Certifying a Section 1603 Grant Program Application at a Moment’s Notice

By Gary Krupa, CPA

In my accounting career, I’ve come across a few clients who truly put my skills to the test. I’m about to describe one for whom I recently performed a Section 1603 Grant Program certification for specified energy property. It’s safe to say that this client needed my services at least as much as I needed to provide services to his company. 

About four and a half months ago, the Director of a Solar Energy installer in Phoenix, AZ, sent me an e-mail expressing interest in my services concerning the preparation of an Agreed-Upon Procedures (AUP) report for a grant application. He had completed a 500kW Photovoltaic system (PV), involving the installation of solar panels, for a commercial client in New Jersey, and was applying for a U.S. Treasury grant for less than $1 million on the client’s behalf. The eligible cost basis was more than $500,000.

According to the Treasury Department’s 1603 program website, an Agreed-Upon Procedures report is required for that kind of project. It’s a type of attest engagement. For this project, my responsibility would be to perform certain required procedures in order to determine whether the project’s eligible cost basis as entered in the accounting records is in accordance with the cost basis for Federal Income Tax purposes.

The alternative form of certification is an examination, which would be required if an applicant requests a grant of $1 million or more. An examination would involve more extensive evidence-gathering procedures than would an AUP engagement (see the brief list of AU procedures below), and may include testing of the client’s accounting system and receiving confirmations from third parties. The accountant’s opinion on compliance with the Federal income tax cost basis would be required in the examination report.

My client’s Director, whose name is Timothy, arranged a meeting with me at his office in Phoenix. During that meeting he emphasized how difficult it was to complete the NJ client’s installation. That was because it snowed heavily in that part of NJ while his company was installing the PV system. We didn’t discuss my credentials at all. Instead, I explained to Timothy what would be involved in an Agreed-Upon Procedures engagement. He asked me to send him a proposal.

I then sent him a list of all the documents I’d need before I could submit the proposal to him. He didn’t respond so I called him. He said he was involved with a project involving a large military organization client and simply didn’t have the time to respond to my e-mail. The NJ client’s project would have to be put on hold. I didn’t expect anything more to come of my relationship with Timothy.

One month and one week later, in early October, much to my astonishment, Timothy called me early in the morning on my cell phone. He said he very much needed my help because his NJ client was demanding that he provide the accountant’s certification needed to complete their Section 1603 Grant application. What was at stake was a grant of more than $700,000. Apparently Timothy was behind schedule in completing the application, even though the official U.S. Treasury Department deadline for submitting it isn’t until October 1, 2012 -- almost one year later. He needed for me to complete the certification, which was at least a three or four day job, by the next day!

I had another engagement of a personal nature that day, but cancelled it and agreed to meet Timothy for lunch at a Wildflower Bread Company much closer to my office in Rimrock, located about forty minutes south of Sedona, than his. Timothy was that eager to get the certification project underway. After hastily preparing an engagement agreement, I set out to meet him. Somehow we got our signals crossed; we each went to a different Wildflower Bread Company, 63 miles apart from each other, and had lunch. We called each other on our cell phones and arranged to meet at a Denny’s even closer to my office an hour later.

When I arrived at the Denny’s, I found Timothy fully prepared with the reports and other documents I had requested in my e-mail. He read my engagement agreement within two minutes, signed it, and gave me a check for nearly 60% of the engagement fee. He answered my questions regarding the documents and the solar installation as best he could. Then he said he had to leave because he had to attend to his beloved dog that was ill.

The fee that I charged Timothy’s firm was somewhat higher than what he originally expected to pay; nevertheless it was reasonable given the nature of the engagement.

I worked until fairly late that evening (about 11 pm) and the entire next day on the project. Timothy called me every few hours the next day to check on my progress. He was concerned that I wouldn’t complete the engagement by the deadline for submitting the certification to the Treasury Department online, which was between 3:00 and shortly after 5:00. Fortunately, after applying every ounce of intense concentration I had at my disposal, I completed the Agreed-Upon Procedures Report and Statement of Findings by shortly after 5:00. Some documents were still needed to provide substantiation for the project’s cost basis. Timothy said he’d provide those.

Briefly, the procedures that I performed were these: 
 

• Tested cost eligibility, e.g. verified project location, determined 1) that the mark-up over cost, 18%, was reasonable according to Treasury Dept. benchmarks, 2) compliance with Sec. 1603 guidelines, and 3) that the cost basis was in accordance with the cost basis for Federal Income Tax purposes.
• Tested costs – for accuracy, completeness and reasonableness. Essentially I agreed the invoices as listed in the accounting records to transaction source documents, and then agreed the invoices to the NJ client’s “detailed calculation of cost basis”, taking into account material invoices.
• Concluded that there were no material potential discrepancies.
• Obtained a representation letter signed by Timothy regarding information I obtained and oral representations he made during the engagement. 

My report on Procedures and Findings accompanied the Agreed-Upon Procedures Report.

I was paid me the balance of my fee within a week. I followed up with the client’s Controller within two weeks and performed testing on the remaining items needed for substantiation of the project’s cost basis. The results were consistent with the findings in my report.

Please be aware that this program will expire at the end of this year, unless Congress extends it, so don't delay in applying or encouraging your clients to apply! It's an excellent program for helping to fund renewable energy projects, and the requirements are relatively straightforward. Also note that the deadline for starting construction on Section 1603 grant property is December 31, 2011.

For more information:
 

Agreed-Upon Procedures (AUP) engagements 
http://garykrupacpa.com/commercial.html#other_attest 

Alternative energy grants
http://garykrupacpa.com/solar.html#alt_energy

The U.S. Treasury Department’s Section 1603 Program
http://www.treasury.gov/initiatives/recovery/Pages/1603.aspx