600 KAR 6:080. Financial records and audits of firms.

600 KAR 6:080. Financial records and audits of firms.

RELATES TO: KRS 45A.800-45A.835, 23 C.F.R. 172, 26 C.F.R. 1.167, 48 C.F.R. 30, 31, Chapter 99, Subchapter B, 23 U.S.C. 112(b)(2)

STATUTORY AUTHORITY: KRS 45A.807(2)

NECESSITY, FUNCTION, AND CONFORMITY: KRS 45A.807(2) requires the Transportation Cabinet to promulgate administrative regulations to implement its procurement of engineering or engineering-related services pursuant to KRS 45A.800 to 45A.835. The U.S. Department of Transportation requires all engineering or related projects which it funds to be subject to the cost principles or accounting standards established in 48 C.F.R. 30 and 31. This administrative regulation establishes the audit methodology to be used by a cabinet auditor for an engineering or engineering-related service agreement entered into by the cabinet pursuant to KRS 45A.800 to 45A.835; establishes the requirements for keeping financial records; and requires all firms contracting with or prequalified by the cabinet to comply with the federal regulations.

Section 1. Financial Records of Firms. (1) A firm which has requested prequalification, has been prequalified, is under contract, or has been selected to provide professional engineering or related services to the Transportation Cabinet shall maintain and allow the cabinet access to:

(a) All financial or other information necessary to determine or verify the firm's direct wage rates, indirect cost rates, overhead, and direct project charges:

(b) All other information necessary to verify the firm's application for prequalification or renewal of prequalification; and

(2)(a) A firm shall maintain all financial records including payroll time records for all employees, including the firm's principals, in accordance with 48 C.F.R. Part 31.

(b) The financial records of a firm shall be retained and made available to the Transportation Cabinet until after the next audit performed by the Transportation Cabinet or for five (5) years, whichever occurs first.

(3) If a firm is notified by the Transportation Cabinet of a pending audit, the auditor may request that some portions of the needed information be mailed to him or her in advance of the audit date. For the audit, the firm shall provide the following information to the auditor when he or she arrives:

(a) Chart of accounts;

(b) The latest fiscal or calendar year financial statement of the firm. If one is available which was compiled, reviewed, or audited by an independent CPA, it shall also be made available to the auditor;

(d) Statement of company policies to include personnel policies, personal leave time, vacation time, sick leave, overtime, pay raise, travel, subsistence reimbursement, bonuses, employment, retirement plans, and other administrative policies;

(e) For the audit period, a breakdown of the total project fees from all contracts by indirect and direct cost, including a detailed listing of the direct costs;

(f) General ledger;

(g) Cash disbursements and accounts payable journals;

(h) All leases, including a lease on office space, buildings, machinery, copiers, equipment, and motor vehicles;

(i) Schedule of current personnel by classification;

(j) Most current payroll register;

(k) All federal, state, and local payroll tax forms;

(l) Billing statements;

(m) List of bonuses to individual employees and the date paid;

(n) The pension or retirement plan of the firm and the contributions made on behalf of each employee;

(o) List of officers and principals of the company which includes their salaries and other compensations paid during the audit year and the amount of time they work direct;

(p) All contracts which were active during the audit year; and

(q) Minutes from the directors or stockholders meetings.

(4)(a) Except for the items set forth in subsection (3)(c) and (q) of this section, the firm shall allow the auditor to make a copy of the items set forth in subsection (3) of this section.

(b) The auditor may review the items set forth in subsection (3)(c) and (q) of this section but shall not remove them from the premises of the firm.

(5) A direct cost shall be determined by the provisions of 48 C.F.R. 31.202 and not by whether it is reimbursable.

Section 2. Limitations on Direct Costs. ] To compute the average hourly pay rate for a salaried job classification at a firm, the number of available annual working hours per year shall be 2080.

Section 3. Approved Audits. (1) If the cabinet has not audited the firm in the previous twelve (12) months, the last available audit may be used for determination of the fee specified in the contract with the understanding that a contract modification shall be processed if an audit by the cabinet reveals substantial differences in overhead rates, wage rates or direct project expenses.

(2)(a) If the firm has an audit which covers the time period that the Transportation Cabinet's audit will cover and which was prepared by the Defense Contract Audit Agency, an independent certified public accountant, or other audit accepted by a federal, state, or local governmental agency, the firm shall provide the audit report to the Transportation Cabinet prior to the scheduled audit.

(b) The Transportation Cabinet shall review an audit submitted pursuant to the provisions of paragraph (a) of this subsection. If necessary for an adequate review, the firm shall provide a copy of the audit work papers in addition to the audit report.

(c) The Transportation Cabinet shall approve the audit for use, disapprove the audit for use, or approve the audit for use based on limitations imposed by the Transportation Cabinet pursuant to 600 KAR 6:070.

(d) The negotiation unit shall use the overhead rates, wage rates, and direct project expenses from an audit submitted pursuant to paragraph (a) of this subsection in negotiating a fee:

1. Subject to:

a. The review performed pursuant to paragraph (b) of this subsection; and

b. An adjustment made based on a limitation imposed by the cabinet pursuant to 600 KAR 6:070; and

2. With the understanding that a contract modification shall be processed if:

a. An audit by the cabinet reveals substantial differences in overhead rates, wage rates, or direct project expenses; and

b. An overhead submission packet is received in a timely manner to allow the cabinet sufficient time to perform or verify the overhead audit.

