Standing board members are as follows:
Office Manager Accounting Manager Senior Project Manager
11
Contract Compliance Procedure Parameters of projects for Board review
Contracts that exceed $50,000 Contracts which include bonding requirements Contracts which include progress payments and/or
significant WIP run up before billing Contracts that are lump sum without progress
payment provisions
Areas of focus Estimated profitability Previous experience with client Anticipated profit
12
Out of Scope Work and Contract Overruns How to spot a troublesome client
Early haggling over what is covered and what is not
Constant demands for special treatment
Too many “battlefield decisions” on extra services
Hiding from you after the work product has been delivered
13
PM Intervention with Clients PM should be in touch with each client at
least every 2 weeks
Prior to contacting clients, PM should have updated account balance, including WIP, and should match up with contract limits
14
PM Intervention with Clients During contact, PM should
Find out how job is progressing Determine if billing has been
received Ask if there are any issues
with services Determine if client anticipates
additional services for out-of-scope items Watch client payment habits
15
Possible Courses of Action Notify firm’s principals and accounting
department of problem
Accounting department sends letter to client that payment terms of contract are not being met
Based on client’s response, consider using available leverage:
Stop work letter as of a date certain if open account if not paid up to date
Notify the owner/funding source by a certain date Place a lien on the project Place the account with an outside collection agency
16
Control & Issuance of A/R Write-offs When and under what circumstances should A/R
write-offs be considered? Common causes
Out of scope services Contract overruns WIP: Work-in-process held for billing on future projects Warehoused hours logged as WIP
How to minimize Get weekly or daily time records from personnel and
crosscheck against contracts Make sure to get contract modifications and/or addenda as
needed
17
Solutions
Work with the Project Managers on a two week basis, engaging them in the billing process and making them more aware of client issues that need to be addresses
Manage a year-end collection effort, sending out balance confirmation letters to selected clients, supported by PM assistance
Established routine telephone calling practices to be followed at set intervals
Case Study
19
Outcomes
Made PMs more responsible for their entire projects from start to finish, and helped tie their project profitability into year-end company bonuses
Made their clients aware of payment responsibilities, and set up a mechanism to deal with slow paying clients
Established year-end internal collection program which exceeded expectations 2 consecutive years
Year 1-actual results were 112% of target Year 2-actual results were 118% of target
Reduced bad debt ratio by 70%
Case Study
20
QUESTIONS?
For more information about AI Consulting, LLC,
please visit www.ai-consultingllc.com.
Presented by: Andy Harmelin, AI Consulting LLC
21
Architecture/Engineering Industry Seminar
A A S H TO U p d a t e O c t o b e r 1 6 , 2 0 1 3
P r e s e n t e d b y :
To m Ya n k a n i c h , C PAM a n a g e r , A u d i t & A c c o u n t i n g
www.kmco.com 22
Topics
The Statutory and Regulatory Framework
Key Cost Principles
Internal Control Systems
Key Areas of Cost, Including Compensation
The Use of Audit Information
The Risk Management Framework, Oversight and Cognizance
23www.kmco.com 23
Learning Outcomes
Explain the Federal and State laws, regulations, policies and procedures relating to the procurement of A/E design services and administration of A/E Contracts.
Summarize and differentiate key cost principles.
Demonstrate an understanding of the importance of internal controls.
Explain how to use audit information in the procurement of A/E services and administration of A/E contracts.
Discuss the risk management framework and tools and correlate them to your role in administering A/E contracts.
24www.kmco.com 24
Federal Statutes and Regulat ions
25www.kmco.com
23 U.S.C 112(b)(2) 23 CFR 172Contracting for Engineering and Design Services Administration of Engineering and Design Related
Service Contracts
48 CFR Part 31 (FAR Part 31) 40 U.S.C Chapter 11 Sections 1101 to 1104Contracts with Commercial Organizations Selections of Architects and Engineers (Brooks Act)
49 CFR 18Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local
Governments (Common Grant Rule)
25
www.kmco.com 26
State Statutes and Wri t ten Procedures
In what ways might the application of State Statutes and procedures differ for the
following types of contracts?
Contracts using Federal-Aid Highway Program Funds?
Contracts using State and local agency funding?
26
www.kmco.com 27
Account ing and Audi t ing Pr inc ip les, Standards, Cr i ter ia and Guidance
FAR Part 31 GAS or GAGASFederal Acquisition Regulation Government Auditing Standards(Also known
as "Yellow Book")
GAAP DCAA CAMGenerally Accepted Accounting Principles Defense Contract Audit Agency Contract
Audit Manual
CAS GAAS and AICPA GuidanceCost Accounting Standards Generally Accepted Auditing Standards
AASHTO Audit GuideAASHTO Uniform Audit & Accounting Guide
27
Key Cost Pr inc ip les
Allowability, FAR 31.201-2
Reasonableness, FAR 31.201-3
Allocability, FAR 31.201-4
Direct and Indirect Costs
28 28
www.kmco.com 29
A l lowabi l ty
Five Criteria per FAR 31.202(a):
Reasonableness
Allocability
Standards promulgated by the CAS Board, if applicable, otherwise GAAP
Terms of Contract
Any limitations set forth within this subpart
29
www.kmco.com 31
Reasonableness
Burden of proof rests with the A/E Consultant
Costs incurred by the A/E Consultant not necessarily reasonable
FAR 31.201-3(a) states:
“No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.”
31
www.kmco.com 32
A l locabi l i ty
What is meant by Allocability?
Was the cost incurred specifically for the contract?
Does the cost benefit both the contract and other work, and can it be distributed to them in reasonable proportion to the benefits received?
Is the cost necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown?
FAR 31.201-4 states:
“A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship.”
32
www.kmco.com 33
B i l lab le/Nonbi l lab le
Whether a cost is billable or nonbillable is based on contract terms.
Often costs are allocable to a project, but are not billable.
33
www.kmco.com 34
In ternal Contro ls
Systems, policies and procedures that prevent or detect misstatements.
Responsibility of the A/E Consultant to establish and maintain strong internal controls.
Strong internal controls are critical to proper contract costing and FAR compliance.
34
www.kmco.com 35
Object ives of In ternal Contro ls
Strong A/E Consultant internal controls support:
Proper charging to contracts
Accurate cost estimations
Proper calculation of indirect cost rate
FAR compliance
Consistency in tracking, accumulation and allocation
35
www.kmco.com 37
Key Systems of a Typical A/E Design Fi rm
Labor Charging System
Compensation System
Purchasing/Accounts Payable System
Estimating System
Job Costing System
Billing System
General Ledger/Accounting System
Budget/Planning System Financial Reporting System
37
www.kmco.com 38
Importance of Labor Charging
Labor hours are A/E consultant’s core product
Labor charging practices drive
‒ Invoicing
‒ Project Costing
‒ Calculation of indirect cost rate
Highest Risk area in most A/E design firms
38
www.kmco.com 39
AASHTO Internal Contro l Quest ionnai re ( ICQ)
Assists the auditor in reviewing the internal control structure in place.
