Audit of the Accounts Receivable and Revenue Management Project (AU1004)

 

Reports 2011


AU1004

EXECUTIVE SUMMARY

Introduction

The Natural Resources Canada (NRCan) Risk-Based Audit Plan for 2009–2010 included an audit of accounts receivable and revenue management. In fiscal year 2008–2009, the Department recorded over $2.7B of revenue and $167 M of accounts receivable.Footnote 1 Receivables are core assets that involve millions of dollars annually and a wide range of transactions. Given this extensive scope, the sound management of receivables is significant to the government achieving its overall objective of responsible fiscal management.Footnote 2

Departmental Requirements

Since the implementation of the Financial Information StrategyFootnote 3 in 2001, Departments are required to record their revenues on an accrual accounting basis (i.e., when the sale of goods or the provision of services takes place) versus recording revenues on a cash basis (i.e., when the deposit is made).

The roles and responsibilities of the Department as they pertain to the management of accounts receivable include the requirement to:

  • classify, record and report accurately and promptly all receivables;
  • sustain efficient and effective collection practices; and
  • take action on a timely basis with respect to any write-off, remission, forgiveness or waiver of debts when they are not settled in full. Footnote 4

Accounts receivable (Canada Map Office (CMO) excluded) are recorded by using the Accounts Receivable Module in the Government Financial System (GFS).Footnote 5GFS is a computerized financial system that provides a single integrated system for transaction processing, expenditure control, financial management and reporting. CMO uses the Mapping Distribution & Invoicing System (MDIS) to record accounts receivable transactions. MDIS is a sales and inventory system that feeds into GFS on a daily basis

Departmental Risks

Based on the relatively high dollar value, accounts receivable and revenue management was described as a core financial management and reporting process in the Department’s Risk-Based Audit Plan 2009-2012. As a result, accounts receivable and revenue management was identified as an area of audit focus.

Audit Purpose and Objectives

The purpose of the audit was to assess the adequacy of key controls of the management control framework for accounts receivable and revenue management.

The objectives of this audit were to determine:

  • whether the management control framework is effectively designed and operating as intended; and
  • the degree to which the Department is in compliance with the applicable accounting regulations, policies and standards.

Applicable regulations, policies and standards include:

  1. NRCan Policies – Accounts Receivable and Collection Activities; Terms of Payments, Granting of Credit & Customer Accounts; Deletion of Debts;
  2. NRCan Accounting Standards – Revenue, Account Receivable and Deferred Revenue;
  3. Financial Information Strategy (FIS) – Accounting Standards and Procedures – Revenue, Accounts Receivable and Deferred Revenue – Procedures;
  4. Treasury Board (TB) Policies Policy on Receivables Management; Financial Information Strategy Accounting Manual; Guideline on Collection of Receivables; Interest and Administrative Charges Regulations; Policy on Allowances for Valuation of Assets and Liabilities; Revised Debt Write Off Regulations; Contracting Policy; and
  5. Treasury Board Secretariat (TBS) Directive – Directive on Receivable Management.
Audit Scope

The scope of this audit covered fiscal years 2007–2008 to 2009–2010 and excluded offshore revenues and Hibernia interest revenue. Offshore revenues were examined in 2009 under the Audit of Nova Scotia and Newfoundland Statutory Transfers. In addition, the scope of the audit did not include validating the terms and conditions of individual agreements.

Internal Audit Conclusion

Overall, NRCan needs to improve its management of accounts receivables. Enhanced controls over areas including the processing and authorisation of adjustments, collection practices, and debt write-offs are required to ensure a more efficient and effective accounts receivable process.

The Audit Branch recognizes that prior to the completion of the audit reporting phase, Corporate Management Services (CMSS) has developed and implemented stronger controls in key areas of the accounts receivable process. Examples of improvements include a new NRCan Directive on the Management of Accounts Receivable and an update of terms of reference and procedures for the Department Debt Write-off Review Committee.

The improved controls in recent months have led to a reduction of $2.0M in the accounts receivable balance. ($5.4 M at November 20, 2010 to $3.4M at February 28, 2011).

A summary of audit findings, recommendations, management responses and timing appear in the following textbox.

MANAGEMENT RESPONSE
Management agrees with the findings and recommendations of this audit. Management action will be implemented by June 30th, 2011.
Audit Findings Pg Recommendation Audit Risk Rating Management Response Timing

Classification, Recording and Reporting of Receivables

Overall, the audit found alignment between the policies of the Department and Treasury Board (TB) policies. The majority of invoices were substantiated with agreements or equivalent binding documents. However, the audit also found various instances in which TB and Departmental policies were not respected regarding:

  • credit limits;
  • terms of payment;
  • interest charges; and
  • revenue recognition.

 

4

1. FMB should clarify the Departmental policy on accounts receivable management within the following areas:

  1. credit limits; and
  2. terms of payment.
Minor

Management agrees with the finding.

