For many companies, a significant line item on the balance sheet is accounts receivable. But can you take the amount reported at face value, or could there be more to the story? It’s important to dig deeper to understand the quality of accounts receivable. Balances might include stale invoices, bad debts — and even fictitious entries.

Benchmarking receivables

A logical starting point for evaluating the quality of receivables is the days sales outstanding (DSO) ratio. This represents the average number of days you take to collect money after booking sales. It can be computed by dividing the average accounts receivable balance by annual sales and then multiplying the result by 365 days.

Companies that are diligent about managing receivables typically have lower DSO ratios than those that are lax about collections. Companies with relatively high DSO ratios may have accounts of the books that may be overdue by 31 to 90 days — or longer. If more than 20% of receivables are stale, it may indicate lax collection habits, a poor-quality customer base, or other serious issues.

The percentage of delinquent accounts is another critical number. You may decide to outsource these accounts to third-party collectors to eliminate the hassles of making collections calls and threatening legal actions to collect what you’re owed.

Diagnosing fraud symptoms

Accounts receivable also may be a convenient place to hide fraud because of the high volume of transactions involved. Warning signs that receivables are being targeted in a fraud scheme include:

• An increase in stale receivables,
• A higher percentage of write-offs compared to previous periods, and
• An increase in receivables as a percentage of sales or total assets.

In addition to creating phony invoices or customers, a dishonest worker may engage in lapping scams. This happens when a receivables clerk assigns payments to incorrect accounts to conceal systematic embezzlement.

Alternatively, a fraudster may send the customer an inflated invoice and then “skim” the difference after applying the legitimate amount to the customer’s account. Using separate employees for invoicing and recording payments helps reduce the likelihood that skimming will occur, unless two or more employees work together to steal from their employer.

Seeking outside help

Like any valuable asset, accounts receivable needs to be managed and safeguarded. Auditors evaluate receivables as part of their standard auditing procedures, including performing ratio analysis, sending confirmation letters, and reconciling bank deposits with customer receipts.

Contact us if you have concerns about your company’s receivables trends. In addition to conducting surprise audits, we can customize agreed-upon-procedures engagements or forensic accounting investigations that dig deeper.

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The accounting profession is facing a talent crisis. The U.S. Bureau of Labor Statistics estimates that roughly 17% of U.S. accountants and auditors have left their jobs over the past two years, leaving some open positions unfilled for many months. And the American Institute of Certified Public Accountants (AICPA) estimates that 75% of CPAs have plans to retire within the next 15 years. There are also fewer new accountants entering the profession: Accounting undergraduate degrees were down almost 9% from 2012 to 2020, according to the AICPA.

Today’s shortage of accountants and high turnover rate in the profession are creating a need for modern accountants to broaden their skills and become more adaptable within their organizations. In fact, a growing number of public companies are disclosing gaps in accounting personnel as a material weakness in their internal controls over financial reporting that could potentially lead to fraud.

What can your business or nonprofit organization do to alleviate such concerns? One possible solution is to consider cross-training your accounting personnel beyond their current job descriptions.

Benefits abound

The most obvious benefit to cross-training is having a knowledgeable, flexible staff who can rise to the occasion when another staff member is out. Whether due to illness, resignation, vacation, or family leave, accounting personnel may sometimes be unavailable to perform their job duties.

Another benefit is that cross-training nurtures a team-oriented environment. If staff members have vested interests in the jobs of others, they likely will better understand the department’s overall business processes, leading to enhanced productivity and collaboration. Cross-training also facilitates internal promotions because employees will already know the challenges of and skills needed for an open position. In addition, cross-trained employees are generally better-rounded and feel more useful.

Additionally, the accounting department is at high risk for fraud, especially payment tampering and billing scams, according to the 2022 Report to the Nations by the Association of Certified Fraud Examiners (ACFE). If employees are familiar with each other’s duties and take over when a co-worker calls in sick or takes vacation, it creates a system of checks and balances that may help deter dishonest behaviors. Cross-training, plus mandatory vacation policies and regular job rotation, equals strong internal controls in the accounting department.

How to cross-train

The simplest way to cross-train is usually to have employees take turns at each other’s jobs. The learning itself need not be overly in-depth. Just knowing the basic, everyday duties of a co-worker’s position can help tremendously in the event of a lengthy or unexpected absence.

Whether personnel switch duties for one day or one week, they’ll be better prepared to take over important responsibilities if the need arises. Also, encourage your CFO and controller to informally “reverse-train” within the department. This will prepare them to fill in or train others in the event of an unexpected employee loss or absence.

For more information

If your organization is having trouble attracting and retaining accounting personnel, it’s not alone. Cross-training your current staff can mitigate accounting personnel concerns not only by preparing staff for the potential departure of a co-worker, but also by fostering a rewarding work environment that nurtures your staff’s career development. Contact us to help you develop an effective cross-training program that’s right for your business or nonprofit.

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Does your organization offer health care and retirement benefits for its employees? Benefit plans with 100 or more participants are generally required to have their annual reports audited under the Employee Retirement Income Security Act of 1974 (ERISA). Here’s some guidance to help plan administrators fulfill their fiduciary responsibilities for hiring independent qualified public accountants to perform audits.

Assess risks

Under ERISA, plan administrators are responsible for ensuring that employee benefit plan financial statements follow U.S. Generally Accepted Accounting Principles (GAAP) and are properly audited. Independent audits of plan financial statements help stakeholders assess whether they provide reliable information about the plan’s ability to pay retirement, health, and other promised benefits to participants. They also help management evaluate and improve internal controls over the plan’s financial reporting.
Administrators who hire unqualified plan auditors face substantial penalties from the U.S. Department of Labor (DOL). In addition, plan administrators who don’t follow the basic standards of conduct under ERISA and DOL regulations may be personally liable to restore any losses to the plan.

Auditor qualifications

To demonstrate your commitment to quality and due care, it’s important to carefully review auditor qualifications, rather than simply accept the lowest-bid contract offer. Only after the technical evaluation is complete and the qualified respondents have been identified should the administrator review the audit fees quoted by the qualified respondents.

Evaluating auditor qualifications requires consideration of licensing and independence rules. Independent plan auditors don’t have any financial interests in the plan (or the plan administrator) that would affect their ability to render an objective, unbiased opinion about the plan’s financial statements. The DOL doesn’t consider a plan auditor to be independent if the audit firm or any of its employees also maintains the plan’s financial records.

RFP process

The American Institute of Certified Public Accountants (AICPA) provides recommendations on how to put together a comprehensive request for proposal (RFP) that can be used to evaluate bidders. Comprehensive RFPs provide detailed explanations of the audit engagement, including its objectives, scope, special considerations and expected timeline.

Once plan administrators weed out unqualified respondents to their RFPs, they should invite the finalists to present and discuss their proposal letters. It’s important to interview prospective auditors to assess relevant experience and training. Also, consider asking prospective auditors to provide a copy of their firms’ latest peer review report. A clean peer review report can provide additional assurance that a firm is applying best practices when auditing benefit plans.

When evaluating potential auditors, discuss the auditor’s work for other benefit plan clients and obtain references. Also, review the audit team’s continuing professional education records over the last three years to determine whether they possess recent benefit-plan-specific training.

For more information

Not every CPA is qualified to audit employee benefit plans. These engagements require specialized training and experience. Contact us to find out more about employee benefit plan audits.

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