Must be completed by the A/E consultant
Developed to help increase consistency and minimize redundancy between State DOTs
Not mandatory unless the State DOT requires it
Other assessment tools: any internal controls and/or process documentation prepared by the A/E consultant or CPA firm auditor
39
www.kmco.com 40
Key Areas of Cost
Compensation:
Allowable – Subject to Excess Compensation Analysis
‒ Direct Labor
‒ Bonus (unless based on ownership)
‒ Deferred Compensation
‒ Employer Contributions to Pension Plans
40
www.kmco.com 41
Key Areas of Cost (cont inued)
Compensation:
Unallowable
‒ Compensation tied to changes in value of corporate securities, e.g. Phantom Stock Plan
‒ Payments in the event of a change in ownership
‒ Lobbying/Advertising/Charitable/Client Entertainment Activities Cost
Management responsible for tracking time
41
www.kmco.com 42
Common Unal lowable Costs
Advertising
‒ Includes Website Development and Maintenance
Personal Use of Company Owned Vehicles
‒ Daily mileage logs must be kept and separate expense tracking for each vehicle
Lobbying Costs
Golf Outings and Other Entertainment
‒ Rule of Thumb – If it’s fun it’s UNALLOWABLE!
42
www.kmco.com 43
The Use of Audi t In format ion
Indirect Cost Rate Audits
Performed to provide reasonable assurance as to the accuracy of the indirect cost rate
Primarily focused on the Income Statement
Involve understanding and testing an A/E consultant’s internal controls
Typically performed annually by a CPA Firm
43
www.kmco.com 44
The Use of Audi t In format ion (cont inued)
The Audit should be designed to determine if:
Expense balances are stated in accordance with GAAP
Direct and indirect costs are properly segregated and reported
Indirect costs are evaluated for allowability
Costs allowable per FAR Part 31
44
www.kmco.com 45
Ind i rect Cost Rate Uses
Applying indirect cost rates to work performed in current or prior periods
Establishing provisional or fixed rates to be used prospectively
Improving systems, procedures and internal controls
45
www.kmco.com 46
Pre-Award Review
Pre-award reviews are typically performed:
‒ On behalf of State DOT procurement or contracting staff
‒ To obtain reasonable assurance that financial information provided by the A/E consultant is materially correct
‒ Occurs during the annual prequalification process and/or during the contract negotiation process
Pre-award audit may also be performed to ensure an A/E Consultant internal controls are adequate to support accurate project costing and invoicing
46
www.kmco.com 47
Pre-Award Review:Costs Typical ly Examined
Direct Labor costs (especially labor rates)
Indirect costs
Direct materials, costs
Subconsultant costs
Other Direct Costs
Profit/Fixed Fee
Overall presentation and mathematical accuracy of the cost proposal
47
www.kmco.com 48
Incurred Cost Audi t
Performed:
‒ By state DOT or local agency auditor or by a CPA hired by the contracting agency
‒ During the course of the project or after an A/E consultant completes all scheduled work on the project
‒ To verify invoiced costs for a project, including direct costs, indirect costs and subconsultant costs
Results are used to determine whether project billing was accurate, and/or necessary corrections were made.
48
www.kmco.com 49
The Risk Management Framework, Overs ight and Cognizance
Risk Analysis Performed by State DOT: Risk Criteria
Dollar Thresholds Type and Complexity of the Accounting System
Experience in Working With State DOT Contracts
Experience of the CPA Firm
Size, History, and Reputation of the A/E Consultant
Responses to AASHTO ICQ
Number of States in Which the A/E Consultant Does Business
Changes in Organizational Structure
Date of the Last Audit Other Risk Criteria
49
www.kmco.com 50
Overv iew of Cognizance and Rel iance of Other Audi ts
In the course of performing audit and attest functions, auditors often rely on the work of other auditors, with appropriate procedures established to do so.
Home State DOT
- Performs the indirect cost rate audit or reviews the audit performed by a CPA firm
Cognizant Audit
State DOT #2
State DOT #3
50
Architecture/Engineering Industry Seminar
B e n c h m a r k i n g O c t o b e r 1 6 , 2 0 1 3
P r e s e n t e d b y :
D a v i d S h a f f e r
www.kmco.com 52
Learning Object ives
Learners will become familiar with key ratios of professional service firms
Learners will become familiar with the definition of terms used in the computation of different ratios
Learners will understand the recent trends of A&E firms
Learners will get example reports of key ratios that our managers and directors look at weekly/monthly
53www.kmco.com 53
Contents
Key definitions used in the ratios
Respondent information
What happened to the trends in 2012
History of some key ratios/expenses
Common sized balance sheet
Key reports used by professional service companies- Sample Kreischer Miller Reports
54www.kmco.com 54
Key Defini t ions Used in the Ratios
Median values: are the midpoint of the values versus the mean which is the average. In most cases, the median values have been used to eliminate the extreme values in the database.
ODC’s: Other direct costs such as mileage, printing, etc.
Net Revenues: Total revenues less subcontractors and ODC’s
Technical Staff: Those charging over 50% of their total time to projects
www.kmco.com 55
PSMJ Respondents
Respondents by Total Staff Size
www.kmco.com
1 to 20 (52)
21 to 50 (80)
51 to 100 (51)
101 to 200 (42)
201 to 350 (25)
351 to 750 (15)
over 750 (4)
56
56
PSMJ Respondents
By Firm Type
www.kmco.com
Architectural 34
Architectural/Interiors 28
Interior Design 0
Engineering (Prime) 94
Engineering (Subconsultant) 44
Engineering (Survey) 13
Architecture/Engineering (orE/A) 36Landscape Architecture 7
Enviromental 8
Construction Management 1
57
www.kmco.com
PSMJ Respondents
Source of Revenue Number Percentage
Private Sector 130 48%
Government Sector 79 29%
Mixed 60 22%
58
Big Picture Results
Recovery is SLOW!!! The net multiplier achieved decreased from 3.04 to 3.02, and still remains below 2008’s all-time high of 3.09. This indicates that companies were providing additional price concessions to obtain work.
Op’g profits (before incentive/bonuses and taxes) as a percentage of net revenues increased from 9.3% to 11.4%.
Gross revenues increased 8% this year versus 3%growth last year and 7.0% decrease reported in 2010.
Backlogs grew last year, indicating a 7% increase for the median firm. Nearly all firms indicated a shrinking backlog of booked business at the end of 2010.
Balance sheets continue to gain strength – median leverage is less than 1-1 (total liab/equity)
www.kmco.com 59
Big Picture Results
This year’s results indicate a median 2.7% growth in staff size, a significant improvement from the 7.5% decrease reported in 2010 and the 0% reported in last year’s results.
