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2.4Financial System

2.4.1Accessibility to the Accounts Receivable Module

Specialists in the financial system accounts receivable module were interviewed to find out more about the various types of access to the module and the controls in place to limit access to the system to those employees who use the system as a normal part of their duties.

In 2008, 176 users had access to the accounts receivable module; 950 users had access to the financial system in general.5

Although access to the accounts receivable module is restricted, there seems to be a lack of follow-up when employees leave: access does not seem to be withdrawn as individuals leave the unit. Thus, when the systems group carries out its annual review of active user accounts by sending a list of users to the accounting offices, several accounts need to be closed. Access should be withdrawn as soon as the employee separation clearance form, which employees must fill out and submit when they leave, is received. However, the systems group does not receive the employee separation clearance forms, either because the forms are not sent or because the other sections of the Finance Directorate that receive the forms have not been notified that they must share the information with the systems group. Steps should be taken to ensure that the information is sent to the systems group when the form has been received at Finance, or a box should be added to the form indicating that a copy should be sent directly to the systems group.



Recommendation
5. 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.

Management’s Response
Management agreed with the recommendation and provided a detailed action plan to address it.

2.4.2Reconciliation of the Accounts Receivable Module with the General Ledger

The reconciliation of the accounts receivable module with the general ledger is an important control that ensures that all of the module’s transactions (receivables, revenue, bad debts, interest, etc.) have been recorded in the general ledger accounts. The general ledger accounts, not the module’s accounts, are used to generate the Department’s financial statements.

Interviews with specialists in Departmental Accounting revealed that the reconciliation of the accounts receivable module with the general ledger is not done on a regular basis. Reconciliation was done by Departmental Accounting in December 2006.

A journal entry of approximately $1.6 million was made during the 2006–2007 fiscal year to cancel the discrepancies that existed as at December 2006. Departmental Accounting provided a copy of the journal entry voucher, accompanied by details of the reconciliation that was done. The auditors compared that information with the information entered into the financial system.

If reconciliations had been done on a regular basis, the adjustments would have been entered during the fiscal years to which they applied. The financial statements of the fiscal years in question were therefore not complete.

At the time of writing, the auditors were informed that a new reconciliation was being done for the 2007–2008 fiscal year.

Members of Departmental Accounting have indicated that their short- and medium-term objective is to reconcile all the modules with the general ledger on a more regular basis; they also pointed out that this would have an impact on their workload. The accounting offices are currently not required to complete this reconciliation for their regions.

The regular and ongoing reconciliation of the module with the general ledger would make it possible to identify errors at their source and to make corrections as soon as they have been detected, i.e., during the accounting periods and fiscal years in question.

Discrepancies between the accounts receivable module and the general ledger have an impact not only on the revenues that appear in the financial statements but also on the budgets of the managers concerned.

Recommendation
6. 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.
Management’s Response

Management agreed with the recommendation and provided a detailed action plan to address it.

2.5Segregation of Duties

The Policy on Receivables Management stipulates that departments must set up a framework of internal controls for the administration of accounts receivables, including the appropriate division of duties relating to credit granting, collections, maintenance of accounting records, and handling and reconciling of money. The segregation of duties is a key control mechanism within organizations for the purpose of, among other things, reducing the risk of fraud.

The results of the audit show that the segregation of duties within the Department varies greatly from one accounting office to another. For example, in one office, the same employee is responsible for both entering deposits into the financial system and for the bank reconciliation. In another regional office, the same employee performs all the tasks related to receivables, from the creation of accounts to the deposits and bank reconciliation, including follow-up on amounts owing.

These breaches can be attributed both to a lack of departmental procedures and communication and to a lack of resources in some accounting offices. Errors or omissions could result, and they would not be detected. In those cases where resources are insufficient to ensure an adequate segregation of duties, alternative control measures could be put in place.



Recommendation
7. 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.

Management’s Response
Management agreed with the recommendation and provided a detailed action plan to address it.

2.6Recording Revenue in the Appropriate Fiscal Period

One of the generally accepted accounting principles is that income must be accounted for in the fiscal period to which it pertains, i.e., at the time that it is earned, not when it is received.


During the audit, it was noted that revenue that is generated with an important customer of the Department is recorded only when the funds are deposited. The employees responsible for invoicing indicated that they have used this process for a long time and that it reduces the time spent modifying invoices when corrections are required.
This method implies that two months of revenue at the beginning and at the end of the fiscal period are not accounted for in accordance with generally accepted accounting principles.
This method has an impact on the amount of receivables and the amount of revenue entered in the Department’s financial statements and an impact on the Department’s appropriations.
Recommendation
8. 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’s Response
Management agreed with the recommendation and provided a detailed action plan to address it.

2.7Departmental Policies and Procedures

The Policy on Receivables Management requires departments to have a departmental credit policy for the management of accounts receivable, thereby making it possible to specify how Treasury Board Secretariat policy will be applied within the department.

There is currently no departmental policy on the management of accounts receivable or a full set of procedures. The development of such a policy, or at least of internal guidelines, is an important element in ensuring the proper management of accounts receivable within the Department.

Nevertheless, certain types of information are available. The Environment Canada Accounting Handbook (which is not up to date) deals with certain aspects of accounts receivable (deposits, interdepartmental settlements, NSF cheques, etc.) but does not define the roles and responsibilities of the personnel involved. In addition, because the information is dispersed throughout various sections of the handbook, the handbook is difficult to use.

