Table of Contents

Adding Value through Performance Audits

Use of the Guide

Collection Options

Obtaining Information to Invoice

Design of Invoices

Reminder Notices

Debt Recovery Agents

Legal Action

Writing-Off Bad Debts

Management Information

 

 

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	The concept of "best practice" is a dynamic one. It is ever changing. Best practice reflects the idea of continuous improvement: the desire to do things better.
	Because of their nature, performance audits can provide a rich source of best practice material, which agencies can use for comparison purposes. It is important that the value of this material be maximised. It must be assembled into a form which can be used by agencies for self assessment purposes. To this end, where possible The Audit Office seeks to produce Guides to Better Practice as a corollary to its performance audits.
	The prompt collection of monies owing to an organisation is one of the most fundamental aspects of business. Basic as it may be, experience has shown that it can often become an area of financial administration which is not conducted effectively, efficiently and economically. If that is the case, as it may be for many organisations, then worthwhile improvements are waiting to be realised.
	Different organisations will have different approaches to the administration of debtors' accounts. These are likely to be determined by the nature of their business. However, by addressing the areas outlined in this Guide organisations may be able to identify ways in which to improve on existing practice.
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	The purpose of this Guide is to assist agencies to review the adequacy of present practices and to stimulate thinking on options for improvement. It does not set out requirements to be complied with. Neither does it override or supersede any existing requirements or other guidance material which agencies may be subject to. For example, Treasurer's Directions (notably the 450 series) and any other instructions; guidance issued on related matters (eg. Treasury Technical Papers such as Internal Control Assessment, July 1995); or portfolio wide directions (such as the Accounts and Audit Determination for Area Health Services, District Health Services and Public Hospitals) continue to apply.
	The Guide is only a basic tool towards best practice - not best practice in itself. Best practice requires agencies to engage in ongoing reassessment and to utilise continuous improvement practices. Management should seek, and welcome, ongoing advice as to how things could be done better.
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	It may not always be necessary to invoice. Invoicing costs money and involves a delay in the realisation of income. Delays cause cash flow losses - possibly trivial individually but significant in aggregate - and reduce the likelihood of income being realised. As a rule of thumb, the greater the interval between receipt of a service and the formal demand for payment the less the likelihood that payment will be received. In some situations it may be possible that the cost of invoicing and associated activities could exceed the income realised. Care must therefore be taken to ensure that collection arrangements are effective, efficient and economic.
	It may be feasible to collect fees and charges when a service is provided . In some cases this will be a very efficient and effective approach, and should certainly be considered. However, it is important to note that there may be strong reasons for continuing to rely on invoicing. In deciding, factors to take into account should include the safety of staff; the impact on service delivery; the security of cash; the adequacy of insurance cover; and the training requirements for staff who have not previously been involved in handling cash.
	Staff safety is paramount. For this reason, and the fact that a greater number of individuals involved in cash handling may increase the risk of misappropriation of funds, collecting fees at the point of service delivery (at least in cash form) may be considered practicable only where small amounts are involved.
	If it is not feasible to collect cash at the point of service, there may be scope for allowing individuals to pay by credit card: although this will have training implications, and credit card commission imposes a further cost.
	Policies for issuing receipts should be evaluated. If an individual pays by cash a receipt must be given. However, there may not be a need to issue a receipt where payment is by cheque or credit card (since financial institution records may provide a form of evidence of payment).
	Organisations providing a community service may find that many customers are exempt from charge or eligible for a reduced charge. Wherever possible it is best to establish such status when the service is provided. This will avoid the costs of invoicing and the administrative difficulties involved in writing back invoiced amounts, and will help to rationalise the follow-up of accounts.

Has the feasibility of allowing customers to pay by credit card been examined ? Have staff received an explanation of the advantages to the organisation of establishing exemptions/eligibility for reduced charges at the point of service delivery ? If a move to a payment-at-point-of-service approach is being proposed, has the adequacy of existing financial stationery been evaluated ? Have security issues been considered? Have training requirements been assessed and effectively actioned? Are existing controls on financial stationery adequate (changes to fee collection procedures may involve far more staff handling cash than at present) ? Are receipts sequentially numbered ? Have banking arrangements/cash receipting arrangements been established ? Has the adequacy of fidelity guarantee and cash handling insurance cover been considered ? (it should be subject to annual review) Have the implications for Internal Audit coverage of greater involvement in cash handling by operational staff been considered?

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	Invoicing often requires data from a separate system to interface with the debtors/accounts receivable systems. If so, it is important to ensure that information is processed as quickly as possible (subject to controls on the integrity of the data and the cost, both physical and electronic, of transferring the data). How long is it taking at present?
	It may be possible to reduce lead times for invoicing by introducing remote or distributed input, allowing key data to be input at a number of locations, rather than having to dispatch large numbers of paper documents to one or a few locations.

Has consideration been given to decentralised data input and invoice generation? Where data from a subsidiary system is required, are quality systems in place for checking data accuracy and completeness and, where interface with the debtors/accounts receivable system is carried out, is there a central or regional station, for dispatch ? Are staff given regular feedback on the types of errors which are common in completing documentation from subsidiary systems ? Does a user-group meet regularly to consider modifications to forms and systems which may be necessary in the light of common errors/confusion over coding? Have modern IT techniques such as scanning / imaging and keypads been considered in order to reduce the time taken and resources involved in keying in data from subsidiary systems / documents ?

