Friday, October 15, 2010

How to "Plug" Data Holes

"Data Hole" is a term used to describe financial information for which source documentation is missing. This could be a vendor invoice, a timecard, electronic media, or any of a host of other source documents. Data Holes are seemingly unavoidable and occur within any organization, regardless of size. Yesterday we discussed how Government auditor's might view claimed costs for which there is no tangible supporting documentation. Government auditors have different objectives and lower materiality thresholds than would your IPA (Independent Public Accountant) auditing your financial statements. They also have FAR 31.201-2(d) to buoy their case. See yesterday's post for further discussion. Today we want to provide some tips for dealing with the absence of supporting documentation.

First, you need to know where your "data holes" are. In preparing for an audit, you need to take inventory of what is likely to be requested by the auditor and ensure that it is complete, up-to-date, and accurate. It is usually unsettling when you cannot find data that has been requested.

Once you know your data holes, you can begin developing alternative documentation that might satisfy the reasonableness test. Reasonableness is very subjective however and even Government auditors will disagree on what constitutes reasonable support under the circumstances.  Whether the Government auditor will accept your alternative supporting documentation is problematic but you need to be looking ahead to possible appeal processes. You can always appeal to the contracting officer and if the costs are significant enough, you can appeal to the ASBCA or higher courts.

Here's an illustration of alternative documentation that might satisfy the reasonableness test. Suppose that one timecard for one employee for one pay period is missing. How do you satisfy the auditor that hours charged to a Government contract by that employee for that pay period was actually worked? You could produce a leave and earnings schedule to show that person did not take vacation, sick or holiday leave. You could peruse travel documentation to show that employee was not traveling somewhere. If you have timeclocks, you can show in and out times. If the incidence was fairly recent, you could have other employees and his supervisor prepare written statements. You could refer to email traffic and note whether he/she sent email during that week related to the Government contract. If he/she were a manufacturing person, there might be travelers, work authorizations, or other documentation that required signatures/initials and dates. Phone records might help.

Now, you might conclude that this is a lot of nonsense for one timecard. You might be tempted just to write the cost off rather than go through the process of generating alternative support. And you might be right. A cost benefit analysis is a good step. However, keep in mind that auditors do not perform 100% reviews of all transactions. They sample items and project the results of the sample to the entire universe. So, a seemingly minor cost can result in significant questioned costs.

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