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Audit of Accounts Receivable

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2 Findings and Recommendations

2.1 Recovery of Debts

2.1.1 Collection Actions

The Treasury Board of Canada Secretariat Policy on Receivables Management  stipulates that departments must vigorously pursue the collection of receivables. These measures must be appropriate, timely and cost-effective. The results of the audit reveal that the Department does not seem to be fully compliant with this requirement.

Monthly account statements are generated and are sent to all clients who have unpaid balances with the Department. These account statements are generated during the first three months following the original invoice.

When the balance is still outstanding after 90 days, the procedure that is followed varies from one accounting office to another. For example, some offices do a direct follow-up with the debtor, while other offices contact the managers to inform them of the delay in payment. Other offices have not developed any clear procedures for follow-up.

The accounting offices mentioned that they would like to receive more information about the methods of collection available to them, especially for debts outstanding for more than 90 days. For example, at what point should the services of a collection agency be used, and beginning at what amount? Some accounting offices would also like to have better definition of the roles and responsibilities of accounting office employees and those of the managers—in particular of who is responsible for collecting sums receivables—in order to ensure that effective follow-up is done.

There is a significant lack of follow-up both within the regional accounting offices and in Departmental Accounting. The lack of vigorous action on collections increases the risk that receivables owed to the Department will not be recovered. Although some of these debts are relatively small, they are receivables due to the Department and should be collected, failing which they should be written off.

2.1.2 Value of Sums to be Recovered

At the time of writing, the balance of external accounts receivable3 was $2.2 million. Of that amount, accounts receivable totalling $521,000 were more than 365 days past due. Close to 86% of accounts that have been overdue for more than a year are for less than $500. In addition, in 62% of cases, the amount in suspense accounts consisted solely of accumulated interest. Steps should have been taken earlier to collect these debts or to write them off.

Table 4. Breakdown of accounts receivable by due date

Number of days past due

Number of accounts

Number of accounts (%)

Amounts due (thousands of dollars)

Amounts due (%)

0 – 29

101

8.8

1 457

64.7

30 – 59

65

5.7

103

4.6

60 – 89

47

4.1

35

1.6

90 – 119

89

7.7

66

2.9

120 – 179

106

9.2

14

0.6

180 – 364

323

28.1

53

2.4

365 and over

419

36.4

521

23.2

Totals

1 150

100.0

2 249

100.0

Source: Data extracted from the Departmental financial system on February 6, 2009.

Recommendation

1. The Assistant Deputy Minister, Finance and Corporate Branch, should:

  • take the actions necessary to recover or write off the amounts over 365 days past due; and
  • ensure that guidelines are sent to the Department’s accounting offices concerning the management of amounts to be collected. Those guidelines should set out items such as:
    • the roles and responsibilities of the personnel responsible for collections (managers, accounting offices, Departmental Accounting); and
    • the methods of collection that are available and when to use them (standardize the process).

Management's Response

Management agreed with the recommendation and provided a detailed action plan to address it.

2.2 Administrative Charges and Interest

2.2.1 Administrative Charges

The Treasury Board of Canada Interest and Administrative Charges Regulations stipulate that if a payment is received in the form of a cheque that is not honoured by the bank because of insufficient funds (NSF cheque), an administrative charge of $15 applies.4 The results of the audit reveal that only one accounting office applied the administrative charge for NSF cheques between 2006 and 2009. The other accounting offices stated that they did not require such a charge, because they were not required to pay their banking institution any penalties.

Even though the number of NSF cheques received by the accounting offices seems to be small, the Department has not been following Treasury Board’s Interest and Administrative Charges Regulations. Requiring only some customers to pay administrative charges could also be interpreted as unfair practice.

The inconsistency and the non-compliance are the result of a lack of communication and of common procedures. The development and implementation of a department-wide procedure or guideline would help resolve this problem.

Recommendation

2. In order to recoup the costs arising from the processing of NSF cheques, the Assistant Deputy Minister, Finance and Corporate Branch, should ensure that all of the Department’s accounting offices invoice the administrative charges stipulated in the Treasury Board of Canada Interest and Administrative Charges Regulations.

Management's Response

Management agreed with the recommendation and provided a detailed action plan to address it.

2.2.2 Interest

In addition to administrative charges, the Department is required to charge interest on accounts that are more than 30 days past due. The rate of interest set out by the Treasury Board of Canada Secretariat is equivalent to the bank rate plus 3%. This rate is calculated on a monthly basis and the financial system is updated by Departmental Accounting before the account statements are generated by the accounting offices and sent to their customers.

The interest charges apply only to external accounts. Internal accounts are paid via the automated Interdepartmental Settlement System and are paid immediately.

