Audited Overhead Rates – The Good, The Bad, and The Ugly AASHTO Subcommittee on Internal and External Audit 2014 Annual Meeting August 10 – 13, 2014 Savannah, Georgia

MH Miles Company CPA PC  Niche Certified Public Accounting Firm  Specialize In Governmental Compliance  NUTRITION, TRANSPORTATION, EDUCATION  TRANSPORTATION  State Agencies  FAR Overhead Rate Audits  CPA Workpaper Reviews  Final Costs Audits / Agreed-upon Procedures Reviews  Staff Augmentation  Training & Consulting Services  A/E Firms  FAR Overhead Rate Audits  Assist management in calculating rate  Accounting system set-up and improvements  Guidance regarding State examinations & disputes

AGENDA Common issues and findings noted Facilitate open discussion

MEALS Employee Team Building  Cost incurred to improve employee working conditions, employee relations, and morale are allowable (reasonable) FAR  Often covered by the entertainment cost principle FAR which overrides all other principles  Examples  Donuts & coffee on Fridays for weekly department meeting  Meal cost incurred at a Quarterly Progress meeting

MEALS Overhead Meals  Overhead meals are allowable when the purpose is not in support of projects and relates to the overall normal operations of business  Examples  A job interview for a project candidate at a restaurant.  A lunch meeting held with a company lawyer to discuss trademark filings  Corporate strategy meeting with managers over dinner.  Catered meal for an open house held to celebrate grand opening of subdivision.

MEALS Business Meetings  If a meal is part of a business meeting and incidental to the meeting then it may be allowable.  Technical meeting with speaker – allowable  Simply discuss some business during meal - unallowable  For the meal to be allowable it must be part of the whole meeting, an incidental part (meeting can stand on its own) and the meeting itself is allowable.  Meal cost must be reasonable

MEALS The Key is Proper Documentation  Who – employee name and names of all guest  What – was purchased and price (including itemized meal receipts)  When – date meal occurred  Where – place meal occurred  Why – purpose of the meal/meeting

MEALS Common Mistakes  Credit Card statement only  Purpose of meal missing  Meal cost excessive  Alcohol not removed  Misinterpretation of < $75 receipt rule Poll – State procedure for unallowable costs

TOTAL TIME ACCOUNTING  Requires all hours are recorded  No specific regulation that requires TTA  FAR : Cost Allocability and Assignability to Final Cost Objectives  CAS 401: Consistency in Estimating, Accumulating, and Reporting Costs  CAS 418: Proper Allocation Bases for Direct and Indirect Costs

TOTAL TIME ACCOUNTING FAR : Cost Allocability and Assignability to Final Cost Objectives  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 relationships. CAS : Proper Allocation Bases for Direct and Indirect Costs  Pooled costs shall be allocated to cost objectives in reasonable proportion to the beneficial or causal relationship of the pooled costs to cost objectives. Implied that all hours worked are needed to correctly determine the beneficial/causal relationship between the cost and the cost objective.

TOTAL TIME ACCOUNTING CAS 401: Consistency in Estimating, Accumulating, and Reporting Costs (Bid = Book = Bill)  FAR : Composition of Total Costs - The total cost is the sum of the direct and indirect costs allocable to the contract…  FAR (d): Once an appropriate base for allocating indirect costs has been accepted, the contractor shall not fragment the base by removing individual elements. The premise is that consistent application of cost accounting practices will result in reliable cost estimates, and later facilitate comparing the estimated cost of contract execution with the actual cost.

TOTAL TIME ACCOUNTING Common Mistakes  Owners only recording 40 hours/week  Employees stop recording time at 40 hours  Time in excess of 40 hours only recorded if billable  All hours recorded but only direct time is compensated Poll – State procedure for correcting

CONTRACT/PURCHASED LABOR  Accounting treatment varies depending on circumstances which costs are incurred  Most likely causes no fringe benefits  Labor performed in-house using the consultant’s supervision and facilities (Overhead Allocated)  Labor performed offsite under the supervision and control of another entity (No Overhead) Does the accounting treatment match billings?

CONTRACT/PURCHASED LABOR Common Mistakes Bill as employee direct labor – Accounted for as ODC or Indirect expense (And Vise-Versa)  How do States correct?  Redistribute in overhead to match billing practices  Make adjustments on individual project basis

OTHER ISSUES  CPA firms performing substantial work to produce overhead audit without identifying Internal Control weaknesses  Travel expenses not limited to FTR  Indirect Labor on timesheets not detailed enough to identify unallowable activities.  Rotary and Chamber of Commerce Dues  Common Control Rent  Parent Company Allocations