Overhead rates decreased to 159.56%, 5% below the 2012 report and significantly below the 20-year high established in 2010. It is expected that the economic recovery will result in continued emphasis on reducing overhead costs.
www.kmco.com 60
www.kmco.com
Key Rat io Comparisons of 2012 to 2011
Medians 2011 2012 %Net Revenues per Total Staff $119,410.00 $125,589.00 5.0%Net Revenues per DL Hour $100.32 $101.66 1.0%
DL Costs per DL Hour $31.31 $31.90 2.0%
Total Costs per DL Hour $88.73 $86.50 -3.0%
Equity per Total Staff $22,249.00 $21,666.00 -3.0%
Operating Profit (Net Revenues) 9.31% 11.42% 23.0%
OH Rate (Before Bonus) 168.42% 159.56% -5.0%
Chargeability (Payroll Dollars) 58.40% 59.69% 2.0%
61
www.kmco.com
Key Rat io Comparisons of 2012 to 2011
2011 2012 %Backlog Change 4.0% 7.0%Gross Revenues Change 3.0% 8.0%
Staff Size Change 0.0% 2.70%
Net Direct Labor Multiplier achieved 3.04% 3.02% -1%
Average Work-in-Process Days 25.48 25.51 0%
Average Collection Dates 70.27 70.12 0%
2013 PSMJ A/E Financial Performance Benchmark Survey
62
Highl ights
Net direct labor multiplier achieved decreasedslightly to a reported level of 3.02 (median). The performance ranged from 2.75 (25th percentile)to 3.36 (75th percentile). This indicates that high-performing firms continue to achieve much more profitable project results than some of their counterparts.
Backlog increased by 3% in 2012. Gross revenues increased 5% compared to a 3% increase in 2011 and a reduction in 2010. Increase continues to reflect slow recovery and ongoing uncertainty in the economy.
Companies doing more with less. Net revenues per total staff increased (by 5%) to $125,589. Similarly, net revenues per project manager increased 7% to $555,142. PM’s financial responsibility continue to increase.
www.kmco.com 63
Highl ights
The turnover rate increased slightly to 12.0%, though it remains significantly below the 15.9% reported in the 2010 survey. This rate, which reflects all types of terminations (resignations, layoffs, retirements, etc.), peaked in 2000 at 18.1%. In times of rapid expansion, turnover rates have increased to well over 20%, due to employee being enticed to move to other firms. Anticipation of the recent economic downturn and forced cutbacks once the full impact of the recession hit the industry may have been influential in pushing turnover rates upward over the past few years. However, with significant decreases for the 2011 and 2012 survey, the rate reached a 25-year low last year and increased only slightly in this year’s results.
www.kmco.com 64
www.kmco.com 65
Key Spending Per Staff
Lower Quartile
MedianQuartile
MeanQuartile
UpperQuartile
Group Insurance Expenses per TotalStaff (no increase for 2011 and 2012)
$3,786 $5,346 $5,512 $6,946
Professional Liability Insurance Expenses per Total Staff (slight decrease)
$860 $1,260 $1,558 $1,911
Total Insurance Expenses per Total Staff (slight decrease)
$4,967 $6,541 $6,439 $8,090
Total Taxes per Total Staff (includespayroll, slight increase)
$5,369 $6,486 $7,232 $8,000
Payroll Taxes per Total Staff (flat) $4,990 $5,833 $5,785 $6,753
Business Development Costs per Technical Staff (increase)
$2,995 $7,375 $8,460 $12,439
65
www.kmco.com
Key Spending Per Staff
Direct Labor Hours Per:Lower
QuartileMedianQuartile
MeanQuartile
UpperQuartile
Space Expenses per Total Staff (flat) $4,617 $6,583 $7,064 $8,769
Education Expenses per Total Staff (9% lower – too low???)
$215 $386 $411 $582
Registrations & Licenses Expenses per Professional Staff (flat)
$279 600 $1,071 $1,045
Local Taxes, Permits & Licenses Expenses per Total Staff
$153 $285 $620 $683
IT Operating Expenses per Total Staff (increasing) Windows versus MAC?
$1,195 $2,138 $2,446 $3,032
66
www.kmco.com
Direct Labor Hours
Direct Labor Hours Per:Lower
QuartileMedianQuartile
MeanQuartile
UpperQuartile
Technical Staff 1,367 1,554 1,545 1,710
Total Staff 1,116 1,228 1,249 1,365
Project Manager 3,678 5,311 6,479 8,365
Partner/Principal 6,799 10,264 14,050 17,189
67
www.kmco.com
Staff ing Size
Technical Staff Ratio to:Lower
QuartileMedianQuartile
MeanQuartile
UpperQuartile
Non-Technical Staff Ratio 3.0 4.0 4.5 5.6
Project Managers Ratio 2.5 3.5 5.3 5.3
Partners/Principals Ratio 4.6 6.8 9.1 11.1
68
www.kmco.com
Common Sized Balanced Sheet
Median MeanCash 7.8% 11.4%Accounts Receivable 49.4% 47.6%
Work in Process 9.7% 11.1%
Other Current Assets 3.6% 4.4%
Total Current Assets 78.3% 71.8%
Fixed Assets 10.6% 15.6%
Other Assets 3.0% 3.1%
Total Assets 100.0% 100.0%
69
www.kmco.com
Common Sized Balanced Sheet
Liabilities Median MeanAccounts Payable 7.1 9.4Deferred Taxes 4.7 8.0Line of Credit Borrowing 5.7 7.5Current Portion of Long Term Debt 2.3 2.7Other Current Liabilities 9.2 10.3Total Current Liabilities 34.4% 33.8%Long-Term Portion of Debt 6.7 8.4Other Liabilities 2.8 5.4
Total Liabilities 44.8% 43.1%
Total Equity 47.6% 41.8%Total Liabilities and Equity 100.0% 100.0%
70
Weekly Report
www.kmco.com
Billable hours per director, manager, senior, and staff for the week, month to date, and year to date – all compared to prior totals
Total production in $ compared to prior year.
Current billing per director, gross and net.
Gross production per billable hour compared to prior year.
Cash position, including debt, compared to prior year.
Total accounts receivable and work in process compared to prior year. Director reports are available for everyone to see.
71
Monthly Reports
www.kmco.com
Director performance report:
Gross production compared to prior year
Net production $ and percentage
Aged AR and WIP per director
Total WIP and AR as a percentage of total production
Billable hours compared to prior year
Production per billable hour
3 year realization history per director per client
Have similar reports for each manager
72
Agenda
New tax law- The Fiscal Cliff? What happened?
Domestic Production Activities Deduction Overview
Cash Basis of Accounting
ESOP’S
Questions & Answers
76
Few Tax Quotes
We have a tax code that favors those with the best accountants.
-- Shane Keats
When you listen to tax-cut rhetoric, remember that giving one class of taxpayer a "break" requires -- now or down the line -- that an equivalent burden be imposed on other parties. In other words, if I get a break, someone else pays. Government can't deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch. -- Warren Buffett
77
Few Tax Quotes
Where there is an income tax, the just man will pay more and the unjust less on the same income. -- Plato
[The Tax Code] is a monstrosity and there's only one thing to do with it. Scrap it, kill it, drive a stake through its heart, bury it and hope it never rises again to terrorize the American people. -- Steve Forbes
[The Tax Code is] a disgrace to the human race. -- Jimmy Carter
78
Section 179
Eligibility - overview
2012 - $500,000 - $2,000,000 investment cap
2013 - $500,000 - $2,000,000 investment cap
2014 - $25,000 - $ 200,000 investment cap
80
Income Tax Rates
Taxpayers with taxable income greater than $400,000—$450,000 for couples—have a new 39.6% top marginal income tax rate.
