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2.2Administrative Charges and Interest

2.2.1Administrative 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.

2.2.2Interest

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.

2.3Writing off Accounts Receivable

2.3.1Approval 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.

2.3.2Authorization 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.

2.3.3Financial 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.