Audit of

Accounts Receivable

June 22, 2009

Audit Key Steps

Planning completed / August 2008
Field work completed / February 2009
Draft report completed and sent for management response / February 2009
Management response received / March 2009
Final report completed / April 2009
Report presented to the External Audit Advisory Committee / April 2009
Approved by the Deputy Minister / June 2009

Prepared by the Audit and Evaluation Team

Acknowledgments

The team responsible for this audit, comprised of Julie Clavet-Drolet, under the supervision of Bruno Pilotte and the direction of Jean Leclerc, would like to thank those individuals who contributed to this project, and particularly, employees who provided insights and comments as part of this audit.

Original signed by

______

Chief Audit Executive

Table of Contents

EXECUTIVE SUMMARY

1INTRODUCTION

1.1Context

1.2Analysis of Risks

1.3Objectives and Scope

1.4Methodology

2FINDINGS AND RECOMMENDATIONS

2.1Recovery of Debts

2.1.1Collection actions

2.1.2Value of Sums to be Recovered

2.2Administrative Charges and Interest

2.2.1Administrative Charges

2.2.2Interest

2.3Writing off Accounts Receivable

2.3.1Approval and Monitoring of Write-offs

2.3.2Authorization for Writing off of Interest

2.3.3Financial Coding Used for Write-offs

2.4Financial System

2.4.1Accessibility to the Accounts Receivable Module

2.4.2Reconciliation of the Accounts Receivable Module with the General Ledger

2.5Segregation of Duties

2.6Recording Revenue in the Appropriate Fiscal Period

2.7Departmental Policies and Procedures

3CONCLUSION

Annex 1 Audit Criteria

Annex 2 Authority Description

Audit of Accounts Receivable

EXECUTIVE SUMMARY

Context

In accordance with Environment Canada’s Risk-Based Audit and Evaluation Plan for 2008–2011, the Audit and Evaluation Branch conducted an auditthe accounts receivable.

The purpose of the audit was to ensure that Environment Canada’s accounts receivable are managed fairly, efficiently and effectively in orderto recover such receivables and minimize the risk of loss. With this in mind, the specific objectives of the audit were to evaluate the adequacy of the management control framework of accounts receivable as well as the degree to whichthe Department is incompliancewith the applicable accounting regulations, policies and standards.

During the initial planning of the audit, a risk analysis was conducted in order to identify, evaluate and prioritize the risks associated with the management of accounts receivable. The analysis was based upon an examination of the accounting regulations, policies, manuals and standards that govern the management of accounts receivable, on data analysis, and on the results of preliminary interviews with personnel considered key in the management of accounts receivable. The criteria and methods used in the audit were based on the identified risks.

Accounts receivable are divided into two categories: internal accounts (created for transactions with other federal departments or organizations) and external accounts (created for other types of clients). The audit dealt with both internal and external accounts receivable created during the 2007–2008 fiscal year and with accounts receivable as at April1, 2008.[1] On March 31, 2008, the balance of accounts receivable was $7.6 million, $3.3 million (43.4%) of which were with external parties.

The methodology used included data analysis, review of the relevant documentation, and interviews with specialists in accounts receivable.

Statement of Assurance

This audit has been conducted in accordance with the International Standards for the Professional Practice of Internal Auditing and the Policy on Internal Audit of the Treasury Board of Canada.

In our professional judgement, sufficient and appropriate audit procedures were completed and evidence gathered to support the accuracy of the conclusions reached and contained in this report. The conclusions are based on a comparison of the situations as they existed at the time of the audit withthe established criteria.

Summary of Findings

The main findings of the audit show that, in general, the Department’s accounts receivable are managed in accordance with the principles of due diligence and in compliance with the main requirements that govern them.

However, certain processes could benefit from further review in order to improve their efficiency, fairness and consistency. For example, the Delegation of Financial Signing Authorities could be modified in order to reduce the level of approval required for the writing off of interest. Currently, the approval of the Director of Financial Policy and Operationsis required to write off interest amounts that are often less than a dollar.