81
Qualified Dividends
Qualified dividends continue to be taxed at preferential capital gains rates, rather than as ordinary income.
83
Payroll Tax Holiday
The employee share of payroll taxes will return to its 2010 level of 6.2% on the Social Security wage base, ending the 2011 and 2012 2% tax holiday.
This means a return to the 6.2% withholding rate on wages up to $113,700 in 2013. The rate was 4.2% in 2012. So, for a taxpayer with an annual salary of $30,000, the increase in withholding rate means $50 less in take-home pay per month. For someone earning $60,000, take-home pay goes down by $100 per month—and at $90,000, it’s $150 less per month. For earners making $113,700 or more, monthly take-home pay is reduced by $189.50.
84
3.8 Percent Medicare Contribution Tax
Starting 2013, the Medicare surtax tax will be imposed on the “net investment income” (NII) and will generally apply to passive income.
The Medicare surtax also will apply to capital gains from the disposition of property.
The Medicare surtax will not apply to income derived from a trade or business or from the sale of property used in a trade or business.
For individuals the Medicare surtax will apply to the lesser of the taxpayer’s NII or the amount of “modified” adjusted gross income above a specified threshold.
85
3.8 Percent Medicare Contribution Tax (cont’d)
Thresholds The Medicare surtax applies to an individual on the lesser of the
taxpayer’s NII or the amount of “modified” adjusted gross income above certain thresholds. Those AGI thresholds are:
• $250,000 for married taxpayers filing jointly or a surviving spouse
• $125,000 for married taxpayers filing separately; and
• $200,000 for single and head of household taxpayers.
86
3.8 Percent Medicare Contribution Tax (cont’d)
Net Investment income (NII)Net investment income (NII) for purposes of the 3.8 percent Medicare surtax includes:
• Gross income from interest, dividends, annuities, royalties, and rents provided this income is not derived in the ordinary course of an active trade or business;
• Gross income from a trade or business that is a passive activity (within the meaning of Code section 469)
• Gross income from a trade or business of trading in financial instruments or commodities; and
• Net gain (taken into account in computing taxable income) from the disposition of property, other than property held in an active trade or business.
87
3.8 Percent Medicare Contribution Tax (cont’d)
Example 1A single taxpayer has modified AGI of $230,000, including NII of $40,000. The Medicare Surtax applies to the lesser of NII($40,000) or the excess of AGI over the applicable threshold ($230,000– $200,000= $30,000). Thus, the Medicare surtax applies to $30,000.
Example 2A single taxpayer has modified AGI of $175,000, including $70,000 of NII. Because the taxpayer’s income is below the single taxpayer threshold of $200,000, the taxpayer does not owe the Medicare surtax, despite having substantial NII.
Example 3Married taxpayers have modified AGI of $350,000, including NII of $75,000 and filing jointly. The Medicare surtax applies to the lesser of NII ($75,000) or the excess of AGI over the applicable threshold ($350,000 - $250,000 = $100,000). Thus, the Medicare surtax applies to $75,000.
88
Additional .9 Percent Medicare Tax
Effective January 1, 2013, higher income individuals will be subject to an additional 0.9 percent HI (Medicare) tax. This additional Medicare tax should not be confused with the 3.8 percent Medicare surtax.
The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing a joint return and $125,000 for married couples filing separately) will be subject to a 2.35 percent Medicare tax rate.
The additional Medicare tax also attaches to self-employed individuals.
89
Alternative Minimum Tax (AMT)
The alternative minimum tax (“AMT”) exemption is permanently patched (with inflation adjustments), thereby sparing millions of middle-income Americans from the AMT’s snare. In 2013 the AMT exemption is $51,900 for single filers and $80,800 for joint filers, up from $50,600 for single filers and $78,750 for joint filers in 2012.
90
Domestic Production Activities Deduction (DPAD)
The American Jobs Creation Act of 2004 authorized a deduction for income attributable to certain manufacturing and domestic production activities conducted in the U.S. (the Domestic Production Activities Deduction, or DPAD). The DPAD is 9% for tax years beginning in 2010 and beyond. It is not limited to any specific entity and is available to sole proprietorships, C and S corporations, and partnerships, among other entities. The DPAD is not allowed in computing self-employment income and the taxpayer can claim the deduction for both regular tax and AMT.
91
Domestic Production Activities Deduction (DPAD) (Cont’d)
The DPAD equals a percentage 9% for 2011 and beyond of the lesser of:
1. Qualified Production Activities income (QPAI) for the year, or
2. Adjusted Gross Income (for an individual taxpayer) determined
a. after application of IRC Sec. 86 (Social Security and tier 1 railroad retirement benefits), IRC Sec. 135 (income from U.S. savings bonds used to pay higher education tuition and fees), IRC Sec. 137(adoption assistance programs), IRC Sec. 219 (retirement savings), IRC Sec. 221 (interest on education loans), IRC Sec. 222 (qualified tuition and related expenses), and IRC Sec. 469 (passive activity losses), and
b. without regard to the DPAD.
92
Domestic Production Activities Deduction (DPAD) (Cont’d)
QPAI is defined as the taxpayer's domestic production gross receipts for the year, reduced by the sum of the following items [IRC Sec. 199(c)(1)]:
1. The cost of goods sold allocable to such receipts; and
2. Other deductions, expenses, or losses directly allocable to such receipts. The DPAD itself is not an allocable deduction.
The taxpayer's domestic production gross receipts drive the deduction, but the deduction is limited to 50% of the qualified W-2 reported wages for the year that are allocable to domestic production gross receipts. Thus, for those taxpayers with large production activities but little W-2 wages (because the work is subcontracted out), the benefits of the deduction may be minimal.
93
Domestic Production Activities Deduction (DPAD) (Cont’d)
Domestic Production Gross Receipts (DPGR) Taxpayers must have income from qualified production activities to be eligible for
the DPAD. In order to compute income from qualified production activities, taxpayers must determine the amount of DPGR that they have for the tax year. The definition of DPGR from qualified production activities is very broad. DPGR includes the taxpayer's gross receipts from the lease, rental, license, sale, exchange, or other disposition of any of the following [IRC Sec. 199(c)(4)]:
1. Qualifying production property (tangible personal property, computer software, and sound recordings), if the property is manufactured, produced, grown, or extracted (see discussion later in this key issue) by the taxpayer in whole or significant part [see Reg. 1.199-3(g) for what constitutes significant part] in the U.S.
2. Motion picture, film, videotape, and sound recording production, renting, and licensing (with exclusions provided in the statute), provided at least 50% of the total compensation relating to the productionof the film is compensation for specified production services(such as actors, directors, or producers) performed in the U.S.
94
Domestic Production Activities Deduction (DPAD) (Cont’d)
3. Production of (but not transmission or distribution of) electricity, natural gas, or water in the U.S.
4. Construction or substantial renovation of real property in the U.S., including residential and commercial buildings and infrastructure such as roads, power lines, water systems, and communications facilities.
5. Civil engineering and architectural services performed in the U.S. for construction projects in the U.S.
6. Farming (i.e., growing and selling agricultural products and food).
7. Processing of agricultural products and food (but not the sale of food and beverages prepared by the taxpayer at a retail establishment).
