Avoiding Five of the Most Common Government Audit Findings
Is Your Entity Making These Common Mistakes?
Nobody is perfect. Add the complexities of government rules and regulations and you have a recipe for mistakes. Entities subject to government audits, such as government agencies and contractors, commercial entities, and not-for-profits, make a variety of mistakes that result in questioned costs and control deficiencies being flagged within audit reports. Here are five of the most common audit findings, and how you may avoid issues:
- Meals & Entertainment Costs
- Air Travel
- Proof of Payment
Timecards, whether manual or electronic, should have evidence of employee and supervisor approvals. When circumstances prevent an employee from signing timecards in a timely manner, and that timecard is signed by another authorized individual, the timecard should be resigned by the employee as soon as possible. Failing to do so could result in a control deficiency in an audit.
Additionally, timecards should include sufficient description of the work being performed for the auditor to determine the work is reasonable, allocable, and allowable per the terms of the contract and all applicable government rules and regulations. Timecards that only provide the hours and project code, generally do not provide sufficient support for the auditor to be able to determine that time incurred was for services in compliance with the statement of work and other federal regulations.
In general, work performed by a subcontractor is subject to the same rules, regulations, and contractual requirements as if the prime had done the work itself. Questioned costs commonly result from use of subcontractor labor where there is a failure to maintain supporting documentation that sufficiently documents the job title of the subcontractor’s personnel, the rate charged (including any indirect cost burdens), a breakdown of hours charged, and a detailed description of the services provided. All this information is required for the auditor to determine compliance (with contractually agreed-upon rates, statements of work, etc.) and allowability of subcontractor costs.
Employees frequently submit reimbursement claims for meals and entertainment after travelling for business purposes. Auditors need to see detailed receipts for these expenses to determine that costs were reasonable, allocable, and allowable per Federal Acquisition Regulation and other applicable rules and regulations. Without itemized receipts, the auditor is incapable of determining whether any of those costs were expressly unallowable (e.g. for alcohol) and may call into question the entire amount claimed. Similarly, when meals & entertainment for several individuals is paid through a single tab, it is a best practice to note in the description the name of all individuals involved.
When applying GSA per diem rates for meals and incidental expenses (instead of reimbursing actual costs), mistakes are commonly made in properly reducing the allowable daily rates for first and last days of travel as well as for government-provided meals. Detailed per diem rates can be looked up at any time through the gsa.gov website.
For tax purposes, the IRS requires businesses to maintain documentary evidence for all travel, meals, and entertainment over $75. It is a best practice to align your financial reporting and tax reporting documentation thresholds to allow for compliance with both sets of requirements without creating unnecessary administrative burden.
Federal Acquisition Regulation prohibits airfare costs more than the lowest priced airfare available to the entity during normal business hours, except in certain situations such as when such accommodations require circuitous routing, require travel during unreasonable hours, excessively prolong travel, etc. The burden of proof falls to the entity, requiring documentation be kept to substantiate lowest cost was obtained and/or the circumstances that required use of one of the accepted exceptions.
Furthermore, the Fly America Act requires federal travelers to use United States air carrier service for all air travel and cargo transportation services funded by the U.S. Government. Use of an unallowable carrier can quickly result in large questioned costs in an audit.
The government requires proof of payment for all costs claimed for reimbursement to ensure costs were incurred and that reimbursement is not being made for cancelled purchase orders. It is a common misconception that invoices, purchase orders, or even cash disbursement reports, fulfill the proof of payment requirements. Returned check copies, bank statements, EFT confirmations, and other such documents are acceptable forms of proof of payment that should be maintained for all purchases.
For more information on how to avoid common governmental audit mistakes, please contact:
Alexander Ng , CPA, PMP
Manager, Government Services
Government and Public Sector
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.