Guidelines should also be communicatedto accounting offices across the Department in order to standardize the accounts receivable management process. This subject is dealt with in greater detail in various sections of the report.

Certain controls should also be reviewed or reinstituted. For example, the definition of the roles and responsibilities of key personnel should be reviewed and documented, segregation of duties should be reintroduced in certain accounting offices, and regular monitoring at the end of fiscal periods and the fiscal year should be reinstituted.

Most of these items could be resolved with a reasonable amount of effort, commensurate with the anticipatedbenefits.

The review of the accounts receivable management process should be integrated into other initiatives in the Department, such as the evaluation of the state of preparedness of audit-ready departmental financial statements.

The following eight recommendations have been made to the Assistant Deputy Minister, Finance and Corporate Branch.

  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 main personnelresponsible for collections (managers, accounting offices, Departmental Accounting); and

-the methods of collection that are available and the when to use them (standardize the process).

  1. In order to recoup the costs arising from the processing of Not Sufficient Funds (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.
  2. 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.
  3. 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.
  1. 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.
  2. 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.
  3. 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.
  4. 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 agreed with all of the recommendations and provided a detailed action plan to address them.

Environment Canada1

Audit of Accounts Receivable

1INTRODUCTION

1.1Context

Accounts receivable are classified as currentassets of the Department and are generally created and recovered during the same fiscal period. They include trade accounts receivable(amounts owed by customers for goods or services rendered as part of normal business operations) and non-trade accounts receivable (amounts related to various transactions, such as interest income, refund of overpayments and recoveries).[2]

As shown in Table 1, on March 31, 2008, the balance of Environment Canada’s accounts receivable was $7.6 million. Accounts receivable from external parties (excluding those with other federal departments and organizations) accounted for$3.3 million of that amount.

Table 1 - Breakdown of accounts receivable as atMarch 31, 2008

Amount
(thousands of dollars) / %
External
Cash in Hands of Departments Awaiting Deposit to the Receiver General
Other revenue / 420
2,917 / 5.6
38.6
Internal
Goods and Services Tax andHarmonized Sales Tax / 2,459 / 32.5
Other Government Department / 1,762 / 23.3
Total / 7,558 / 100.0

Source: Departmental financial system

Close to $80 million were generated in revenue during the 2007–2008 fiscal year. Approximately half of that amount was generated by the Ontario Region. Table 2 shows the types of revenue.

Table 2 – Types of revenuefor the 2007-2008 fiscal year

Amount
(thousands of dollars) / %
Sales of Goods and Information Products / 43,561 / 54.40
Services of a Non-Regulatory Nature / 17,749 / 22.17
Services of a Regulatory Nature / 5,141 / 6.42
Lease and Use of Public Property / 4,615 / 5.76
Other revenues / 3,811 / 4.76
Revenue from Joint Project and Cost Sharing Agreements / 2,988 / 3.73
Environmental Damages Fund / 649 / 0.81
Rights and Privileges / 616 / 0.77
Gain on Disposal of Assetsand Foreign Exchange Valuations / 485 / 0.61
Found Assets Credited to Revenue / 411 / 0.51
Interest on Overdue Accounts Receivable(net of write offs and cancellations) / 33 / 0.04
Other Fees and Charges / 9 / 0.01
Fines / 3 / 0.00
Total / 79,794 / 100.00

Source: Departmental financial system

Departmental Requirements

The roles and responsibilities of Environment Canadaas they pertain to the management of accounts receivable are defined by the Treasury Board of Canada Secretariat Policy on Receivables Management. That policy stipulates that:

  • departments must ensure that all of the government’s receivables are managed fairly, efficiently and effectivelyto recover such receivables and minimize the loss of risk;
  • departments must charge interest on overdue accounts;
  • departments must take progressive collection actions, which include legal proceedings, if necessary; and
  • departments must take action on a timely basiswith respect to any write-off of debts when they are not settled in full.

