Updated Audit Guide Clarifies Guidelines for Audits of Architecture and Engineering (A/E) Firms September 19, 2016The following article, which has been slightly modified for publication here, about audits of architecture and engineering firms was first published in September, 2016. The article is included here as a representative sample of the expertise of KatzAbosch’s professionals in the subject matter covered by the article. The article has not been updated to take into account subsequent developments, if any. Accordingly, the article is not intended to be a description of the current state of affairs in this area or to provide advice to viewers. The article should not be relied upon in making any financial, legal, accounting, operational or other decision.Updated Audit Guide Clarifies Guidelines for Audits of Architecture and Engineering (A/E) FirmsAfter two years of work, the American Association of State Highway and Transportation Officials (AASHTO) recently released its updated “Uniform Audit and Accounting Guide for Audits of Architectural and Engineering (A/E) Consulting Firms, 2016 Edition” (Audit Guide). This update provides clarifications and other refinements to the previous version of the Audit Guide (2012 Edition).Before dissecting the improvements in the Audit Guide, first, you may be asking a few questions:What is AASHTO?The Organization’s website (https://sp.www.transportation.org/Pages/Organization.aspx) provides key information about this organization:Nature of Organization: “AASHTO is a nonprofit, nonpartisan association representing highway and transportation departments in the 50 states, the District of Columbia, and Puerto Rico.”Mission: “to foster the development, operation, and maintenance of an integrated national transportation system.”Strategy: Educating the public, and key decision makers, regarding the importance of transportation and serving as a liaison between state departments of transportation (DOT) and the Federal governmentWhat is the Audit Guide and why is it important?The Audit Guide is a tool, published by AASHTO, that provides general guidance for state DOT auditors and public accounting firms that perform audits and attestations of A/E firms regarding examination, auditing and reporting policies, procedures and techniques related to audits of the costs incurred by A/E firms for engineering and design related services performed on various federal, state, and local transportation projects.Specifically, the techniques described in the Audit Guide are designed for audits of an A/E firm’s “indirect costs rate schedule”, as well as the related accounting, job-costing and labor-charging systems that capture the costs used to develop this schedule. A/E firms prepare the “indirect cost schedule” to calculate a periodic “indirect cost rate”, which is ultimately used in contract estimating, negotiations, administration, reporting and contract payments for the applicable period. Accordingly, the audit of the “indirect cost rate schedule”, and the calculation of an audited “indirect cost rate” has a profound effect on the A/E firm, and is greatly influenced by the content of the Audit Guide.How is the Indirect Cost Rate calculated?The “indirect costs rate” typically represents the amount of “indirect” costs (those costs not applicable to a single project) incurred by the A/E firm in relation to each dollar of “direct” labor costs incurred (those applicable to a single project), after eliminating costs “disallowed” under federal cost principles (Federal Acquisition Regulation (FAR)), specifically FAR Part 31, which identifies specifically “disallowed” costs which the federal government does not wish to reimburse, such as entertainment costs, interest, expense, etc.Section 112(b)(2) of Title 23 of the U.S. Code requires that contracts funded in whole or in part with federal-aid highway funds (even $1) be performed and audited in compliance with FAR cost principles (FAR part 31). The Audit Guide digests FAR Part 31 for auditors and provides them guidance on procedures to detect these “disallowed” costs as part of their audits of the “indirect cost rate schedule”. A/E firms contracting with state DOTs that receive federal funding must consider FAR Part 31 as part of their “indirect cost rate” calculation.Finally…what are the updates to the Audit Guide?The 2016 edition of the Audit Guide provides several enhancements to guide auditors and A/E firms in calculating the appropriate “indirect cost rate” and assessing systems that capture the costs that drive this rate. We’ve made it easy for you to review and understand the key enhancements. To view a summary report, click here.KatzAbosch will provide updates for any future significant revisions to the Audit Guide and is able to perform analysis of the reasonableness of “indirect cost rate” calculations and the systems used to derive these rates. Contact Terry Grant, CPA (firstname.lastname@example.org) or Timothy Redmond, CPA (email@example.com) for additional details.