1&2a.+b. FMB has clarified the Departmental policy on accounts receivable management.

A new NRCan Directive on Management of Accounts Receivable amalgamating two NRCan policy instruments: Terms of Payments, Granting of Credit and Customer Accounts, and Accounts Receivable and Collection Activities has been developed and will be submitted for ADM CMSS approval.

The new Directive clarifies the roles and responsibilities of major stakeholders with regard to the granting of credit and includes new responsibilities for sector ADMs to approve the granting of credit for all revenue contracts, and to provide sector recommendations when requested credit exceeds standard Departmental thresholds.

The ability to grant credit to customers with poor credit ratings has been removed.

1&2a.+b.
Implemented on
November 8, 2010

 

New Directive approved May 25, 2011

Communication will be done to reach NRCan employees affected by the improvements to the new NRCan Directive of Accounts Receivable and training will be provided as necessary.

Following the approval of the Directive.

On November 8, 2010 a communication was sent to NRCan Managers regarding the policy requirements for credit limits, terms of payment and interest charges.

1&2 a.+b. The above communication was also posted on the NRCan intranet on January 7, 2011.

1&2 a.+b.
Implemented on
January 7, 2011

2. FMB should circulate a communication bulletin to ensure Sectors are aware of policies regarding:
  1. terms of payment;
  2. interest charges; and
  3. revenue recognition.

2.b. Under the new Directive, the interest waiving tolerance amount for the Department has been reduced so that no interest will be charged when the customer’s account balance has been cleared before the interest posting and the accrued interest is less than $10 (was previously $25).

No supplementary collection actions for debts which are less than $5 will be pursued (was previously $25). These debts will be recommended for write-off once they are 90 days overdue. Both of these changes will align the Department with the Agriculture and Agri-Food Canada SAP configuration.

 

2.c. On September 21, 2010 FMB communicated with the Sector concerned in order to explain the requirement for revenue recognition of licensing fees. The Sector and FMB agreed on a process to record / recognize licensing revenue at fiscal year-end. On January 11, 2011, FMB communicated to the Sector again, as a reminder, the agreed upon requirements for revenue recognition for the current year-end.

2.c.
Implemented on
September 21, 2010 & January 11, 2011

Also, the Departmental year-end procedures will be expanded to address revenue recognition.

Implemented
February 2011

FMB’s Centre of Expertise (COE) has enhanced its Quality Review controls by asking to verify all Revenue Generating Agreements over $250K, prior to the signing of contracts through the issuance of a Directive on External Charging

Implemented, Dec 29, 2010

A Revenue Generation Working Group (RGWG) which includes Sector Business Development Office representation and functional experts meet regularly to share lessons learned, standardize and enhance tools and communicate best practices. Meets on a quarterly basis

Adjustments, Collection Practices and Write-offs

From the invoices issued in fiscal year 2008–2009 ($73M), excluding Hibernia interest, 96.8% ($71M) of accounts receivable were collected within the year. Only 3.2% ($2.3M) were outstanding as of March 31, 2009. However, the audit identified opportunities for improvement in the following stages of the accounts receivable life cycle:

  • adjustments (including authority and justification);
  • collection practices; and
  • the debt write-off process.

8

 

 

3. SSO should implement procedures and controls to:
  1. review and challenge the appropriateness of all adjustment requests by the Sectors and ensure these are appropriately approved, and
  2. improve the timely collection and write-off approval of receivables.

 

Management agrees with the finding.

3.a. As of December 31, 2010, SSO implemented, and posted on the NRCan intranet, procedures and controls for SSO personnel and Sector clients documenting the requirements for providing supporting documentation to SSO in regards to account receivable adjustment requests.

 


3.a.
Implemented on
December 31, 2010

3.b. As of December 31, 2010, SSO has improved the timely collection and write-off approval of receivables, by developing and posting on its internal SharePoint site an SSO procedure for debt collection escalation, including specific time frames for each collection action and record keeping requirements of all collection actions taken.

3.b.
Implemented on
December 31, 2010

3.c. As part of this procedure, SSO Financial Services will meet on a monthly basis to continuously monitor and review the aging accounts and take corrective measures in consultation with relevant Sectors as required.

3.c.
Implemented on
March 31, 2011 and then on-going

3.d. The Department Debt Write-off Review Committee’s Terms of Reference and procedures were updated in fiscal year 2010-2011. The Committee meets quarterly.

3.d.
Implemented September 2010 and then on-going

3.e. A new Departmental Debt Write-Off Directive has been developed which represents a complete re-write of the debt deletion policy instrument currently in place. Key changes include:

  • Clarify the purposes of writing off debts – to reduce costs of uncollectible receivables and to reflect the net realizable value of receivables;
  • Focus on debt write-offs, as the majority of debt deletions are write-offs and they can be approved at the Departmental level;
  • Highlight debt write-off requirements, including the debt write-off criteria, contained in the Debt Write-off Regulations, 1994;
  • Provide guidance on circumstances where the Department can write off debts which do not meet normal criteria;
  • Specify the requirements regarding documentation of collection efforts and debt write-off actions for audit purposes; and,
  • Specify the information requirements for submissions to the Departmental Debt Write-off Review Committee.

