Accounting Systems and Recordkeeping for A/E Firms ACEC/MD Small Business Enterprise Committee October 13, 2017
and Ron Grodzinsky At a Glance works with engineering firms with fees ranging from $2 million to over $200 million. Ron Grodzinsky has been with for 28 years. Ron works exclusively with consulting engineering firms providing: Income tax return planning and preparation Audits of and consulting for FAR overhead rates Accounting systems planning and advice Audits of retirement plans
Objectives Description and importance of an accounting system Critical parts of an accounting system for an A/E firm Key Performance Indicators (KPI) for an A/E firm Record retention requirements under IRS and FAR
What is a Financial and Accounting Reporting System? A system used to process financial transactions of a business and provide reports to be used by executives of the company, creditors, and government officials.
Financial Accounting System Diagram INPUTS Timesheet Policies and Procedures OUTPUTS Billing and Invoicing Expense Report Employee Data Project Data Subconsultant Accounting and Project Management Software Internal Controls CPAs for engineering firms for over 80 years Employee Labor Reports Project Detail Reports Payroll Reports
Financial Accounting System Diagram (Continued) INPUTS Cash Recipts Cash Disbursements Vendor Bills Fixed Asset Records Policies and Procedures Accounting and Project Management Software Internal Controls CPAs for engineering firms for over 80 years OUTPUTS Receivables Aging Payables Aging General Ledger Financial Statements Scorecard Metrics
Financial and Accounting System Accounting and Project Management Software Requirements Accounting for direct, indirect, and unallowable costs Time and billing Project management Financial Statements Integration between timesheet and expenses, job costing, and general ledger DCAA compliant (if necessary) Reasonable cost
Financial and Accounting System Accounting and Project Management Software (Continued) Some software available: * Deltek Vision * Deltek Ajera * Clearview InFocus * BQE Core * Microsoft Dynamics SL (Formerly Solomon) * QuickBooks Enterprise Construction and Contractor Version * QuickBooks integrated with project management, time and billing software such as BillQuick, Praesto AE, Big Time, etc.
Importance of Effective Accounting/Recordkeeping System Information for business decisions Scorecard of business performance Information for project managers Compliance with FAR and related DOT requirements Fewer adjustments by CPAs and amount of time CPA needs to analyze overhead accounts for direct expense and unallowable expenses Reduce reportable conditions on Overhead Audit Report
Employee and Owner Timesheets Suggestions ~ Timesheets completed at time task performed (if practical) ~ Otherwise record the timesheet daily ~ Timesheets recorded accurately ~ Timesheets reviewed and approved by the supervisor ~ Owner held to same timesheet requirements as employees
Employee and Owner Timesheets Suggestions (Continued) Timesheet designed to record the following types of labor: Project labor (Project number, phase, task, etc.) Non-project labor broken into detail such as: * Administrative * Training * Proposal * Unallowable activities (entertainment, advertising, and lobbying) * Vacation * Sick
Employee Expense Reports Suggestions Completed by due date per company policy Include the following information: Date and amount of expense incurred Activity related to the expense Project number if related to a project For meals, include date, related activity, and attendees If alcohol, ask for a separate bill Restaurant/hotel receipts (not only credit card slip) Copy of Vendor bill
Chart of Accounts/General Ledger History Example of Chronological coding to help prepare Financial Statements and Overhead Statement For example: 1000-1999- Assets 2000-2999- Liabilities 3000-3999- Stockholder's equity Balance Sheet
Chart of Accounts/General Ledger History (Continued) Example of Chronological coding to help prepare Financial Statements and Overhead Statement (Continued) For example: 4000-4999 - Fee income 5000-5999 - Direct costs reimbursable 6000-6999 - Direct costs non-reimbursable 7000-8999 - General and administrative expenses 9000- Unallowable expenses Income Statement Overhead Statement Key is to have separate accounts for direct, indirect, and unallowable costs
Written Accounting Policies and Procedures Benefits of written accounting policies and procedures: Provides uniformity of processing transactions for consistency Guides employees processing and recording transactions Can be used as part of training employees Reduces auditor's skepticism compliance with Federal Acquisition Regulation (FAR)
Written Accounting Policies and Procedures (Continued) Keys to successful implementation of policies and procedures Explaining policies to employees to understand and buy in Actually following policies and procedures Reviewing and updating policies and procedures as needed
Written Accounting Policies and Procedures (Continued) Examples of written policies and procedures Description of accounting system and software used Basis of accounting used (e.g. accrual basis under GAAP) Name of software used to process transactions (FAR compliant) How often system is backed up and where stored