95
Domestic Production Activities Deduction (DPAD) (Cont’d)
The following steps compute the DPAD: Step 1 Determine DPGR
Step 2 Determine QPAIStep 3 Compute the AGI limitationStep 4 Determine the W-2 wage limitationStep 5 Calculate the DPAD
Example
Mel Myers owns Myers Engineering, a sole proprietorship in the U.S. The company conducts no other activities; therefore, all of its income is qualified production activity income. Mel's adjusted gross income for 2011 is $250,000. During 2011, Myers Manufacturing showed the following income and expense:
Gross receipts $900,000Costs of Goods sold (including $350,000 of W-2 wages allocable to DPGR) (600,000)Other allocable expenses (100,000)Net Income $200,000
Mel's QPAI is $200,000 and his tentative deduction is $18,000 [9% × $200,000;the lesser of QPAI ($200,000) or modified adjusted gross income ($250,000)]. His DPAD is limited to 50% of W-2 wages, which is $175,000 (50% of $350,000).
96
Cash Basis of Accounting
Eligibility – overview
Accrual Basis
Constructive Receipt
Prepaying expenses
Tax Planning – very powerful tool
97
Cash Basis of Accounting – Accrual to Cash Conversion
CASH CONVERSION
Client Name: ABC CompanyClient Code: 3944.205Year Ended: 12/31/11
3900F.01
Retained Earnings Income Workpaper ReferenceDR (CR) Add(Subtract)
Per Financial Statements (Beginning) 80,371 (120,964) TB
ADD:Beginning Accounts Receivable 611,566 PYBeginning Prepaid Expenses (10,671)Allowance for Doubtful Accounts 12,943 PY
1380-000-00Interest Receivable613,838 613,838
SUBTRACT:Beginning Accounts Payable (548,995) PYBeginning Accrued Expenses (28,217)Beginning Accrued Accounts Payable (70,127) PYPrior Period Adjustments 0
Beginning Accrued Expenses 0 PYPY
0 0 (647,339) (647,339)
Beginning Retained Earnings per Tax Return 46,870 BOY R/E
SUBTRACT:Ending Accounts Receivable (1,505,196)Add: Ending Allowance 60,187 Ending Prepaid Expenses (22,193)Allowance for Doubtful Accounts
(0)(0) (1,467,202)
ADD:Ending Accounts Payable 1,330,903 Ending Accrued Expenses 37,608 Ending Accrued Accounts Payable 163,800
(0) (0) 1,532,311
Income before tax adjustments 89,356 (89,356) Engagement/TRCash Contributions M-2
Ending Retained Earnings per Tax Return 136,226 CY TR98
What is an ESOP?
ESOP = “Employee Stock Ownership Plan”
Qualified deferred compensation plan under ERISA and Internal Revenue Code
Similar to Profit Sharing and 401(k) Plans
Must invest primarily in company stock
Can be leveraged
99
Typical Goals of an ESOP
Shareholder Liquidity
Long-term succession plan
Corporate and personal tax planning
Ownership/Partnership incentive for key employees
100
ESOP Tax Preferences
Effective deduction of principal on ESOP loan repayment
Section 1042 Capital Gains Deferral
Deduction of dividends paid on ESOP shares
S Corporation ESOP non-recognition of corporate income
101
Section 1042 Gain Deferral
Permits shareholders selling to an ESOP to defer indefinitely capital gains tax on sale of shares
ESOP must own 30% of value of all company stock after sale
Selling shareholders must purchase qualified replacement property (“QRP”)—stocks or bonds of any domestic operating corporation
102
S Corporation ESOP’S
“S” Corporation income attributed to shareholders
ESOP as S Corp shareholder pays no taxes on its share of corporate income
No section 1042 Capital Gains Deferral
103
How Does an ESOP Work?
Company establishes an ESOP Trust
ESOP Trust purchases company stock from shareholders or company
Bank or seller provides financing to Company
Company pays contributions or dividends to ESOP that ESOP uses to repay debt
Company or ESOP repurchases shares from employees after termination
104
Company
ESOP
Note &Pledge
of StockCash
Company Stock
Cash
Bank
Shareholders
Pledge ofQRP??
Cash
Note & Collateral
Initial C Corp ESOP Transaction
105
106
Company
Bank and/orShareholder
ESOP
Release of Shares Pledged as Collateral and Share Allocations
to Individual ESOP Accounts
Contributions or Dividends ($$$)
Loan Payments ($$$)
LoanPayments
($$$)
ESOP Loan Repayment
106
Company
ESOP
Note &Pledge
of Stock
Company StockCompany Stock
Cash &Sub. Note
Bank
Shareholders
Cash
Note & Collateral
Initial S Corp ESOP Transaction
107
108
ESOP Transaction Concerns
Valuation
Financing
Effect of ESOP on overall benefits structure
Legal/fiduciary risk
Cost and complexity
108
109
ESOP Plan Design Issues
Eligibility
Stock allocations
Vesting
Benefit Distributions
Voting of company stock
Trustee
109
110
Steps in an ESOP Transaction
Feasibility study
Financing
Appraisal
Plan Design
Legal Documents
Closing
IRS Determination Letter
110
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-2
Internal Control Questionnaire (ICQ) for Consulting Engineers
Name of Engineering Consultant (―the Company‖):
TIN (Taxpayer Identification Number):
Headquarters Address:
Company Website:
Fiscal Year End:
This ICQ was prepared for (DOT/agency name):
Time Period Covered:
Location of Accounting Records:
- Please include the following items as attachments to this ICQ:
FAR Part 31 Overhead Audit Report for most recent fiscal year, including audited Statement of Direct Labor,
Fringe Benefits, and General Overhead (hereinafter ―Indirect Cost Rate Schedule‖) and related reconciliation
to the financial statements.
Cognizant audit report or cognizant letter of concurrence from the cognizant Government agency.
Check here if not applicable:
Post-closing trial balance and financial statements (balance sheet, income statement, and statement of cash
flows) for the most recent fiscal year. (Note: If the indirect cost rate schedule does not directly tie to the trial
balance, then please provide a supplemental reconciliation schedule.)
Current chart of accounts that ties to financial statements and indirect cost rate schedule.
Independent Auditor’s Report on financial statements and accompanying management letter.
Check here if not applicable:
Sample timesheet.
The Company’s policies for vacation and sick leave.
The Company’s bonus policy.
Other written policies, as requested throughout this ICQ.
Note: Throughout this ICQ, all references to ―AASHTO Guide‖ pertain to the 2012 Edition of the
AASHTO Uniform Audit & Accounting Guide.
- Please identify the Company’s primary contact for accounting questions:
Name:
Title:
Phone Number:
E-mail Address:
Mailing address (if different than headquarters address listed above):
A. Background Information
A.1. Year Established. When was the Company formed?
A.2. Business Form. What form of business entity is the Company?
Sole Proprietorship Partnership C Corporation S Corporation
Other
43
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-3
A.3. Parent/Subsidiary. Is the Company a subsidiary of any other company?
Yes If ―yes,‖ please explain:
No
A.4. Common Ownership. Does the Company own or control any other company or legal entity (e.g., trust or
foundation) through common ownership? (See AASHTO Guide Section 8.23.B for details.)
