(Editor’s Note. Auditing advertising and public relations costs represent likely areas for audit scrutiny. This category of expense often represents significant dollar amounts and since they are often considered "expressly unallowable" often include penalty provisions. The regulations covering "public relations" costs is an example of one of the cost principles that can be subject to many interpretations. FAR 31.205-1 defines public relations costs as functions and activities dedicated to enhancing an organization’s image or products and maintaining or promoting favorable relations with the public and intends for such costs to be unallowable. But the same regulation makes certain public relations costs allowable so disputes will arise on whether a given transaction is an unallowable public relations expense or meets one of the many allowable activities. Below is a summary "case study" of a response our consulting group made to a DCAA draft audit report that questioned certain vendor charges as unallowable advertising and public relations expenses. The client is a large engineering firm and we will refer to it as "Contractor.")

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