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FRAUD INDICATORS Part 3 Indirect Costs

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In this article, we review several specific areas on indirect cost fraud indicators. As you review them, you will notice that once again, the allowability and reasonableness of an indirect cost is a factor considered in fraud. In addition, supporting documentation is very important. That is why I focus on FAR Part 31 and the basics of cost and pricing in government contracting. It is the foundational basics that must be strong. Otherwise, one is building the firm, and future, on a shaky foundation. An indirect cost is any cost that is not directly identified with a single final cost objective, but is identified with two or more final cost objectives or an intermediate cost objective. Indirect costs are incurred as a result of business decisions made at all levels of management. Those decisions may be based on established policies or may be a managers choice among several options for achieving an objective. To be allowable, indirect costs must be allowable according to FAR, allocable to the contract, and reasonable. Lets review three selected Fraud Areas for indirect costs: 1. Transfer of costs, 2. Sensitive Accounts, and 3. Certification of Indirect Costs. 1. Transfers of costs are always suspect. The auditor is looking for a sufficient explanation for transfers and may expand the scope of audit to adequately review and evaluate the contractors rationale. In most cases, the auditor cannot accept the contractors explanation without some additional audit work. At major contractor locations, (most of you are non-major contractors), the auditor should review the adjusting journal entries on a monthly basis and pay special attention to cost transfers. The auditor must also be skeptical when costs are transferred between contract line items. Some contracts include different types of reimbursements or fundings. The auditor will try to determine the nature of the work orders/charge numbers involved in the transfers and determine what motive the contractor would have for the cost transfers. That is not to say most transfers are unacceptable


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