We are not allowed to have overtime at work. If an employee punches out late and then fills out an exception report to change the time to their scheduled time to punch out, is this legal? :)

It's not illegal as such. However, it is ultimately the employer's legal responsibility to keep accurate records of ALL time worked (authorized or not) and pay the employees accordingly. The employee can, however, be disciplined for working unauthorized overtime and for trying to get the company to falsify time records.

http://www.dol.gov/esa/whd/regs/compliance/whdfs23.pdf

Overtime Pay May Not Be Waived: The overtime requirement may not be waived by agreement between the employer and employees. An agreement that only 8 hours a day or only 40 hours a week will be counted as working time also fails the test of FLSA compliance. An announcement by the employer that no overtime work will be permitted, or that overtime work will not be paid for unless authorized in advance, also will not impair the employee's right to compensation for compensable overtime hours that are worked.

It depends on why the employee punched out late. If he punched out late because he worked late, and the employer altered the time records to avoid paying overtime for that additional time worked, then it's a violation of the Fair Labor Standards Act ("FLSA") and the employee can recover overtime damages. Employer alteration of time cards in this manner is also likely to result in a finding that they are willfully violating the FLSA without a good faith basis (which means the employee can recover unpaid overtime for the 3 years prior to the filing date, rather than 2 years, plus an equivalent amount as liquidated damages).

If, however, the employer is altering the time card because the employee delayed punching out after finishing work, then there's no violation of the FLSA (and the employee is subject to disciplinary action for failure to follow the company's clock-in/clock-out procedures).