Year 16 – 2003 – Accounts Receivable

It was beginning to almost become routine – get data, perform analysis, identify significant results, make recommendations and, often, transfer the analysis jobs to management for continuous monitoring.  This doesn’t mean that there were problems: obtaining the data, persuading audit teams to use analysis, and sometimes convincing management to address the control problems.  It was a challenge and it kept the job interesting.

I was also performing consulting from time to time.  This year I was asked to assist an audit team in a retail company with branches across the country.  The company was having cash flow problems and the Vice President of Finance had questions about the efficiency of the accounts receivable department. I explained that an aging of the A/R transactions in ACL would quickly identify all invoices that were past the due date by 30, 60, 90 days, or any cut-off point he chose to specify.  We performed that analysis and confirmed the Vice President’s concerns, but the team leader decided to take the analysis a step further and calculate the average time each account was past due for each branch office.  Again, this was easy to do using the break field on the AGE command. In addition, he calculated the carrying cost associated with borrowing money to finance the shortfall in revenues.

This analysis determined that accounts at some branches were past due well beyond 60 days.  The office in New York appeared to be the main source of late payments, in fact, a large invoice was 179 days past due.  A review of the New York office identified inefficiencies resulting in long delays in cashing checks received.

New York  Accounts Receivable
Days           Number     % of              % of            Carrying
Overdue                         Number       Amount           Cost
0  >  29           981          51.58%         26.07%       103,430.06
30  >  59          602          31.58%        21.53%          85,428.58
60  >  89          110           5.79%           5.61%          22,259.33
90  > 120         190         10.00%         10.81%          42,873.09
> 120                  21           1.05%         35.97%        142,712.17
                      1,904      100.00%       100.00%        396,703.23  
The St. Louis office also had several accounts that were past due by more than 200 days, but their transactions presented another problem as well.  The aged analysis identified 50 transactions that would not even be due for more than 100 days from the auditor selected cut-off date.  This was a possible symptom of fraud – kickback from vendors in exchange for favorable credit terms.  A detailed analysis by A/R clerk determined that all of these transactions were processed by the same clerk, and were with only two firms.  When presented with the analysis, the clerk admitted to accepting money from the firms in exchange for extending the due date.

The clerk at the St Louis office was fired for accepting kickbacks, and after New York implemented the audit recommendations their carrying charges were reduced by almost 60 percent in the first year, and a further 18 percent the next year.  The savings in the first year more than paid for the audit costs and additional savings continued to be realized in future years.

Rich Lanza, a long time friend and ACL user, will tell you about the numerous times he has found hundreds of thousands in saving in various industries.  In particular, I remember him telling me about a hospital that was having serious cash flow problems and his simply aging report identified delinquent accounts.


Lessons-Learned:  Any area where there is money moving between customer/vendors – even employees – and the company present opportunities for fraud.  This includes: accounts receivable, accounts payable, contracting, travel expenses and payroll.  Fraud has three basic steps: commit, conceal and convert.   There needs to be a deliberate effort to commit the fraud – not simply an accidental act.  However, many frauds start with an accidental act that passes through the controls undetected.  Concealing the fraud can be simple or involve elaborate schemes.  I worked on one fraud where the fraudster hired a reputable firm to produce and submit invoices based on what were falsified contracts and deliverables.  Lastly, the fraudster must be able to convert the act to achieve a benefit.  This is much easier to do when cash is involved at the outset.

On a personal note, I think A/R is a problem for many businesses – small and large.  But it is not just late payments; sometimes it is the company’s A/R function that is at fault.  For example, a few years back I contracted with a firm to have my driveway cleared of snow for the winter.  I signed the contract in late August and included a cheque dated November 12th.  Snow started early and my driveway had been cleared six times before the end of December.  In February I was updating my bank statement and notice that the cheque for snow removal had not been cashed so I called them.  Yes, they had my cheque, and would be cashing it soon was the reply.  I couldn’t believe it – a company with huge expenses (salary for drivers, tractors, gas, etc.) and they had not cashed the cheques three months into operations. Since then I have been tracking the time it takes for cheques to clear – many companies need to do a better job in A/R operations.

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