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How to Avoid Some of the Most Common (and Expensive) Findings from an IG or State Audit

(Boston, MA – October 16, 2011) An audit by a federal IG (Inspector General) staff or any government audit is under the best of circumstances a disruption to your agency’s operations – sometimes for months – and cause for concern. Even the most assiduous amongst us make innocent mistakes (or incorrect interpretations), and the thought of having to return money spent with good intentions is not pleasant.

To be forewarned is to be forearmed, so here are some tips gleaned from recent audit reports and personal experience.

1. Internal Controls. Audit Reports always, always mention the agency’s internal control system. While the auditors aren’t there to assess it step by step, it’s the first thing they look at. If you don’t have a procedures manual, or haven’t updated it in years, the auditors start out with some cynicism. And don’t forget that the auditors are likely to interview employees. I had one veteran administrator say she didn’t even know there was a procedures manual she was supposed to follow.

2. Payroll. Audit Reports almost always have a finding relating to payroll distribution. Payroll distribution generally starts with time sheets and ends at the general ledger. If your employees fill out time sheets based on their budgeted percentages of time to each project – rather than actual time – you’re in trouble. And if an interviewee says, “I don’t charge much time to that project because it doesn’t have enough funding,” your problems just multiplied.

3. Occupancy Costs. Occupancy costs are always closely examined and the allocation methodology questioned. It’s important to have a simple, written, well thought out methodology. The methodology can be somewhat general and multiple choice for different situations to maximize flexibility, but if it appears that you were somehow charging the programs based on the funding availability, the consequences can be severe. Important to keep in mind is that every single project at every single location needs to have an occupancy cost or documentation that it is infinitesimal. Without documentation, the auditors will have no basis to agree with you and it becomes an issue which will cost you money. If you acquire a new program mid-year, be sure to re-do your occupancy allocation to include the new program. Some agencies recalculate monthly.

4. Inventory. Equipment purchases generally require pre-acquisition “special” approval and post-acquisition proof that it is “inventoried.” It’s a simple task to comply, but paying back thousands of dollars for lack of perhaps five minutes’ effort will sting.

5. Attitude. While this term is never used per se in reports, some reports reek of “bad attitude” by the agency under audit. If you have made a mistake, admit to it and think creatively about how to minimize the impact. If you insist that you’re right in spite of the facts or if you make up an implausible rationale and repeat it ad nauseam, you will only extend the length of the audit disruption and lose credibility in areas where you could have reached a compromise solution. The auditors are generally just trying to do their jobs objectively, not trying to play “gotcha”, so antagonizing them with an “above the law” attitude is not a wise path.

NPA Consultants

NPA Consultants are specialists in Policies, Procedures, Internal Controls and Financial Reporting. We help accounting departments run “better, faster, cheaper,” and Boards of Directors/senior managements insure that they are performing their fiduciary duties at the highest possible level. We are also happy to answer any questions. Contact us at info@NPAccountants.org or 617 694 4600.

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