Yes If ―yes,‖ please explain:
No
A.5. Ownership. Please list the stockholders, partners, or other owners with greater than five percent ownership of
the Company and their respective percentages of ownership.
Table 1: Company Ownership
Name Title Ownership Percentage
%
%
%
%
%
%
%
%
%
%
%
%
A.6. Services Provided. What types of services does the Company provide? (e.g., consultant–Architectural and
Engineering Design)
a.
b.
c.
d.
A.7. Locations. How many offices does the Company operate, and where are these offices located?
a. Number:
b. Locations:
44
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-4
A.8. Number of Employees. How many employees (including managers and principals) does the Company currently
employ?
a. Full time: b. Part time:
- Has this number changed in the past one-year period?
No Yes. If ―yes,‖ please explain:
A.9. Revenue Sources.
1. For most recent fiscal year, what percentage of the Company’s revenue was generated from each of the
following?
a. State government: % c. Local government: %
b. Federal government: % d. Commercial/private: %
2. Please specify all revenues earned as either a prime consultant or subconsultant:
a. Revenues from Government Projects: $
b. Revenues Other Customers: $
Total Company Gross Revenue: $
A.10. Contract Mix. What percentage of the Company’s revenue was generated from each of the following contract
types?
a. Lump sum: % c. Cost plus (time and materials): %
b. Cost plus fixed fee: % d. Other: % Please explain ―Other.‖
B. Accounting: General Background
B.1. Fiscal Period. Has the Company used the same fiscal reporting period for the past two years?
Yes No
B.2. Accounting Method/Basis. What basis of accounting does the Company use to prepare general purpose
financial statements?
Cash Accrual Hybrid. Please explain ―Hybrid.‖
- Was the same basis of accounting also used to prepare the firm’s indirect cost rate schedule?
Yes No. Please explain:
B.3. Accounting Policies. Does the Company have written accounting policies that address the following topics?
(If ―yes,‖ please provide a copy.) Yes No
a. Accounting system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c. Cost estimating/allowability. . . . . . . . . . . . . . . . . . . . . . . . . . . .
d. Recording time worked/timesheet preparation . . . . . . . . . . . . .
e. Fringe benefits/leave time . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
f. Recording overtime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
g. Compliance with FAR Part 31(†)
and applicable CAS . . . . . . . .
h. Recording direct and indirect costs . . . . . . . . . . . . . . . . . . . . . .
i. Overhead/indirect cost rate development . . . . . . . . . . . . . . . . .
j. Billing rate development . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(†) FAR Part 31 is codified at 48 CFR Part 31, which is available at
https://www.acquisition.gov/far/html/FARTOCP31.html.
45
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-5
B.4. Preparing the Indirect Cost Schedule. How frequently does the Company prepare an indirect cost rate schedule
to determine costs eligible for reimbursement per FAR Part 31?
Annually Other (please specify):
- Was the most recent schedule prepared by the Company or by another entity instead (e.g., CPA firm)?
Prepared by: Internal staff External party (specify):
- Period covered by most recent indirect cost schedule:
One-year period ended December 31, 20
Other (please specify):
B.5. Fraud, Abuse, and Contract Violations. Is the Company’s management aware of any material instances of
fraud, illegal acts, abuse, or violations of contracts provisions or grant agreements?
No Yes. If ―yes,‖ please explain:
B.6. Knowledge of FAR Part 31. Are appropriate personnel within the Company familiar with FAR Part 31?
Yes No. If ―no,‖ please explain:
B.7. Audits/Examinations. Within the past three years, has a CPA or governmental agency performed an independent
audit, review, attestation, or compilation of the Company’s financial data or any phase of the Company’s
operations?
No Yes. If ―yes,‖ please complete the following (if applicable):
a. Financial Statements: Audit Review Compilation Other (please specify):
Name of CPA or Agency:
Contact:
Period Covered:
b. Overhead Rate: Audit Review Compilation Other (please specify):
- Was the overhead rate calculated in accordance with FAR Part 31? Yes No
Name of CPA or Agency:
Contact:
Period Covered:
c. Project Audits: Audit Review Compilation Other (please specify):
Name of CPA or Agency:
Contact:
Period Covered:
46
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-6
C. Accounting System(s)
C.1. Accounting Software. What type of accounting software does the Company use?
Internally-developed system. Commercial system. Name of vendor:
Hybrid system. Please explain:
- Please describe any significant manual procedures used outside of the automated accounting system to record transactions:
C.2. Job Costing. Does the Company have a job-cost accounting system? Yes No
If ―no,‖ please explain what type of system is used to determine project costs:
C.3. Integration. Does the accounting general ledger interface with the job-cost ledger?
Yes No N/A (no job-cost ledger used)
a. Are billings prepared from, or reconciled to, reports generated from the Company’s job-cost system?
Yes No. Please explain:
b. Describe any manual procedures that occur outside of the automated accounting system to prepare
billing packages.
C.4. Accounting Records. Which of the following types of records does the Company maintain to support financial
transactions?
Yes No
a. General ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Cash disbursements journal . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c. Cash receipts journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d. Job/Project-cost ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
e. Labor distribution reports . . . . . . . . . . . . . . . . . . . . . . . . . . . .
f. Employee expense reports . . . . . . . . . . . . . . . . . . . . . . . . . . . .
g. Payroll registers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C.5. Direct and Indirect Expenses. Does the general ledger contain separate direct and indirect accounts for the
following?
a. Labor costs Yes No
b. Non-labor expenses Yes No
If ―no,‖ please explain:
C.6. Exclusion of Unallowable Costs. Does the Company have a system in place to identify and remove from the
indirect cost pools all unallowable costs, in accordance with per FAR Part 31 and applicable Cost Accounting
Standards? (See AASHTO Guide, Sections 2.2, 4.4, 5.2, 5.5, and 6.3.)
No. Please explain:
Yes. If ―yes,‖ please answer a through c, below.
a. Please provide details about the system.
b. How are appropriate personnel trained to distinguish between allowable and unallowable costs?
c. When does the primary review for allowability occur—at time the transaction is recorded, or later?
47
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-7
C.7. Divisions/Cost Centers. Does the Company have more than one division/cost center?
No Yes
- If ―yes,‖ are separate ledgers maintained for each? Yes No
Comment:
C.8. Reconciliations.
a. Does the Company reconcile the financial accounting system to the job-cost system?
N/A (no job-cost ledger used).
No. Please explain: Check here if systems are integrated:
Yes. If ―yes,‖ how often? (Check all that apply.) Monthly Quarterly Semi-annually Annually
Comment:
b. How frequently are bank statements reconciled? Who performs this process?
C.9. Budgeting. Does the Company use a budgeting system for project planning and oversight?
Yes No
Comment:
- If ―yes,‖ does the Company prepare variance reports to compare budgeted amounts to actual amounts on
projects, and are the reports distributed to appropriate management personnel?
Yes No. If ―no,‖ please explain:
C.10. Cost Allocation. Does the Company use cost allocation methods consistently for all contracts, including
commercial contracts as well as for State and Federal government contracts?
(See AASHTO Guide, Sections 5.3 and 10.5.)