3.e.
New Directive to be submitted for approval.

4. FMB should review SSO procedures and controls to assess compliance with policy and monitor these procedures and controls to ensure they are working as intended.

 

4.a. By February 28, 2011, FMB will review and assess SSO procedures and controls against Treasury Board and Departmental financial policies. This timing will allow for adequate review and assessment, given that the new SSO procedures and controls in 3.a. were implemented as of December 31, 2010.

4.a.
On February 28, 2011, FMB provided comments to SSO on the outcome of its procedures and controls review
- Procedures updated April 2011

4.b. By June 30, 2011, FMB will monitor SSO procedures and controls in 3a for the last quarter of FY 2010-11 to ensure that they are working as intended. Given that the new SSO procedures and controls in 3.a. were implemented as of December 31, 2010, the June 30, 2011 timing will allow for an appropriate number of sample transactions (over the 3 month period of January–March 2011) to be extracted as part of the new on-going monitoring process.

4.b.
Will be Implemented on
June 30, 2011 and then on-going

4.c. The new NRCan Directive on Management of Accounts Receivable has clarified the roles and responsibilities of major stakeholders with regard to outstanding accounts receivable. Key changes include:

  • New responsibilities for the CFO to oversee the management of accounts receivable including collection activities, and to distribute monthly aging accounts receivable reports to sector ADMs.
  • New responsibilities for sector ADMs to provide justification when overdue accounts should not be sent to a Private Collection Agency, and to perform active monitoring of the outstanding accounts receivable on a monthly basis.

Starting May 2011 and on-going

Table of Contents


INTRODUCTION

Accounts receivable and revenue management are core financial management and reporting processes that constitute a significant level of materiality to the Department. According to the Department’s financial statements as at March 31, 2009, the Department earned $2.7B in revenues and had an accounts receivable balance of $167M.Footnote 6

Accounts receivables are classified as short-term receivables that are normally, but not necessarily, expected to be collected within one year, and may include trade and non-trade receivables. The former represents amounts owed by customers for goods sold and services rendered as part of normal business operations. The latter arises from a variety of transactions, including return on investments (dividends), interest income, and refunds of overpayments and recoveries.Footnote 7

Revenue is defined as the inflow of cash, receivables or other considerations arising in the course of ordinary activities of a government entity, normally from the sale of goods, the rendering of services or the earning of interest, royalties and dividends. It does not include borrowings, such as debenture proceeds or transfers from other funds, or repayments of loans, receivables, advances, etc.Footnote 8 In addition, fines and amortization of discounts of loans are also categories of revenue in the Department’s reported financial statements.

The Shared Services Office (SSO) Accounts Receivable (AR) Unit is responsible for monitoring and recovering receivables on behalf of the Department. Credit sales are generated at the Sector level, where most invoices are initiated. When business agreements have been reached, Sectors notify SSO and ask for a customer account to be set up, including the establishment of the customer’s credit limit, as applicable. Once the goods are sold and/ or the services rendered, an invoice is then issued, usually by the Sector according to the agreement or equivalent documents between the Department and the customer. Once invoices are issued through the Department’s financial system (Government Financial System (GFS)), an account receivable is generated simultaneously. It is at this point that the SSO AR Unit monitors the receivables and collections. Sectors are to report to the SSO AR Unit any changes in the status of receivables, and changes need to be approved by the appropriate authority. The SSO AR Unit is also responsible for receivables created in other legacy systems outside of GFS, such as the Mapping Distribution & Invoicing System (MDIS) used by the Canada Map Office (CMO).

AUDIT PURPOSE AND OBJECTIVES

The purpose of the audit was to assess the adequacy of key controls of the management control framework for accounts receivable and revenue management.

The objectives of this audit were to determine:

  • whether the management control framework is effectively designed and operating as intended; and
  • the degree to which the Department is in compliance with the applicable accounting regulations, policies and standards.

Applicable regulations, policies and standards include:

  1. NRCan Policies – Accounts Receivable and Collection Activities; Terms of Payments, Granting of Credit & Customer Accounts; Deletion of Debts;
  2. NRCan Accounting Standards – Revenue, Accounts Receivable and Deferred Revenue;
  3. Financial Information Strategy (FIS) – Accounting Standards and Procedures – Revenue, Accounts Receivable and Deferred Revenue – Procedures;
  4. Treasury Board (TB) Policies Policy on Receivables Management; Financial Information Strategy Accounting Manual; Guideline on Collection of Receivables; Interest and Administrative Charges Regulations; Policy on Allowances for Valuation of Assets and Liabilities; Revised Debt Write Off Regulations; Contracting Policy; and
  5. Treasury Board Secretariat (TBS) Directive – Directive on Receivable Management.
AUDIT SCOPE

The scope of the audit consisted of an examination of the processes, controls and supporting documentation from fiscal years 2007–2008 to 2009–2010. Offshore revenues, Hibernia interest payments and agreement validation were excluded from the audit scope, as offshore revenues was examined in 2009 under the Audit of Nova Scotia and Newfoundland Statutory Transfers, while the other areas are currently being reviewed separately by the Internal Audit Branch.