There is also the MERLIN Accounts Receivable Training Guide. This guide is used by the accounting offices to train new employees and as a reference tool in their daily duties. However, the guide is limited to the processing of accounts receivable in the financial system. The concept of the management of accounts receivable should be considered in a wider context.

In addition, internal procedures have been developed by the accounting offices to respond to certain needs in terms of the management of accounts receivable. The level of detail and the extent of these internal procedures varies, however, from one accounting office to another.

In addition to clarifying and standardizing the practices to be followed in the management of accounts receivable, departmental procedures would facilitate the training of new employees in the accounting offices.

3CONCLUSION

The main purpose of this audit was to ensure that accounts receivable are being managed fairly, efficiently and effectively. In particular, it verified the control framework for the management of accounts receivable and the degree to which the Department is in compliance with applicable accounting regulations, policies and standards.

Audit criteria and techniques were developed in order to gather sufficient information on these subjects. The methodology used consisted primarily of interviews, data analysis, and a review of the relevant documentation.

The main observations show that, in general, the Department’s accounts receivable are managed in accordance with the principal policies, regulations and standards that govern them. However, the management framework for accounts receivable has certain gaps, and steps should be taken by management in order to improve its efficiency. Departmental Accounting should play a more active role in this regard.

The following measures could be put in place to improve the effectiveness and efficiency of the management of accounts receivable:


  • develop and distribute guidelines on the processes that are currently in place, such as the collection and writing off of receivables and the invoicing of administrative charges and interest;

  • review key controls, such as the segregation of duties, access to the accounts receivable module, the section on the writing off of interest in the departmental delegation instrument, and monitoring and reconciliations; and

  • take the necessary steps to recover sums that are more than 365 days past due or write them off, as appropriate.

The Department could address most of the identified gaps with a reasonable amount of effort commensurate with the anticipated benefits. The review of the accounts receivable management process should, however, be integrated into other initiatives within the Department, such as the initiative on the state of preparedness of audit-ready departmental financial statements.

It would also be appropriate to re-establish active communications with the accounting offices. A few years ago, an annual national workshop was organized, and various financial topics were discussed at this workshop. It would be advantageous to organize such an initiative again in order to promote the sharing of best practices between Departmental Accounting and the accounting offices.



Annex 1
Audit Criteria


Criteria

Methodology

Interviews

Data analysis

Accounting offices

Departmental Accounting

Systems experts




Objective 1: Determine whether the framework of controls is appropriate

Procedures

  • The Department has a departmental credit policy in place.

 

X

 

 

  • The roles and responsibilities of stakeholders are well defined.

X

X

 

 

  • The Department has put in place a receivables management plan.

X

X

 

 

  • A framework of internal controls for accounts receivables is in place.

    • Financial system

    • Segregation of duties

    • Audit trails

    • Monitoring mechanisms

X

X

X

X

  • The procedures are communicated to the employees responsible for the administration of accounts receivable.

X

X

X

 

Human resources

  • The level of experience and training of those who administer accounts receivable are appropriate.

X

X

 

 

Reporting and follow-up

  • Accounts receivable transactions are classified, recorded and reported accurately and promptly, in accordance with government accounting and financial reporting standards.

X

X

 

X

  • Reconciliation of accounts is done regularly and errors that are identified are followed up.

 X

X

 

X

  • Periodic management reports are prepared and presented to senior management.




X

X

 

 

Objective 2: Determine the degree to which the Department is in compliance with applicable accounting regulations, policies and standards.

Creation of accounts receivable

  • The Department recognizes receivables promptly.

 X










  • A process is in place to allow receivables to be identified promptly and customers to be invoiced.

X

 

 

 

Deposits

  • Deposits are made promptly and assets are protected.

X

 

 

 

  • The Department charges interest and applies administrative charges when appropriate.

X

X

 

X

Collections

  • The Department pursues collections vigorously.

 X

X

 

X

Bad debts

  • Actions with respect to any write-off, remission, forigveness, or waiver of debts are taken on a timely basis in accordance with relevant regulations, Treasury Board policies and guidelines.

 X

X

 

X

  • Allowances for doubtful accounts are estimated in accordance with the Policy on Allowances for Valuation of Assets and Liabilities.

X

X

 

 

Year-end Procedures

  • Year-end procedures are followed.

X

 

 

X

Annex 2
Authority Description



  • Receipt and Deposit of Public Money Regulations, 1997, TBS

  • Interest and Administrative Charges Regulations, TBS

  • Debt Write-off Regulations, 1994, TBS

  • Policy on Allowances for Valuation of Assets and Liabilities, TBS

  • Interdepartmental Settlements Policy, TBS

  • Financial Information Strategy Accounting Manual, TBS

  • Receiver General Manual

  • Environment Canada Accounting Handbook.




1 Analyses were also done on subsequent dates for specific requirements, since some reports could not be produced retroactively.


2 Financial Information Strategy Accounting Manual, Treasury Board of Canada Secretariat, section 3.2.


3 Internal accounts receivable are normally closed within a short timeframe, since transfers of funds between departments are done automatically.


4 Additional charges of $10 apply if a department is required to pay administrative charges to its banking institution for the processing of NSF cheques. Environment Canada does not currently have to pay any such charges.


5 Information taken from data provided by the Accounting Operations, Financial Policy and Systems Directorate.


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