Although the analysis of the accounts shows that, in general, all of the accounting offices charge interest, we noted that a large part of that interest is subsequently cancelled. For example, during the 2007–2008 fiscal year, 36% of the interest calculated by the system was subsequently cancelled; this represents almost $19,000. The amounts of interest cancelled were even higher during previous fiscal years. The reduction in the amount of interest that is cancelled could in part be explained by the new signing authorities instrument, which now gives the Director of Financial Policy and Operations the sole authority to approve write-offs of interest (see section 2.3.2 for more details).

There is nothing to indicate that these reductions in interest were not justified. In some cases, for example, reductions or cancellations were applied because the amounts in the suspense accounts were minimal (a few cents) or because there had been a delay between the receipt of payment and the deposit, delay for which the customer was not responsible. Nevertheless, improving the process by putting a minimum amount on which interest is calculated in the system, for example, could significantly reduce the number of cancellations that are needed and the extra work that they entail. That would help to increase the efficiency of the processes.

Recommendation

3. The Assistant Deputy Minister, Finance and Corporate Branch, should ensure that guidelines concerning the management of interest (charging and writing off) are sent to the Department’s accounting offices.

Management’s Response

Management agreed with the recommendation and provided a detailed action plan to address it.

2.3 Writing off Accounts Receivable

2.3.1 Approval and Monitoring of Write-offs

If an accounting office determines that, after consultation with the manager of the program in question, a debt is uncollectible, that debt should be written off from the Department’s accounts receivable immediately. All write-offs must be approved in accordance with the levels of authority required by the Environment Canada Delegation of Financial Signing Authorities.

To record a write-off in the financial system, the accounting offices must use the “adjustment” function in the account to be written off and then choose “write-off” as the adjustment type. This is the correct way to write off an account, but there are other ways that an account receivable can be reduced or written off in the financial system, either by means of another type of adjustment or a credit note.

This audit was therefore interested in the controls that have been put into place to prevent the use of these adjustments to write off an account without the required level of approval.

Write-Off by Means of an Adjustment

In the case of adjustments, the financial system provides a certain amount of control, inasmuch as there are limits on the amount of the adjustment allowed. These limits are set according to the type of user (sales, clerk or officer). The types of users are categorized according to the role and level of the employees involved in the management of accounts receivable. Access is authorized by the employee’s supervisor, the regional coordinator, the system administrator and the head of the module.

Table 5. Types of access to the accounts receivable module

Type of access

Employees

Adjustment limit

“Sales”

Employees in the programs (to generate invoices)

N/A

“Clerk”

Clerks in accounting offices

$500 

“Officer”

Supervisors in accounting offices

$2,000 

It is, however, possible to bypass these limits by recording a series of adjustments in the same account: each individual adjustment would be below the limit but the total of the adjustments would exceed the allowed limit. This method would make it possible to bypass the authorizations that would otherwise be required. During an examination of all adjustments entered between 2005 and 2009, the auditors found approximately 15 accounts for which a series of adjustments totalling more than $500 per account were entered. The total of these adjustments was approximately $20,000 and they were all entered in the 2005–2006 fiscal year.

Write-off Using a Credit Note

Credit notes are generally used to cancel an invoice completely and recreate it. They are used when errors on invoices are identified after they have been generated. Only those users with “clerk” level access can generate credit notes. Unlike adjustments, credit notes do not require any particular approval within the financial system, regardless of the amount. The total amount of credit notes entered during the 2007–2008 fiscal year (external customers only) was $2.6 million.

Employees in the accounting offices mentioned that when a credit note is created, all the supporting documentation must be included in the file. On the other hand, they also indicated that no periodic monitoring of credit notes is done. Departmental Accounting stated that it does not conduct any periodic checks of credit notes either.

Since the controls in the financial system are limited in scope and there is no monitoring of the reductions and cancellations that are entered, the audit concluded that there is limited control over the writing off of debts at Environment Canada. The Department’s accounting offices are required to respect the levels of approval as stipulated in the Delegation of Financial Signing Authorities, but no one ensures that the offices do so. If a request for approval is submitted, it will be examined and duly approved if substantiated, but amounts can be written off without any request for approval being submitted. In addition, the limits set in the financial system do not correspond to the limits set by the Environment Canada Delegation of Financial Signing Authorities.

The results of this audit do not make it possible to confirm that the required level of authorizations were obtained for all the write-offs before they were entered into the financial system. The lack of monitoring in this regard increases the risk of non-compliance.