METHODOLOGY

The audit was conducted within the established parameters of the TB Policy on Internal Audit, as well as the prescribed standards of the Institute of Internal Auditors. A business-cycle approach was used to determine the level of compliance and effectiveness of procedures. The audit methodology consisted of

  • reviewing relevant documentation;
  • conducting interviews with management and staff;
  • questioning Sector Financial Providers (SFPs)Footnote 9;
  • conducting a gap analysis of Departmental versus TB policies;
  • identifying and assessing key risks associated with accounts receivable and revenue management; and
  • sampling accounts receivable transactions (net of exclusions listed above) between fiscal years 2007–2008 to 2009–2010 with a total population size of $177M;
    • conducting a detailed review of 200 randomly selected accounts receivable transactions (184 invoices greater than $1K and 16 invoices less than $1K, totalling $39.7M), as well as 15 CMO accounts receivable transactions ($2.8K); and
    • conducting a detailed review of a judgmental sample.Footnote 10

The audit findings have been rated according to their level of risk. Refer to Appendix A for more information on how the audit findings are rated.

CRITERIA

Audit criteria are reasonable standards of performance and control that were used by the Audit Branch to assess the adequacy of the Department’s accounts receivable and revenue management practices. The audit criteria were derived from Departmental and TB policies and procedures. Actual performance was assessed against the audit criteria, resulting in either a positive finding or the identification of an area for improvement. The audit criteria were reviewed by management prior to the commencement of the audit.

FINDINGS AND RECOMMENDATIONS

CLASSIFICATION, RECORDING AND REPORTING OF RECEIVABLES
Conclusion

Overall, the audit found alignment between the policies of the Department and TB. The majority of invoices were substantiated with agreements or equivalent binding documents. However, the audit also found various instances in which TB and Departmental policies were not respected regarding:

  • credit limits;
  • terms of payment;
  • interest charges; and
  • revenue recognition.
Risk and Impact
Risk Type Audit Risk Rating Impact
Compliance Risk Minor Risk of non-compliance with the requirements of the Departmental policy may lead to the inaccurate classification, recording and reporting of revenue transactions and accounts receivable. It may also increase the number of receivables deemed uncollectible.
Observations
SUPPORTING DOCUMENTATION

According to the TB Policy on Receivables Management, Departments must establish a framework for internal controls, including the provision of supporting documentation “to track all claims from the transaction that gave rise to the debt to its final settlement.”Footnote 11 Without written supporting documentation regarding a customer’s acceptance of a business transaction prior to the delivery of a product/service, the Department is at risk in terms of collection as the customers could potentially deny the existence of the liability.

  • The audit team reviewed 200 invoices totalling $39.7M and found 183 invoices (or 91.5%), representing $39.5M, had on file the requisite contract, purchase order, service agreement or memorandum of understanding.
  • Six invoices, totalling $56K, had insufficient supporting documentation to support the business transaction. All six invoices involved business transactions with non-other government department (non-OGD) customers and had been paid.
  • The 11 remaining invoices, totalling $170K, were damaged because of a flood in the storage area of the Department’s archives section. As a result, the audit team could not determine if supporting documents existed. However, these 11 invoices were business transactions with other government departments (OGDs). Thus, the risk of incurring a bad debt was minimized.
CREDIT LIMIT

The TB Policy on Receivables Management stipulates that Departments are required to establish, through a Departmental credit policy, an acceptable level of credit risk.Footnote 12 The Departmental policy states that full credit is extended to OGDs, Crown corporations and agencies, provincial governments, other government-funded organizations, educational institutions, and major companies.Footnote 13 For all other customers (including non-OGDs), only 33% of the expected annual sales can be granted as a credit limit.Footnote 14 The policy also states that a credit limit greater than 33% of expected annual sales can be granted if justified by the appropriate manager.

Overall, the audit found that the credit limit policy does not clarify the definition of expected annual sales, how the amount should be determined and captured and by whom, or the justification for a management override.

