Accounting and Audit Guidelines for Contracts with Caltrans

INTRODUCTION

The purpose of this brochure is to outline for you, a potential contractor with the California State Department of Transportation (Caltrans), the basic elements of an adequate accounting system, and the types and objectives of audits that will be performed in relation to your contract. In order to successfully compete for contract and meet the audit requirements, a contractor (whether a prime or subcontractor) must have a system of record keeping and internal control. Although a specific cost accounting is not required, a contractor needs a system which will assure compliance with the terms of the agreement. A preaward audit will be performed to assure you meet these requirements prior to contract execution. If your system is deficient, the contract will not be executed.

Caltrans reimburses, through your overhead rate, the costs attributable to establishing and maintaining a cost accounting system.

Staff time and other costs related to an audit performed of your contract are normally reimbursed through your overhead rate.

ACCOUNTING SYSTEM

Contractors (whether a prime or subcontractor) planning to contract with Caltrans must have an accounting system which meets the following objectives:

• The ability to record and report financial data in accordance with generally accepted accounting principles.
• A system of record keeping to ensure that costs billed to Caltrans are:
  • Supported by adequate documentation,
  • In compliance with the terms of the contract and applicable Federal and State regulations specified in the contract.

• A system of record keeping ideally includes the following:
  • General ledger
  • Job cost ledger
  • Labor distributions.
  • Time records
  • Subsidiary journals
  • Chart of accounts
  • Financial statements

• The ability to accumulate and segregate reasonable, allocable (incurred solely for a project) and allowable (per terms of the contract) costs through the use of a cost accounting system. The following some of the attributes which would ideally be found in such system:
  
  
  • A chart of accounts which includes indirect and direct general ledger accounts, Indirect costs are not specifically identified to a project, for example, rent and/or utilities. Direct costs are identified with a project, for example, drafting hours and/or design hours.
    
    
  • Segregation of costs by contract, category of cost and milestones (if applicable).
    
    
  • Proper recording of direct and indirect costs. For example, recording of labor costs should provide that non-project indirect hours be recorded on a time sheet and in the accounting records to an administration, vacation, sick leave or other indirect cost account/code. Direct project hours should be recorded on a­­ time sheet and in the accounting records to a direct project cost account/code.
    
    
  • Consistent accounting treatment of costs in recording and reporting. For example, if travel expense is charged directly to a project, all travel expense incurred on any project should be considered a direct costs, As a result, project-related travel, whether reimbursable per the contract terms or not, should be included us direct cost.
    
    
  • Ability to trace from invoices submitted to Caltrans to job cost records original, approved source documents, for example, time sheets, vendor invoices, cancelled checks.
    
    
  • Ability to reconcile job cost records to the accounting records.

• Compliance with cost principles described in the Code of Federal Regulations 48, Federal Acquisition Regulations System (FAR), Chapter I, Part 31, Information or, how to obtain this regulation is described under “Audit Criteria” on the following page,

• Procedures to monitor and adjust projected overhead rates to actual rates.

• Controls to ensure that written approval is obtained prior to any changes to the contract.

• Procedures to retain accounting records and source documentation as by the terms of the contract.

• A system of internal control which provides reasonable assurance that assets are protected; financial data, records and statements are reliable; and errors and irregularities are promptly discovered, reported and corrected. The elements of a system of internal control should include, but not be limited to the following:
  • Separation of duties for proper protection of assets. Incompatible duties are those that place any person in position to both perpetrate and conceal errors or irregularities in the normal course of business, For example, the person who writes checks should be different from the person who reconciles bank statements and the person who purchases goods should different from the person who receives goods.
    
    
  • Limiting access to assets to only authorized personnel who require these assets in the performance of their assigned duties. For example, blank check stock should be locked in safe when not in use.
    
    
  • Authorization and record keeping procedures which provide effective accounting control over assets, liabilities, revenues, and expenditures.
    
    
  • A system of practices to be followed in the performance of duties and functions, such a system normally includes policies and procedures which establish the purpose and requirements of the accounting system. For example, timekeeping practices should ideally provide for the following:
    • Time sheets be prepared, signed and dated by all employees.
    • Time sheets be completed in non-erasable ink.
    • Time sheet corrections be crossed out and initialed by the employee.
    • Time sheets be signed by a supervisor as reviewed and retained on file as required by the contract.

     

  • A system of internal review. For example, bank reconciliations and travel expense claims should be reviewed, approved, and signed by supervisor,
  • Personnel with skills and training commensurate with their responsibilities.

AUDITS

Contractors, whether a prime or subcontractor, performing under a negotiated contract with Caltrans are subject to the following audits.

• Preaward Audits: Prior to the award of a contract, Caltrans Audits and Investigations will conduct a preaward audit to determine if the contractor's accounting system is adequate to accumulate and segregate costs as detailed in the previous section and to determine if the proposed costs are reasonable. The audit alerts both the contractor and Caltrans management to problems relative to the contractor's cost proposal and cost accounting system. Due to time constraints in the award process, your cooperation in scheduling the preaward audit with short notice will expedite the execution of your contract.
  
  
• Interim Audits: Interim audits are performed on an as needed basis. During the preaward audit, if it is determined that the contractor's accounting system is new or minor deficiencies are noted, an interim audit is scheduled to determine that the system is functioning adequately to ensure that billed costs are supported and that any deficiencies were corrected. An interim audit may be requested by the contract administrator or by Caltrans management to address concern during the course of the contract. Also, an audit manager may initiate an interim audit of a multi-year contract to ensure that costs reimbursed to date are allowable.
  
  
• Post Audits: Post audits of contracts are performed routinely after project completion. Post audits are performed to determine whether the costs claimed are allowable, allocable, reasonable, and in compliance with the Federal and State laws and regulations as well as the fiscal provisions stipulated in the contract. The examination includes reviews of applicable laws and regulations, the contract requirements and the contractor's internal control system. Audit tests of the contractor's accounting records and other auditing procedures considered necessary will also be performed. Applications of all audit procedures would also be governed by the individual contract under audit. Unsupported or unallowable costs are normally the result of weaknesses in the accounting system and will be reimbursed to Caltrans.

To provide contractors with a procedure for obtaining prompt and equitable resolution to a dispute arising from a post audit of a non-highway construction cost reimbursement contract, Caltrans has established an Audit Review Committee (ARC), Information explaining the ARC should be found in your contract and/or as an attachment to the post audit report.

AUDIT CRITERIA

For specific information regarding basic cost accounting systems and applicable State and Federal regulations, please see the following:

Code of Federal Regulations 48, Federal Acquisition Regulations System Chapter 1, Part 31: This regulation contains cost principles and procedures for the pricing of contracts/subcontracts and the determination, negotiation. or allowance of costs. Contact:

Superintendent of Documents

Government Printing Office

Washington, DC 20402

Washington, DC - (202) 512-1800
San Francisco, CA - (415) 512-2770
Los Angeles, CA - (213) 239-9844

 

California State Administrative Manual: A reference source: for statewide   procedures, regulations and information, Contact:

Office Of State Publishing,

Department Of General Services.

Call for order form (916) 445-2295.

 

For review of the above references, contact your local library or the California State Library,

California State Library

Library and Courts Building

914 Capitol Mall, P.O. 94237-0001

Information (916) 654-0261

 

For assistance in establishing an accounting system which will meet the objectives outlined in this brochure, you should contact an accountant and/or bookkeeper who is familiar with cost accounting systems.