Thursday, October 14, 2010

What To Do About Data Holes

The term "data hole' is used to describe financial information for which supporting documentation is no longer available. Missing invoices, misplaced time cards, or electronic media that's been wiped out are all examples of data holes. Sometimes data holes can be patched with duplicate sources. Often times, not. The older the information, the less likely it will be to plug those holes. This is no small matter as Government auditors are significantly in arrears in completing required incurred cost reviews. The existence of data holes is nothing new - they've existed forever and affect both small and large companies alike. One would expect that with electronic media that the incidences of missing data would diminish but that is not the current trajectory.

When it comes to financial reporting, data holes are often glossed over without so much as a mention. If a contractor is making monthly payments to lease some equipment and can locate all but one of the monthly invoices but all twelve cancelled checks, a CPA will reasonably conclude that the payment was made. The CPA can review subsequent invoices and see that there are no delinquencies on the account and gain reasonable assurance that the cancelled check did indeed represent the monthly lease payment.

That's not necessarily the case for a Government auditor. A Government auditor must contend with the provisions of FAR 31.201-2(d) which states:
A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported.
The Government's position is that the contractor bears the burden of documenting its costs. If it cannot do so, then it has failed to meet its burden and the costs are unallowable. Auditors who take such a strict interpretation in all cases, such as the lease payment example mentioned above, have abandoned a key element of auditing, that being "judgment". But, these situations are happening with increasing frequency and will ultimately lead to unnecessary disputes.

Tomorrow we will look at some steps that contractors can take proactively when it discovers data holes in its books and records.

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