2.3.2 Authorization for Writing off of Interest

The interviews with the staff in the accounting offices and the examination of the Environment Canada Delegation of Financial Signing Authorities revealed that the level of authority required to write off interest on debts is in some cases higher than the level of authority required to write off the debt itself. The approval of the Director of Financial Policy and Operations at headquarters is required to write off interest. On the other hand, a director or equivalent (level 4 operational authority) can approve a write-off of up to $200.

Sometimes, by the time approval is received to write off interest on an account receivable, the financial system has generated additional interest. This results in certain accounting offices allowing interest to accumulate (when the amount of interest is small) rather than attempting to have it written off.

2.3.3 Financial Coding Used for Write-offs

As stated by Departmental Accounting, cancellations of interest must be recorded along with write-offs of debts in the departmental financial statements. The analysis of the accounts and the interviews with the staff in the accounting offices show that the regional accounting offices do not all use the same financial coding to record interest that has been written off. For example, all of the accounting offices use the line object for interest on overdue accounts receivable (recorded as decrease of income), except for one office, which instead uses the line object for allowance for bad debts, as should be done. The charges for write-offs presented in the financial statements therefore represent only those from a single accounting office. As a result, the amount of write-offs reported in the 2007–2008 financial statements was only $701. If all of the write-offs had been correctly reported, that amount would have been approximately $20,000.

This situation has arisen because of the absence of department-wide procedures and the lack of communication concerning the writing off of debts, including the coding to be used. The only accounting office that uses the correct financial coding for the writing off of interest is the one that sought clarification from Departmental Accounting. That information was not sent to the other accounting offices.

Recommendation

4. The Assistant Deputy Minister, Finance and Corporate Branch, should:

  • ensure that the guidelines concerning the writing off of debts, including the writing off of interest, are sent to the Department’s accounting offices;

  • ensure that regular monitoring of the many adjustments and of credit notes is carried out to ensure that the write-offs are approved in accordance with the Environment Canada delegation instrument; and

  • suggest a modification to the Environment Canada Delegation of Financial Signing Authorities in order to change the level of authorization required for the writing off of interest so that the efficiency of the process may be improved.

Management's Response

Management agreed with the recommendation and provided a detailed action plan to address it.

2.4 Financial System

2.4.1 Accessibility to the Accounts Receivable Module

Specialists in the financial system accounts receivable module were interviewed to find out more about the various types of access to the module and the controls in place to limit access to the system to those employees who use the system as a normal part of their duties.

In 2008, 176 users had access to the accounts receivable module; 950 users had access to the financial system in general.5

Although access to the accounts receivable module is restricted, there seems to be a lack of follow-up when employees leave: access does not seem to be withdrawn as individuals leave the unit. Thus, when the systems group carries out its annual review of active user accounts by sending a list of users to the accounting offices, several accounts need to be closed. Access should be withdrawn as soon as the employee separation clearance form, which employees must fill out and submit when they leave, is received. However, the systems group does not receive the employee separation clearance forms, either because the forms are not sent or because the other sections of the Finance Directorate that receive the forms have not been notified that they must share the information with the systems group. Steps should be taken to ensure that the information is sent to the systems group when the form has been received at Finance, or a box should be added to the form indicating that a copy should be sent directly to the systems group.

Recommendation

5. The Assistant Deputy Minister, Finance and Corporate Branch, should ensure that access to the accounts receivable module is limited to employees who require access to it during the normal course of their duties. Access should be reviewed regularly. The managers of the financial system should be promptly notified of the departure of any employee so that accounts can be deactivated in a timely manner.

Management's Response

Management agreed with the recommendation and provided a detailed action plan to address it.

2.4.2 Reconciliation of the Accounts Receivable Module with the General Ledger

The reconciliation of the accounts receivable module with the general ledger is an important control that ensures that all of the module’s transactions (receivables, revenue, bad debts, interest, etc.) have been recorded in the general ledger accounts. The general ledger accounts, not the module’s accounts, are used to generate the Department’s financial statements.

Interviews with specialists in Departmental Accounting revealed that the reconciliation of the accounts receivable module with the general ledger is not done on a regular basis. Reconciliation was done by Departmental Accounting in December 2006.

A journal entry of approximately $1.6 million was made during the 2006–2007 fiscal year to cancel the discrepancies that existed as at December 2006. Departmental Accounting provided a copy of the journal entry voucher, accompanied by details of the reconciliation that was done. The auditors compared that information with the information entered into the financial system.

If reconciliations had been done on a regular basis, the adjustments would have been entered during the fiscal years to which they applied. The financial statements of the fiscal years in question were therefore not complete.

At the time of writing, the auditors were informed that a new reconciliation was being done for the 2007–2008 fiscal year.

Members of Departmental Accounting have indicated that their short- and medium-term objective is to reconcile all the modules with the general ledger on a more regular basis; they also pointed out that this would have an impact on their workload. The accounting offices are currently not required to complete this reconciliation for their regions.

