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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 risks associated 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	Incorrect amounts 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 purpose of this audit was to ensure that Environment Canada’s accounts receivable are managed fairly, efficiently and effectively to recover such receivables and minimize the risk of loss. The audit objectives were to assess:

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  whether the framework of controls for the management of accounts receivable is appropriate; and
  
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  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 data analysis with a 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 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.

2.1.2Value 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:

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  take the actions necessary to recover or write off the amounts over 365 days past due; and
  

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  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:
  

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  the roles and responsibilities of the personnel responsible for collections (managers, accounting offices, Departmental Accounting); and
  
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  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.