Yes No. If ―no,‖ please explain:
C.11. Allocation Base(s). When computing indirect cost rates, the Company uses—
a single base for cost allocation. Description of base:
multiple bases for cost allocation. Description of bases:
(See AASHTO Guide Section 4.7 for a discussion of common allocation bases for indirect costs.)
C.12. Field Offices. Does the Company have field offices? (See AASHTO Guide Section 5.6.)
No
Yes. If ―yes,‖
a. Are separate indirect cost rates used for the home office and field offices?
Yes No
Please explain:
b. If home office and field office indirect cost rates are computed, are they presented consistently to
all State DOTs?
Yes No. If ―no,‖ please explain:
Please check here if not applicable:
48
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-8
C.13. Project-Specific Indirect Cost Rate(s). Does the Company have any special, project-specific indirect cost
rates negotiated with a State DOT?
No Yes. If ―yes,‖ please explain, and list the States that use these rates:
D. Information Technology (IT) Systems
D.1. IT Policies. Does the firm have written IT system policies concerning the following topics?
(If ―yes,‖ please provide a copy.) a. Hardware/Software Yes No
Purchasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Use of In-house and off-site . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Addition and removal/retirement/disposition of . . . . . . . . . . . . . . . . . . .
b. Business Continuation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c. Security Protocol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d. Activation and deactivation of employees upon hiring or termination. . . . . . . . .
D.2. IT Risk Assessment. Has the Company’s management conducted an IT system risk assessment within the past
three years?
Yes No
D.3. IT Security Review. Are system security and application access logs enabled and reviewed periodically?
Yes No
Comment:
D.4. IT Electronic Data Safeguards. If documents are retained in electronic format, are they stored in a format that
cannot easily be modified, removed, or replaced, and does a mechanism/audit trail exist to track all such events?
Yes No
Comment:
49
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-9
E. Accounting – Payroll and Timekeeping
E.1. Payroll Service. Does the Company use an external payroll service?
No Yes. If ―yes,‖ please specify:
E.2. Pay Cycle. What is the Company’s standard pay cycle?
Bi-weekly Monthly 1st & 15th Other (please specify):
If the Company uses more than one pay cycle, please explain:
E.3. Payroll Register. Does the payroll register include the following data?
Yes No
a. Employee Name. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Employee ID number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c. Gross pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d. Payroll deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
e. Net pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
f. Check amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
g. Hourly rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
h. Pay period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
i. Normal hours for pay period . . . . . . . . . . . . . . . . . . . . . . . . . . .
j. Overtime hours for pay period . . . . . . . . . . . . . . . . . . . . . . . . . .
Comments:
E.4. Timekeeping System.
a. Does the Company use an electronic timekeeping system?
Yes No
- If ―yes,‖ please provide an explanation of its operation, or provide system documentation:
b. Are all employees, including managers and owners/principals, responsible for signing their own timesheets?
Yes No
If ―no,‖ please explain:
c. Are all employee timesheets approved by supervisors?
Yes No
If ―no,‖ please explain:
d. Is there a certification and approval process required for all time worked by owners and principals?
Yes No
If ―no,‖ then how is time accounted for and billed to projects?
e. How are timesheet coding errors detected and corrected?
f. How do timesheets identify work performed outside an agreement’s original scope of services?
50
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-10
F. Labor Cost Accumulation
F.1. Direct & Indirect Labor. Do the Company’s timesheets include reporting codes for both direct and indirect
hours? (See AASHTO Guide, Chapter 6.)
Yes No
- If ―yes,‖ do all employees, including managers and principals, record direct and indirect time on their
timesheets?
- If ―no,‖ then please explain the method used to segregate direct and indirect labor hours.
F.2. Work Week. Please list the Company’s normal hours of business operation (normal work week):
F.3. Uncompensated Overtime (see AASHTO Guide, Section 5.4). Does the Company record all hours worked by
all employees, including managers and principals, regardless of whether the employees are exempt from overtime
pay or whether all direct labor hours are billed to specific contracts?
No. If ―no,‖ please explain:
Yes. If ―yes,‖ which of the following methods does the Company use to account for uncompensated
overtime—the hours worked without additional compensation in excess of an average of 40 hours per
week by direct-charge employees who are exempt from the Fair Labor Standards Act?
Effective Rate Method. Please explain:
Salary Variance Method. Please explain. (E.g., What was the total dollar amount of
the salary/payroll variance for the year?): $
Other. Please explain:
F.4. Contract Modifications/Time Tracking. How does the Company segregate work performed under a basic
agreement/contract from work performed for contract changes/modifications?
51
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-11
G. Labor Billings and Project Costing
G.1. Billing Rates. Please describe how billing rates are determined, or attach the Company’s billing-rate policy.
Description:
Billing-rate policy attached.
G.2. Premium Overtime. Does the Company pay overtime at a premium to any employees? Yes No
- If ―yes,‖
a. What premium rate is paid, and what categories of employees are eligible for this rate?
Time-and-a-half for all non-exempt employees.
Other. Please explain:
b. How is the overtime premium accounted for and billed?
As part of direct labor, and overhead is applied.
As an Other Direct Cost (no overhead applied).
As an indirect labor cost (included in the indirect cost rate).
Other. Please explain:
G.3. Allocation of Overtime Costs. Are overtime costs allocated to contracts consistently, regardless of the type of
contract (lump sum versus actual cost) or customer (government versus commercial)?
Yes No. If ―no,‖ please explain:
G.4. Cost Allocation versus Billing. If the Company pays a principal or an employee at a rate in excess of a
contract’s maximum hourly labor rate, where will the excess cost be allocated/charged?
G.5. Contract/Purchased Labor. Does the Company invoice/bill contract labor directly to any customers?
Yes No N/A
- If ―yes,‖ please complete the following: Contract labor is billed—
As part of direct labor, and overhead is applied.
As an Other Direct Cost (no overhead applied).
Other. Please explain:
52
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-12
H. Expense Accumulation and Billing
H.1. Nonsalary Direct Costs (Other Direct Costs). Besides labor, what type of costs does the Company normally
bill/invoice as direct expenses?
H.2. Credits Associated with Direct Costs. Is the indirect cost pool relieved/reduced for credits/reimbursements
received for direct costs?
Yes No. If ―no,‖ please explain:
H.3. Design/Build Stipends. Has the Company received a stipend from any State DOT in connection with
design/build efforts?
Yes No
- If ―yes,‖ please explain how the Company accounted for the stipend in the accounting
system:
H.4. Classification of Cost Items. How are the following cost items accounted for and billed?
(Check both ―D‖ and ―I,‖ if applicable.)
(D = Direct; I = Indirect; N/A = not applicable) D I N/A
a. Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Computer Assisted Design and Drafting (CADD) . . . . . . . . . . . . . . . . .
c. Computer (non-CADD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d. Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
e. Printing / Reproduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
f. Postage
g. Lab
h. Drilling
i. Travel and Subsistence
j. GPS and/or Nuclear Density Meters
k. Other (list if significant)
H.5. Nonbillable Costs. Describe the accounting treatment for direct costs not billable to clients. (Where/how are
these costs recorded?)
H.6. Authorization. How does the Company ensure that costs are not billed to Government projects prior to proper
authorization?