Due to system limitations, the audit team was not able to review information on how customer credit limits were generated. This is due to the fact that many of the customer accounts within GFS were created many years ago and the corresponding information is not maintained within the system. To overcome this limitation, a questionnaire was distributed to Sector representatives to further understand how the credit limit is determined at the operational level. The results indicated that 55% of Sector representatives base a credit limit on the “full amount of a contract” or the “estimated total value of invoices”. Of the 200 invoices sampled, 90 invoices, totalling $2.7M, were generated by these Sector representatives and 47 of these invoices, totalling $1.8M, were overdue beyond 30 days. This approach increases the Department’s credit risk exposure. This is also contrary to the spirit of the TB Policy to “avoid, wherever possible, the creation of receivables”Footnote 15 and contrary to the new TB Directive “to minimize the amount of any potential receivable”.Footnote 16

TERMS OF PAYMENT

The Department’s internal policy states that where credit is extended, “the payment period shall be 30 days following the date of invoice.”Footnote 17 This will maximize the Department’s cash flow position while minimizing potential loss of interest revenue. An exception, approved by the Director General of the Financial Management Branch through email communication, was granted on May 26, 2008 to the CMO, allowing for terms of payment of 60 days.

The audit found 7 non-OGD/non-CMO customer invoices, totalling $150K, within the 200 invoice sample where the terms of payment exceeded 30 days and no documentation was found to support the granting of exceptions. Through interviews, the audit noted that payment terms are either extended based on the customer’s proposal or by giving foreign customers additional time to pay. As interest is automatically charged in GFS on the 31st day, SSO manually adjusts these entries to align with the extended terms.

Although internal policy also specifies that a United States dollar (USD) payment option is to be given to customers only in “exceptional cases”, the policy is unclear as to the process for documenting these exceptions. Between fiscal year 2007–2008 and 2009–2010, the Department recorded over $207K of foreign exchange losses. Without documenting the justifications to accept USD payments, the reasonableness of justification cannot be determined, which may potentially expose the Department to greater foreign exchange losses.

INTEREST FEE

According to the TB Interest and Administrative Charges Regulations, Departments must charge interest on amounts owed by non-OGDs (i.e., provincial/territorial governments, foreign governments and Crown corporations) that are more than 30 days past due, unless stated otherwise in an order, contract or arrangement. However, the audit determined that for 24 non-OGD invoices out of the 200 sampled, totalling $1.8M, the interest calculation had been manually blocked by those who created the invoices in GFS, constituting a potential interest revenue loss for the Department of approximately $7.3K. Sector representatives explained that interest was not charged to these customers as “it has been an old practice not to charge interest to these clients” or that it was their understanding that “interest should not be charged to provincial governments”.

REVENUE RECOGNITION

According to the Department’s Revenue, Accounts Receivables and Deferred Revenue – Standards and Procedures, measurable licensing revenues and receivables shall be accounted for in the period in which transactions occurred that gave rise to the revenues and receivables.Footnote 18 The audit found one instance, totalling $10K per year, in the 200 invoices sampled where measurable licensing revenues were not recorded in the period in which transactions occurred, and it was only recognized when payment was received. In this case, the licensing revenue was overdue by three years. Thus, revenue was not recorded until the fourth year and no receivable was recorded. At the time of the audit, the related program office had 15 valid licensing agreements with similar terms and conditions, resulting in a minimum annual royalty of $89.5K in 2010–2011. Financial Management Branch (FMB) has since reviewed the program’s licences billing process and agreed that the program will invoice any outstanding fixed amount before the end of the fiscal year to ensure these amounts are recorded in the proper period.

Recommendations
  1. FMB should clarify the Departmental policy on accounts receivable management within the following areas:
    1. credit limits; and
    2. terms of payment.
       
  2. FMB should circulate a communication bulletin to ensure Sectors are aware of policies regarding:
    1. terms of payment;
    2. interest charges; and
    3. revenue recognition.
Management Action Plan and Time Frame

Management agrees with the finding.

1&2a.+b. FMB has clarified the Departmental policy on accounts receivable management.

Timing: 1&2a.+b. Implemented on November 8, 2010

A new NRCan Directive on Management of Accounts Receivable amalgamating two NRCan policy instruments: Terms of Payments, Granting of Credit and Customer Accounts, and Accounts Receivable and Collection Activities has been developed and will be submitted for ADM CMSS approval.

The new Directive clarifies the roles and responsibilities of major stakeholders with regard to the granting of credit and includes new responsibilities for sector ADMs to approve the granting of credit for all revenue contracts, and to provide sector recommendations when requested credit exceeds standard Departmental thresholds.

Timing: New Directive approved on May 25, 2011

The ability to grant credit to customers with poor credit ratings has been removed.

Communication will be done to reach NRCan employees affected by the improvements to the new NRCan Directive of Accounts Receivable and training will be provided as necessary.

Timing: Following the approval of the Directive

On November 8, 2010 a communication was sent to NRCan Managers regarding the policy requirements for credit limits, terms of payment and interest charges.
1&2 a.+b. The above communication was also posted on the NRCan intranet on January 7, 2011.