(3) Quarterly, the Transportation Cabinet shall select for audit a minimum of thirty (30) percent of the number of lump sum contracts that have been completed during the previous three (3) months.

Section 4. Audit Standards. (1) The following accounting and auditing standards shall be abided by in an audit conducted by the cabinet:

(a) "Government Auditing Standards";

(b) "Codification of Statements on Auditing Standards (Including Statements on Standards for Attestation Engagements)";

(d) 48 C.F.R. Part 31, Contract Cost Principles and Procedures;

(e) 48 C.F.R. Part 30, Cost Accounting Standards Administration, as it relates to 48 C.F.R. Part 31;

(f) 48 C.F.R. Chapter 99, Subchapter B, Procurement Practices and Cost Accounting Standards; and

(g) 26 C.F.R. Part 1.167, Depreciation, if a firm does not have an acceptable depreciation schedule in effect.

(2) The term "common control" or "related parties" as used in Number 57 of the "Original Pronouncements, Accounting Standards as of June 1, 2005, Volume I, Volume II, and Volume III" shall be determined to exist if, in the relationship between a consultant firm and another company which is involved in real property renting, leasing arrangements, or joint ventures:

(a) A principal or person with management responsibilities or significant influence in the consultant firm:

1. Owns twenty (20) percent or more of the other company;

2. Is also a principal or person with management responsibilities or significant influence in the other company;

3. Has a family member whom he or she might control or influence because of the family relationship and who is a principal or has management responsibilities or significant influence in the other company; or

4. Has a family member who might control or influence him or her because of the family relationship and who is a principal in or has management responsibilities or significant influence in the other company; or

(b) The interrelationship that exists between business entities makes it appear that the same persons control or have significant influence in those businesses.

Section 5. Audit Findings. (1)(a) Prior to the issuance of a final audit report, the auditor from the Transportation Cabinet shall present preliminary findings to the firm.

(b) If the auditor's preliminary findings include an adjustment to the overhead rate submitted by the firm, the auditor's work papers shall be included with the preliminary findings upon request by the firm.

(c) A comment from the firm shall be submitted in writing within fifteen (15) calendar days of the firm's receipt of the preliminary findings.

(d) The firm's comments shall be taken into consideration in the issuance of the final report.

(2)(a) A firm shall have thirty (30) calendar days from the date the final report is received by the firm to request a review of the final report.

(b) The request for a review shall be in writing and clearly state all of the concerns with the final report and the reasons for the concern.

(d)1. The firm may submit a supplement to the request for review.

2. The supplement shall be submitted in writing within the thirty (30) calendar days established in paragraph (a) of this subsection.

(3) The External Audit Review Committee shall evaluate the request for review and the final report.

(4) The External Audit Review Committee shall consist of the following:

(a) Executive Director of the Office of Budget and Fiscal Management, Chair;

(b) Deputy State Highway Engineer for Project Development; and

(5) A committee member may appoint a proxy to serve on this committee.

(6) If desired, the External Audit Review Committee may request the firm or the auditor to answer questions in person, by electronic communication, or in writing.

(7)(a) The firm shall have thirty (30) calendar days from receipt by the firm of the committee's decision to appeal the decision to the Secretary of the Transportation Cabinet.

(b) An administrative hearing to hear the appeal shall be held pursuant to the provisions of KRS Chapter 13B.

Section 6. Governing Federal Regulations. The following federal regulations shall govern the financial records and audits of firms:

(1) 48 C.F.R. Part 31, "Contract Cost Principles and Procedures";

(2) 48 C.F.R. Part 30, "Cost Accounting Standards Administration";

(3) 48 C.F.R. Chapter 99, Subchapter B, "Procurement Practices and Cost Accounting Standards"; and

(4) 26 C.F.R. Part 1.167, "Depreciation".

Section 7. Incorporation by Reference. (1) The following material is incorporated by reference:

(a) "Government Auditing Standards", 2003 Revision by the Comptroller General of the United States;

(b) "Codification of Statements on Auditing Standards (Including Statements on Standards for Attestation Engagements)", copyright 2006 by the American Institute of Certified Public Accountants, Inc.; and

(c) "Original Pronouncements, Accounting Standards as of June 1, 2005, Volume I, Volume II, and Volume III", published by the Financial Accounting Standards Board.

(2) This material may be:

(a) Inspected, copied, or obtained, subject to applicable copyright law, at the Division of Audits, External Audit Branch, 200 Mero Street, Frankfort, Kentucky 40622, Monday through Friday, 8 a.m. to 4:30 p.m.; or

(b) Obtained by contacting:

1. For a copy of "Government Auditing Standards", 2003 Revision, the U.S. Government Printing Office, Superintendent of Documents, Mail Stop: SSOP, Washington, D.C. 20402-9328;

2. For a copy of "Codification of Statements on Auditing Standards (Including Statements on Standards for Attestation Engagements)", the American Institute of Certified Public Accountants, Inc., Harborside Financial Center, 201 Plaza Three, Jersey City, New Jersey 07311-3811; or

3. For a copy of "Original Pronouncements, Accounting Standards as of June 1, 2005, Volume I, Volume II, and Volume III", the Financial Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. (22 Ky.R. 1419; Am. 1633; 1849; eff. 4-5-96; 24 Ky.R. 2765; 25 Ky.R. 350; 839; eff. 10-6-98; 29 Ky.R. 1885; 2494; 2888; eff. 6-3-03; 33 Ky.R. 557; 1319; eff. 11-9-06.)