H.7. Vehicle Expenses. Does the Company provide vehicles to employees for business purposes?
Yes No
a. If ―yes,‖ are the vehicles leased or owned?
Leased Owned
b. Identify the total number of vehicles owned or leased by the company.
Leased Owned
c. Are mileage logs maintained for all vehicles? If ―no,‖ please explain below.
Yes No
Explanation:
53
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-13
d. Is mileage separated by direct and indirect classifications, and is mileage incurred in connection with
unallowable activities tracked? Yes No
Explanation:
e. What recovery/billing rate is used for Company vehicle mileage reimbursement?
$ per mile.
Explanation:
f. How was the rate developed?
H.8. Computer Expenses. Are the Company’s computer expenses incurred as a result of (select one):
a. Outside Services? Company ownership? Both?
b. Does the Company compute a charge rate for computers? Yes No
- If ―yes,‖ what is the rate?
- How was the rate developed?
c. Is computer usage segregated by direct and indirect classifications? Yes No
d. Are computer usage logs maintained and coded by job/project? Yes No
H.9. Printing and Reproduction Costs. How are printing and reproduction expenses treated?
- In House: Direct cost Indirect cost Combination of direct and indirect
- Outside vendor: Direct cost Indirect cost Combination of direct and indirect
If you marked “combination of both,” please explain:
a. For in-house services, are usage logs maintained and coded by job/project?
Yes No
b. Is usage segregated by direct and indirect classifications?
Yes No
c. If these costs are incurred through the use of an outside vendor, are the invoices coded by job/project when
received?
Yes No
H.10. Telephone Costs. How is the expense for telephone service recorded and billed?
Direct cost Indirect cost Combination of direct and indirect
If you marked “combination of direct and indirect,” please explain below:
- Does the Company maintain a telephone log to record toll calls? Yes No
- Are the calls job-coded by direct and indirect classifications? Yes No
54
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-14
H.11. Activities Ineligible for Cost Reimbursement. Did any of the Company’s employees engage in activities for
lobbying, advertising, public relations, charity, and/or entertainment?
- If ―yes,‖ please list the employees who engaged in these activities, and describe how the associated costs
were tracked and accounted for in relation to the submitted indirect cost rate.
Table 2: Unallowable Activities
Employee Name or ID & Title/Classification:
Activities: Accounting Treatment:
I. Compensation for Owners and Employees
I.1. Bonuses.
a. Did the Company pay, or accrue for, bonuses earned by owners or employees during the period covered by
the latest indirect cost rate schedule?
Yes No
- If ―yes,‖ were the bonuses included in the submitted overhead rate? Yes No N/A
- Was any portion of these bonuses excluded from the submitted overhead rate? Yes No N/A
Comment:
b. Does the Company have a written bonus plan?
Yes. Please provide a copy of the plan.
No. Please describe how bonuses are determined and how this is communicated to employees.
c. Are all employees eligible for the bonuses? Yes No. If ―no,‖ please explain:
I.2. Executive Compensation. Has the Company, an independent CPA, or compensation consultant performed an
evaluation of executive compensation for reasonableness in accordance with FAR 31.205-6? (See AASHTO
Guide Section 7.5.)
Yes No
- If ―yes,‖ describe the methodology used and how this process has been documented:
55
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-15
J. Related-Party Transactions
J.1. Related Employees. Please provide the following information for all employees who are related to the parties
listed in the Ownership Table (Table 1) shown in A.5:
Table 3: Employees Related to Company Owners
Name or ID: Title/Position: Wages/Salary: Bonus: Other Compensation:
Total Compensation:
1
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related (e.g., spouse, parent, child, sibling, in law):
2
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
3
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
4
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
5
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
6
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
7
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
8
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
56
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-16
Name or ID: Title/Position: Wages/Salary: Bonus: Other
Compensation: Total Compensation:
9
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
1
0
$ $ $ $
Total Hours
Worked During
Year:
Job Duties:
Related to:
How Related:
J.2. Related Vendors. Please provide the following information for all vendors related to the parties listed in the
Ownership Table (Table 1) shown in A.5:
Table 4: Vendors Related to Company Owners
Name: Contact Information: How Related: Products/Services Provided: Total Payments
During Year:
$
$
$
$
$
$
$
$
$
$
$
$
57
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-17
J.3. Property or Facilities Leased from Related Parties. Does the Company rent or lease property and/or facilities
from another entity (organization or individual)?
Yes No
- If ―yes,‖
a. Are any of the Company’s owners/stockholders, or members of their immediate family, also
owners/stockholders of the other entity?
Yes No
- If ―yes,‖ please explain:
b. Have the rental/lease costs been adjusted to the property owner’s actual costs?
Yes No
- If ―yes,‖ what basis was used to determine actual cost? (E.g., the property owner’s tax return
less interest expense, plus cost of money).
Description:
J.4. Other Related-Party Transactions. Did the Company engage in any transactions with related parties other
than those listed and described in J.1 through J.3?
No Yes. If ―yes,‖ please complete Table 5:
Table 5: Other Related-Party Transactions
Name: Contact Information: How Related: Products/Services Provided: Total Payments
During Year:
$
$
$
$
$
$
$
$
$
$
$
$
58
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-18
K. Other Questions
K.1. Life Insurance. Does the Company pay life insurance for officers/principals?
Yes No
- If ―yes,‖
(a) Have any costs associated with this life insurance been included on the indirect cost rate schedule?
Yes total amount: No
(b) Please identify the beneficiary of the life insurance:
Company/surviving partners Officer/principal’s family
Other (specify)
(c) Please identify the type(s) of the life insurance:
Term Whole life Universal life Endowments (annuities)
Accidental death Other (please specify):
K.2. Suspension or Debarment. Has the Company, its parent, subsidiary, or any owner, stockholder, officer, partner,
or employee of the Company been suspended or debarred from doing business by any State or the Federal
government?
Yes No
- If ―yes,‖ please provide complete details:
K.3. Updates for Changes to FAR Part 31. Does the Company have an existing process designed to provide timely
updates to company policies and procedures to accommodate changes in the FAR Subpart 31.2 cost principles?
Yes No
- If ―yes,‖ please describe the process:
K.4. Risk Assessment. Does the Company have a process for assessing risks that may result from changes in cost
accounting systems or processes?
Yes No
- If ―yes,‖ please describe the process. How are risks identified and addressed?
K.5. Communications of FHWA/DOT Requirements. How does information flow from the FHWA/State DOT to
appropriate management personnel? (E.g., How are relevant updates to State DOT procedures or Federal
Regulations disseminated to project managers and accounting personnel?)
59
AASHTO Internal Control Questionnaire (ICQ) for Consulting Engineers
Internal Control Questionnaire for Consulting Engineers (rev. 05/01/2012)
AASHTO Uniform Auditing & Accounting Guide (2012 Edition) Appendix B-19
I certify that to the best of my knowledge and belief this ICQ is a complete and accurate representation of the above-
named Company’s cost accounting and billing practices.
Typed or Printed Name
___________________________
Signature Title Date Completed
Note: The representations on this ICQ were made by, and are the responsibility of, the Company’s management.
60