Timing: 1&2 a.+b. Implemented on January 7, 2011

2.b. Under the new Directive, the interest waiving tolerance amount for the Department has been reduced so that no interest will be charged when the customer’s account balance has been cleared before the interest posting and the accrued interest is less than $10 (was previously $25).

No supplementary collection actions for debts which are less than $5 will be pursued (was previously $25). These debts will be recommended for write-off once they are 90 days overdue. Both of these changes will align the Department with the Agriculture and Agri-Food Canada SAP configuration.

2.c. On September 21, 2010 FMB communicated with the Sector concerned in order to explain the requirement for revenue recognition of licensing fees. The Sector and FMB agreed on a process to record / recognize licensing revenue at fiscal year-end. On January 11, 2011, FMB communicated to the Sector again, as a reminder, the agreed upon requirements for revenue recognition for the current year-end.

Timing: 2c. Implemented on September 21, 2010 & January 11, 2011

Also, the Departmental year-end procedures will be expanded to address revenue recognition.

Timing: Implemented February 2011

FMB’s Centre of Expertise (COE) has enhanced its Quality Review controls by asking to verify all Revenue Generating Agreements over $250K, prior to the signing of contracts through the issuance of a Directive on External Charging.

Timing: Implemented, Dec 29, 2010

A Revenue Generation Working Group (RGWG) which includes Sector Business Development Office representation and functional experts meet regularly to share lessons learned, standardize and enhance tools and communicate best practices.

Timing: Meets on a quarterly basis

ADJUSTMENTS, COLLECTION PRACTICES AND WRITE-OFFS
Conclusion

From the invoices issued in fiscal year 2008–2009 ($73M), excluding Hibernia interest, 96.8% ($71M) of accounts receivable were collected within the year.Footnote 19 Only 3.2% ($2.3M) were outstanding as of March 31, 2009. However, the audit identified opportunities for improvement in the following stages of the accounts receivable life cycle:

  • adjustments (including authority and justification);
  • collection practices; and
  • the debt write-off process.
Risk and Impact
Risk Type Audit Risk Rating Impact
Operations Risk Moderate Inefficient collection practices decrease the potential recovery of accounts receivable and may cause relationship problems with client organizations.
Monitoring Risk Moderate Lack of monitoring efforts on outstanding receivables may cause insufficient recoveries of accounts receivable and cause relationship problems with client organizations.
Reporting Risk Minor Inaccurate reduction of accounts receivable may lead to inaccurate and untimely financial information.
Observations
ADJUSTMENTS: AUTHORITY AND JUSTIFICATION

An adjustment made to an account receivable is an administrative action whereby a cancellation of an amount due occurs when a receivable is recorded in error or when the legitimacy of the receivable cannot be substantiated either by cancellation of the agreement or through the reduction of products or services delivered. According to the audit team’s examination of the GFS accounts receivable database, downward adjustments (i.e. reductions of accounts receivable, cancellation of invoices, interests waived or taxes reversals), totalling $2.8M were made out of $110.0M on the accounts receivable, created in FY 2008–2009.

Sectors inform the SSO AR Unit regarding adjustments and the SSO Supervisor then approves the adjustments and appoints SSO Unit staff to process the adjustment in the financial system (GFS). According to the Department’s accounts receivable internal policy, the Supervisor of the SSO AR Unit must approve adjustments to any accounts receivable.Footnote 20 However, at the time of the conduct phase, the audit found that adjustments were authorized by an individual who did not have the proper delegation of financial signing authority. In addition, the audit observed that one Division processed its own adjustments without having the approval of the SSO Supervisor. By the end of the conduct phase of the audit, corrective actions were initiated by SSO AR Unit and adjustments were being approved by the Manager of Accounting Operations, who had the appropriate delegated financial signing authority.

Through interviews, the SSO AR Unit confirmed to the Audit Branch that adjustments are executed based on the Sector’s requests and that no further questioning takes place prior to the processing of the adjustment in GFS. SSO AR Unit also noted that it does not receive or review any corresponding documents, such as contracts, prior to the reduction of the amount. The lack of an independent review of the Sector justification increases the risk that adjustments to accounts receivables could be inappropriate and not in accordance with the Departmental policy on debt write-offs. Footnote 21

According to the audit team’s review of adjustment transactions made between 2008-2009 and 2009-2010, 26 of the 5,238 downward adjustments (totaling $1.5M) were greater than $10K and were made more than 90 days after the issuance of the original invoice. Sixteen of these adjustments (totaling $753K) had reminder letters issued prior to the execution of the adjustments. Thirteen of these 16 adjustments were for reasons including amendments to payment schedule on contribution agreements and payments being credited to the Free Balance account and not directly to the outstanding invoices. The remaining three invoices (amounting to $20K, $14K and $220K, respectively) were cancelled as a result of a settlement action with the respective customer.