In situations where the Department determines that a debt is uncollectible, it is responsible for writing off that debt, and it must comply with the levels of approval required by the Delegation of Financial Signing Authorities that it has set up. The write-offs must appear in the financial statements as expenses in the statement of operations.

Financial Information Strategy

Since the implementation of the Financial Information Strategy 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. Previously, departments recorded revenues on a cash basis, i.e., when the deposit was made.

Financial System

Accounts receivable are recordedin the accounts receivable module in the MERLIN financial system. The system is used for invoicing, monitoring suspense accounts, entering payments, adjustments and interest, and also for writing off debts, when necessary.

1.2Analysis of Risks

During the planning of the audit, a risk analysis was carried out to identify, evaluate and prioritize the risks associated with the management of accounts receivable. This analysis was based upon an examination of the accounting policies, manuals and standards that govern the management of accounts receivable and on an analysis of the data contained in the Department’s financial system. Key personnel in the management of accounts receivable were also interviewed.

The identified risks were then evaluated in terms of the probability of their becoming a reality and of their impact on the Department’s activities. As shown in Table 3, the risk evaluation activity did not reveal any high-level risks associated with the management of accounts receivable.

Table 3. Matrix of risksassociated with the management of accounts receivable

Low / Medium / High
Impact / High /
  • Problems with invoicing (delays, amounts)
/
  • Inadequate controls

Medium /
  • Unjustified or unauthorized write-offs
  • Ineffective collection measures

Low /
  • Inefficient management of deposits (delays, protection of assets)
  • Failure to comply with year-end procedures
/
  • Failure to charge interest on overdue accounts
  • Uncollectible debts not written off
/
  • Incorrectamounts for the allowance for uncollectible debts ($)

Probability

Annex 1 sets out the auditing criteria that were developed following the risk analysis.

1.3Objectives and Scope

The purposeof this audit was to ensure that Environment Canada’s accounts receivable are managed fairly, efficiently and effectivelyto recover such receivables and minimize the risk ofloss. The audit objectives were to assess:

  • whether the framework of controls for the management of accounts receivable is appropriate; and
  • the degree of the Department’s compliance with the applicable accounting regulations, policies and standards.

The audit dealt with internal accounts receivable (with other federal departments and organizations) and external accounts receivable created during the 2007–2008 fiscal year and with accounts receivable as at April 1, 2008. Other analyses were carried out on subsequent dates for specific requirements, as certain reports could not be produced retroactively.

1.4Methodology

In order to meet its objectives, this audit combined dataanalysis witha review of relevant documentation and interviews with various accounts receivable specialists.

Review of the Documentation

Although the management of accounts receivable is largely governed by the Treasury Board of Canada Secretariat Policy on Receivables Management, other regulations and policies are also directly involved. The list of documents that were consulted during the audit is attached in Annex 2.

Interviews

Interviews with specialists from Departmental Accounting, the regional accounting offices, and financial systems were conducted in order to identify and evaluate current practices, the controls that are in place, and the difficulties that are being encountered.

Data Analysis

The conclusions of the audit are also based on an analysis of data contained in the Department’s financial system. No review of files was conducted at the accounting offices. All of the transactions concerning accounts receivable for the 2007–2008 fiscal year were downloaded from the financial system so that an analysis using computer-assisted techniques and tools could be completed.

1.5Statement of Assurance

This audit has been conducted in accordance with the International Standards for the Professional Practice of Internal Auditing and the Policy on Internal Audit of the Treasury Board of Canada.

In our professional judgement, sufficient and appropriate audit procedures were completed and evidence gathered to support the accuracy of the conclusions reached and contained in this report. The conclusions are based on a comparison of the situations as they existed at the time of the audit with the established criteria.

2FINDINGS AND RECOMMENDATIONS

2.1Recovery of Debts

2.1.1Collection 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 oneaccounting 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 andshould be collected, failing which they should be written off.

2.1.2Value of Sums to be Recovered

At the time of writing, the balance of external accounts receivable[3] 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 systemon February 6, 2009.