The regular and ongoing reconciliation of the module with the general ledger would make it possible to identify errors at their source and to make corrections as soon as they have been detected, i.e., during the accounting periods and fiscal years in question.

Discrepancies between the accounts receivable module and the general ledger have an impact not only on the revenues that appear in the financial statements but also on the budgets of the managers concerned.

Recommendation

6. In order to ensure that all the information contained in the accounts receivable module is posted correctly to the general ledger accounts, the Assistant Deputy Minister, Finance and Corporate Branch, should ensure that the information from the accounts receivable module is reconciled with the general ledger regularly and that all differences are documented, explained and corrected.

Management’s Response

Management agreed with the recommendation and provided a detailed action plan to address it.

2.5 Segregation of Duties

The Policy on Receivables Management stipulates that departments must set up a framework of internal controls for the administration of accounts receivables, including the appropriate division of duties relating to credit granting, collections, maintenance of accounting records, and handling and reconciling of money. The segregation of duties is a key control mechanism within organizations for the purpose of, among other things, reducing the risk of fraud.

The results of the audit show that the segregation of duties within the Department varies greatly from one accounting office to another. For example, in one office, the same employee is responsible for both entering deposits into the financial system and for the bank reconciliation. In another regional office, the same employee performs all the tasks related to receivables, from the creation of accounts to the deposits and bank reconciliation, including follow-up on amounts owing.

These breaches can be attributed both to a lack of departmental procedures and communication and to a lack of resources in some accounting offices. Errors or omissions could result, and they would not be detected. In those cases where resources are insufficient to ensure an adequate segregation of duties, alternative control measures could be put in place.

Recommendation

7. The Assistant Deputy Minister, Finance and Corporate Branch, should address the deficiencies in the segregation of duties in the accounting offices as soon as possible and ensure that all the managers responsible for accounts receivable are informed of this.

Management's Response

Management agreed with the recommendation and provided a detailed action plan to address it.

2.6 Recording Revenue in the Appropriate Fiscal Period

One of the generally accepted accounting principles is that income must be accounted for in the fiscal period to which it pertains, i.e., at the time that it is earned, not when it is received.

During the audit, it was noted that revenue that is generated with an important customer of the Department is recorded only when the funds are deposited. The employees responsible for invoicing indicated that they have used this process for a long time and that it reduces the time spent modifying invoices when corrections are required.

This method implies that two months of revenue at the beginning and at the end of the fiscal period are not accounted for in accordance with generally accepted accounting principles.

This method has an impact on the amount of receivables and the amount of revenue entered in the Department’s financial statements and an impact on the Department’s appropriations.

Recommendation

8. In order to comply with generally accepted accounting principles, the Assistant Deputy Minister, Finance and Corporate Branch, should ensure that all revenues are accounted for during the period in which they are earned.

Management's Response

Management agreed with the recommendation and provided a detailed action plan to address it.

2.7 Departmental Policies and Procedures

The Policy on Receivables Management requires departments to have a departmental credit policy for the management of accounts receivable, thereby making it possible to specify how Treasury Board Secretariat policy will be applied within the department.

There is currently no departmental policy on the management of accounts receivable or a full set of procedures. The development of such a policy, or at least of internal guidelines, is an important element in ensuring the proper management of accounts receivable within the Department.

Nevertheless, certain types of information are available. The Environment Canada Accounting Handbook (which is not up to date) deals with certain aspects of accounts receivable (deposits, interdepartmental settlements, NSF cheques, etc.) but does not define the roles and responsibilities of the personnel involved. In addition, because the information is dispersed throughout various sections of the handbook, the handbook is difficult to use.

There is also the MERLIN Accounts Receivable Training Guide. This guide is used by the accounting offices to train new employees and as a reference tool in their daily duties. However, the guide is limited to the processing of accounts receivable in the financial system. The concept of the management of accounts receivable should be considered in a wider context.

In addition, internal procedures have been developed by the accounting offices to respond to certain needs in terms of the management of accounts receivable. The level of detail and the extent of these internal procedures varies, however, from one accounting office to another.

In addition to clarifying and standardizing the practices to be followed in the management of accounts receivable, departmental procedures would facilitate the training of new employees in the accounting offices.


3 Internal accounts receivable are normally closed within a short timeframe, since transfers of funds between departments are done automatically.

4 Additional charges of $10 apply if a department is required to pay administrative charges to its banking institution for the processing of NSF cheques. Environment Canada does not currently have to pay any such charges.

5 Information taken from data provided by the Accounting Operations, Financial Policy and Systems Directorate.

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