These invoices should have been considered as write-offs as per the Debt Write-off Regulations to reflect the fact the debt remaining after the agreement was not collectible.Footnote 22 In addition, the $220K invoice had no formal service agreement in place for the provision of services up to an estimated $1.9M. Actual services rendered totalled $500K; however, the program did not record this amount within GFS as an accounts receivable. Only the prepayment amount of $220K was recorded and cancelled. An invoice in the amount of $240K for settlement was re-issued and payment was received.

COLLECTION PRACTICES

According to the Detailed Accounts Receivable Aging Report By Invoice Number dated November 20, 2009, 37% ($2.0M) of accounts receivable had been outstanding for more than one year.

According to Departmental policy, reminder letters are to be sent at 60 and 90 days regarding overdue accounts.Footnote 23 Receivables are to be sent to collections at 120 days if they do not qualify as debts owed by OGDs, government agencies and organizations, foreign governments, debts under appeal or in litigations, or debts that can be easily recovered through set-offs or reducing future amounts of recurring payments.Footnote 24 From the 200 invoices examined, 30 invoices were overdue by 60 days or more when comparing the invoice date and the last date of payment/adjustment.

From the Detailed Accounts Receivable Aging Report By Invoice Number judgmental sample, comprised of 27 invoices and totalling $1.0M, eleven invoices were either not at the stage of being sent to a private collection agency (PCA) or with GFS status in bankruptcy or to be submitted for deletion. The remaining 16 of the 27 invoices, totalling $313K, were indicated in GFS as having been sent to PCA. However, all were sent beyond the required 120 day threshold, ranging from 165 days to 7 years.

Analyzing the effectiveness of PCA collection efforts for the last three fiscal years, only 5% (on average) of outstanding accounts receivables overdue for more than 365 days were sent to a PCA, with only a 0.14% recovery over the past three fiscal years.

According to Departmental policy, monthly reports are to be obtained from the PCAs and reconciled to Departmental records; these reports are also intended to use to monitor the operational performance of the PCAs.Footnote 25 Through interviews, the SSO AR Unit stated that no standards are used to ensure that receivables are sent to a PCA on a timely basis or to determine the length of time receivables should stay with a PCA. The SSO AR Unit also stated that once receivables are sent to a PCA, the SSO AR Unit does not actively monitor and communicate with the PCA on the status of the receivables.

The delay in sending accounts to a PCA and the insufficient monitoring of collection efforts may decrease the probability of the Department fully recovering its outstanding accounts receivable and may also have contributed to the existence of long overdue accounts.

Better collection practices such as performing sound credit checks and rigorous monitoring of outstanding receivables should assist NRCan in becoming a better performer and achieving the intent of the TB directive on Receivables management such as minimizing the receivable to the extent possible.

DEBT WRITE-OFF PROCESS

A debt write-off is an accounting action that applies primarily to uncollectible debts. It does not forgive the debt or release the debtor from the obligation to pay, nor does it affect the right of the Crown to enforce collection in the future. The audit identified that three write-offs reviewed for fiscal year 2009–2010 were not signed off by the Department’s Chief Financial Officer (CFO) prior to their write-off in GFS.

According to the Department’s policy, Legal Services is required to provide an opinion on any debt equal or greater than $300 where the collection efforts are unsuccessful.Footnote 26 Legal Services will determine the course of action. If the amount considered to be uncollectible exceeds $2KFootnote 27, the proposed write-off file must be reviewed and approved by the Department’s Debt Write-off Review Committee, which is chaired by the CFO. The CFO is responsible for granting the ultimate approval for debt write-offs over $2KFootnote 28 according to the Department’s Delegation of Financial Signing Authorities Instrument.

The audit noted that at its first official meeting on March 12, 2010, the Committee recommended the write-off of three files, totalling $932.5K, on condition of having the Sector’s Director General request the write-offs and provide a copy of the original contribution agreement for one of the files. This information was provided to the Committee between March 18 and April 6, 2010. The write-offs were recorded in the General Ledger on April 23, 2010 for fiscal year 2009–2010. Although the decision to recommend the write-offs was recorded in the minutes of the Committee meeting, these write-offs were not formally approved by the CFO. The Committee had its second official meeting on September 15, 2010 wherein it was agreed that subsequent write-offs will be formally approved by the CFO using the approved Recommendation to Write-off a Debt form.

Recommendations
  1. SSO should implement procedures and controls to:
    1. review and challenge the appropriateness of all adjustment requests by the Sectors and ensure these are appropriately approved; and
    2. improve the timely collection and write-off approval of receivables.
       
  2. FMB should review SSO procedures and controls to assess compliance with policy and monitor these procedures and controls to ensure they are working as intended.
Management Action Plan and Time Frame

Management agrees with the finding.

3.a. As of December 31, 2010, SSO implemented, and posted on the NRCan intranet, procedures and controls for SSO personnel and Sector clients documenting the requirements for providing supporting documentation to SSO in regards to account receivable adjustment requests.