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	Invoice design should not be neglected. Poor design may lead to invoices being confused with junk mail and not being properly considered, or may leave individuals confused and uncertain as to why they are being billed.
	Invoices should always state the nature of the service provided and the date of service provision. Invoice design must consider the suggestions of those who are regularly answering queries from customers, since these staff have valuable first hand knowledge of what customers cannot find on existing invoices or what customers find confusing.
	If an individual can claim a reduction or an exemption from charge, the invoice must make this very clear with an 'up-front' message that also explains exactly what needs to be done to substantiate such status. It should be noted that exemptions may affect vulnerable groups, for whom demands for even relatively small amounts of money may be alarming. If so, agencies might consider if issuing invoices to such individuals at all is appropriate.

		Is the invoice clearly addressed? Does it provide enough information for the individual to understand why payment is being requested ? Does the invoice avoid jargon which may be unfamiliar to the reader, particularly if English is not their first language ? Does the invoice avoid extraneous detail which may distract the reader ? Does the invoice clearly stipulate who is exempt from charge or eligible for a reduced charge and the procedure for substantiating this status ? Is the due date highlighted ? Is any essential reference number highlighted ? Is a contact name and telephone number given for inquiries ?
		Are penalties for late payment stated ? Does the same customer always have the same customer code ? Does the invoice contain a tear-off remittance advice with clear instructions that this should be submitted with payment ? Does the invoice make clear that a receipt will not necessarily be issued for non-cash payments? Does it contain a box so that customers can indicate if they require a receipt ? Does the invoice clearly indicate the type of payments accepted (cheque, credit card) and methods that can be used (telephone, agencies, personal payment, bank transfers, etc) ?
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	Many of the same principles for invoicing also relate to reminder notices.
	It is important to ensure that reminder notices are clear and unambiguous. A common fault is to send out too many reminder notices over a long period. Treasurer's Direction 450.02 requires two reminders to be issued. Some agencies may use more than this. However, if an individual has not paid after receiving a second reminder it is perhaps not likely that a third reminder will prompt payment.
	Agencies using multiple reminders should investigate the effectiveness of their processes.

Does the reminder contain enough information for the individual to understand why payment is being requested? (remember that they may not have access to the original invoice) Has a policy been formulated for the timetabling of reminder notices ? There is likely to be little point in sending out more than two reminder notices and there may be scope for tightening the timetable for their issue. No more than 30 days should elapse between dispatch (not printing) of the invoice and dispatch of the first reminder notice, and no more than a further 30 days between first and second reminder notices. Does the reminder notice state in plain, but polite, language that non-payment will lead to further action ? (ie. non-payment is not an option) Does the reminder notice give a contact number which an individual can ring to clarify any details ? Is the policy for recovery action documented, and are the staff responsible for recovery action aware of the policy ? Is the effectiveness of the recovery policy regularly monitored and changes made as necessary ? (exemptions from Treasurer's Directions can be sought when valid reasons exist)

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If a decision is made to hire debt recovery agents, is the award of the contract based on the results of a competitive bidding process in which selection criteria are clearly laid down? Where debt recovery agents are employed are clear conditions governing their approach and behaviour laid down in the contract? Is the performance of debt recovery agents regularly evaluated ?

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	The ability of an organisation to take legal action against non-payers is a key sanction in the effective follow-up of debts. However, legal action is expensive and, particularly where the average debt is small, is unlikely to be economic (see Treasurer's Direction 450.05).
	Legal action should be seen as a weapon of last resort. A regular need to take legal action may be an indication of weaknesses in other aspects of an agency's debtors administration. The possibility that an individual may be exempt or eligible for a reduced charge makes legal action even more difficult to plan and execute.

Has the approach to legal action been determined at Board level (or equivalent) and laid down in the Financial Handbook (or equivalent) ? Has this approach taken into account the cost of legal action and other non-financial factors ?

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	Treasurer's Direction 450.05 addresses irrecoverable debts.
	Writing-off debts must always be seen as an absolute last resort. However, retaining bad debts when all avenues of realisation have been exhausted is likely to lead to a distortion of the operating position in management reports, reports to the Board and, potentially, in the financial statements. The former can lead to poorly based management decisions, or an absence of action when warranted. The latter incurs the related costs of explanations to and discussions with the external auditor, and even the possibility of a qualification of the agency's accounts.
	When it is clear that income is not going to be realised (perhaps because the indigent status of the debtor has been established), a decision to write-off should be taken quickly at the appropriate levels and actioned speedily in Accounts Receivable and General Ledger systems.

Is the procedure for writing-off bad debts (against the provision for bad and doubtful debts where relevant), including level of approval, clearly laid down in the Financial Handbook (or equivalent) in accordance with external guidelines and schemes of delegation and regularly evaluated ? Does senior financial management regularly review debts to ensure that those deemed uncollectable are written-off, but not before all pre-determined recovery mechanisms have been exhausted ? Does senior financial management have access to an aged debtors summary structured in line with organisational arrangements and responsibilities ? Are the level of bad debts regularly reported to the Board or equivalent ? Is the viability of the provision for bad and doubtful debts (where relevant) regularly evaluated ? If the basis of computation of the provision for bad and doubtful debts is changed are the external auditors informed as soon as possible ? Is the authority for writing-off bad debts at an appropriate senior level?

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Can staff dealing with queries easily access information on accounts ? If information cannot be easily accessed do staff have access to on-line computer system report-generation facilities (preferably as a temporary expedient whilst standard reports are developed), and have they been trained in their use ? Is an easily understood aged debtors report accessible to staff involved in following-up accounts so that staff can assess where to focus attention when investigating outstanding accounts ? Where such reports are distributed from a central point, do staff know when they will be available ? Are regular reports relating to debtors submitted to the Board (or equivalent)?