Written Accounting Policies and Procedures (Continued) Examples of written policies and procedures Description of how expenses are recorded in the general ledger Direct costs (related to a project) Indirect costs (overhead) Unallowable costs under FAR Record unallowable costs at point of entry or at year-end via account analysis
Written Accounting Policies and Procedures (Continued) Examples of written policies and procedures Employee and owner travel Air travel Commercial air using lowest available rate at reasonable time that is not circuitous Meals and lodging using GSA per diem rates Lodging rates using actual cost up to 300% of GSA if hotel at location of convention Company vehicles mileage logs (direct, indirect, personal)
Written Bonus Plan FAR does not require bonus plan to be written However, it makes it easier to get bonus accepted by DOTs if written MDOT has asked for copies of written bonus plans
Written Bonus Plan (Continued) Suggested documentation Document what part of plan is performance based Document what part of plan is profit distributions Does not need to be overly elaborate with many formulas Key: document the process and show consistency from year to year Some items to include in the bonus plan Eligibility Performance criteria measurement When is bonus awarded and paid Owner/executive approval of plan (s) documented
Internal Controls Policies, procedures, and practices of a business implemented to reduce risks of errors, irregularities, and fraud and provide owners reasonable assurance that business objectives will be met Why are internal controls important Protect company assets from theft Reduces the risk of fraud Reduces frequency of errors Prevent and detect errors and irregularities
Internal Controls (Continued) Key components Tone at the top owners and executives Segregation of duties of employees
Internal Controls (Continued) Tone at the top Ownership review of financial reports Oversight of employees Written ethics policy for integrity and ethics Occasional spot checking accounting employees' work
Internal Controls Other Ideas Some suggestions Owner involvement Cross-training of employees Job rotation Required vacations Background checks Get to know if employee having financial difficulties Bonding if necessary
Internal Controls Segregation of Duties Policies and procedures to improve internal controls at a company by separating: Authorization and approval of a transaction Recordkeeping Custody of assets Reconciliations
Internal Controls Segregation of Duties (Continued) Over cash receipts from clients - some examples Electronic Funds Transfers from client Lockbox accounts with bank for deposits
Internal Controls Segregation of Duties (Continued) Over cash receipts from clients - some examples (Continued) For Payments from clients received via mail Receptionist opens mail and prepares summary of receipts and stamps checks for deposit only Receipts given to other employee to post to books Other employee or owner makes deposit Owner or other employee compares summary of deposits to bank statement Receipts should be deposited daily and intact
Internal Controls - Bank Accounts Bank reconciliations and bank statements Owner reviews monthly bank statement online for any unusual transactions Owner reviews bank reconciliation for unusual or very old reconciling items
Internal Controls Accounts Receivable Analyze accounts receivable aging each month Approval by owner for any write offs Review of ratios such as average collection period
Internal Controls Payroll and Labor Costing Reconcile payroll in general ledger to job costing reports and payroll reports monthly Owner/manager review employee utilization rates and other metrics each month Review and approval of employee pay rate increases annually
Metrics and Key Performance Indicators Review dashboard of Key Performance Indicators monthly (examples below) Payrolls in the bank (cash balance/total wages per pay period) Staff utilization rate (direct labor/total labor) Multipliers of direct labor (net fee income/direct labor) Write offs of accounts receivable
Metrics and Key Performance Indicators (Continued) Review dashboard of Key Performance Indicators monthly (examples below) Overhead rate ((indirect payroll + benefits + G&A exp)/direct labor) Operating profit/net revenue Net fees/employee Backlog volume (unearned fees on open contracts)
Records Retention Federal Acquisition Regulation (FAR Subpart 4.7) Generally 3 years after final payment Unless contract clause specifies longer period Financial and cost accounting records Accounts receivable invoices and related records 4 years after final payment Expense reports for employees 4 years after final payment Paid, cancelled, and voided checks 4 years after final payment
Records Retention (Continued) Federal Acquisition Regulation (FAR Subpart 4.7) Financial and cost accounting records (Continued) Labor distribution reports 2 years after final payment Timesheets and payroll reports 4 years after final payment Payments for services of employees 2 years after final payment Property records 4 years after final payment
Records Retention (Continued) IRS Requirements See IRS Publication 552 Income tax returns and related records 3 years from date of filing Employment tax records 4 years from date tax paid or due whichever is later Property and equipment 3 years after the end of year when disposed Corporate records - permanent