Timing: 3a. Implemented on December 31, 2010

3.b. As of December 31, 2010, SSO has improved the timely collection and write-off approval of receivables, by developing and posting on its internal SharePoint site an SSO procedure for debt collection escalation, including specific time frames for each collection action and record keeping requirements of all collection actions taken.

Timing: 3b. Implemented on December 31, 2010

3.c. As part of this procedure, SSO Financial Services will meet on a monthly basis to continuously monitor and review the aging accounts and take corrective measures in consultation with relevant Sectors as required.

Timing: 3c. Implemented on March 31, 2011 and then on-going

3.d. The Department Debt Write-off Review Committee’s Terms of Reference and procedures were updated in fiscal year 2010-2011. The Committee meets quarterly.

Timing: 3d. Implemented September 2010 and then on-going

3.e. A new Departmental Debt Write-Off Directive has been developed which represents a complete re-write of the debt deletion policy instrument currently in place. Key changes include:

  • Clarify the purposes of writing off debts – to reduce costs of uncollectible receivables and to reflect the net realizable value of receivables;
  • Focus on debt write-offs, as the majority of debt deletions are write-offs and they can be approved at the Departmental level;
  • Highlight debt write-off requirements, including the debt write-off criteria, contained in the Debt Write-off Regulations, 1994;
  • Provide guidance on circumstances where the Department can write off debts which do not meet normal criteria;
  • Specify the requirements regarding documentation of collection efforts and debt write-off actions for audit purposes; and,
  • Specify the information requirements for submissions to the Departmental Debt Write-off Review Committee.

Timing: 3.e. New Directive to be submitted for approval.

4.a. By February 28, 2011, FMB will review and assess SSO procedures and controls against Treasury Board and Departmental financial policies. This timing will allow for adequate review and assessment, given that the new SSO procedures and controls in 3.a. were implemented as of December 31, 2010.

Timing: 4a. On February 28, 2011, FMB provided comments to SSO on the outcome of its procedures and controls review - Procedures updated April 2011

4.b. By June 30, 2011, FMB will monitor SSO procedures and controls in 3a for the last quarter of FY 2010-11 to ensure that they are working as intended. Given that the new SSO procedures and controls in 3.a. were implemented as of December 31, 2010, the June 30, 2011 timing will allow for an appropriate number of sample transactions (over the 3 month period of January–March 2011) to be extracted as part of the new on-going monitoring process.

Timing: 4b. Will be Implemented on June 30, 2011 and then on-going

4.c. The new NRCan Directive on Management of Accounts Receivable has clarified the roles and responsibilities of major stakeholders with regard to outstanding accounts receivable. Key changes include:

  • New responsibilities for the CFO to oversee the management of accounts receivable including collection activities, and to distribute monthly aging accounts receivable reports to sector ADMs.
  • New responsibilities for sector ADMs to provide justification when overdue accounts should not be sent to a Private Collection Agency, and to perform active monitoring of the outstanding accounts receivable on a monthly basis.

Timing: Starting May 2011 and on-going

APPENDIX A – STANDARD INTERNAL AUDIT OPINIONS AND STANDARD AUDIT RISK RATING

STANDARD INTERNAL AUDIT CONCLUSIONS

Our standard audit conclusions are as follows:

Operating Well: Key controls are effectively designed and operating as intended. Objectives of the audited process are likely to be achieved.

Opportunities Exist to Improve Controls: One or more key controls do not exist, are not designed properly or are not operating as intended. Objectives of the process may not be achieved. The financial/reputation impact to the audited process is more than inconsequential. Timely action is required.

Not Controlled: Multiple key controls do not exist, are not designed properly or are not operating as intended. Objectives of the process are unlikely to be achieved. The financial/reputation impact to the audited process is material. Action must follow immediately.

STANDARD RISK TYPES

Our standard risk types are classified based on the COSOFootnote 29 Internal Control-Integrated Framework as follows:

Strategy – High-level goals, aligned with and supporting the Department's mission.

Operations – Effective and efficient use of resources.

Monitoring – Accurate assessments or evaluation of activities.

Reporting – Reliability of operational and financial reporting.

Compliance – Compliance with applicable laws, regulations, policies and procedures.

STANDARD AUDIT RISK RATINGS

Audit findings are rated as follows:

Major: A key control does not exist, is poorly designed or is not operating as intended and the related risk is potentially significant. The objective to which the control relates is unlikely to be achieved. Corrective action is needed to ensure controls are cost effective and/or objectives are achieved.

Moderate: A key control does not exist, is poorly designed or is not operating as intended and the related risk is more than inconsequential. However, a compensating control exists. Corrective action is needed to avoid sole reliance on compensating controls and/or ensure controls are cost effective.

Minor: A weakness in the design and/or operation of a non-key process control. Ability to achieve process objectives is unlikely to be impacted. Corrective action is suggested to ensure controls are cost effective.