Audit of Accounts Receivable

February 7, 2003

Report Summary - Authority for the Project

In accordance with the 2001-2002 fiscal-year audit plan approved by the Departmental Audit and Evaluation Committee, an audit of accounts receivable in the Vote Net Revenue (VNR) programs in Health Products and Food Branch (HPFB), Healthy Environments and Consumer Safety Branch (HECSB) and Pest Management Regulatory Agency (PMRA) was completed by the Audit and Accountability Bureau (AAB). (Accounts receivable for HPFB and HECSB are managed by the Corporate Services Branch (CSB).)

Objectives

The objectives of this engagement were to:

• Assess the adequacy of, and compliance with managerial and operational controls which ensure completeness, accuracy and authenticity of accounts receivable processed;
• Provide senior management with an independent examination and assessment of the accounts receivable management, advising as to the application of relevant policies, practices and controls.

Scope and Methodology

The scope of the audit focused on the accounts receivable fiscal year-to-date balance as at September 30, 2001 for VNR programs except for those at PMRA which was based on the balance as at January 31, 2002.

The audit examined the business objectives for accounts receivable, ranked the threats (risks) to achieving objectives, and reviewed the management control framework practices, information used for decision making and reporting as applicable to the accounts receivable. The audit also formulated and ranked the residual (remaining) risks. The scope did not include advances for contributions and cost recovery data. These issues were not addressed. In addition, the audit focused on the Corporate Services Branch (CSB) and the VNR programs it manages and PMRA. Thus, it did not address the programs at the First Nations and Inuit Health Branch (FNIHB). The audit was conducted from January to May 2002 in accordance with the new Treasury Board Policy on Internal Audit and the Institute of Internal Auditors Standards for the Professional Practice of Internal Auditing.

The methodology included an assessment of the risk strategy, management control frameworks and information used for decision-making. The methodology also included seven workshops with key personnel in the accounts receivable areas under review to determine the performance of accounts receivable. During the workshops they provided information leading to the audit findings.

In addition to the workshops, financial analyses were conducted of the accounts receivable statements, selected interviews and reviewed documents as part of the quality assurance process. Audit testing was done in situations where the workshops yielded information about weak internal controls. In general, weak internal controls indicate that there are residual risks. That is, some risks remain that are not mitigated by controls.

Background

For the purpose of this audit, an account receivable shall be deemed to have occurred when goods/services are provided on a credit basis and cash is not immediately received. It also includes amounts related to a refund of overpayment. Accounts receivable are classified as short-term receivables that are normally, but not necessarily, expected to be collected within a year.

The total budgeted VNR for fiscal year 2000-2001 at Health Protection Branch (HPB), now reorganized for revenue/programs as Healthy Environments and Consumer Safety Branch and the Health Products and Food Branch, was $45,987,000 and the total invoiced and collected for the year was $35,583,701. Health Canada's accounts receivable originated from commercial, other government departments and non governmental organizations. The collection of accounts receivable is done by CSB for the branches, except in the case of PMRA.

For PMRA, the budgeted cash to be collected for the 2000-2001 fiscal year was $8,000,000, the actual amount collected was $7,700,000 less $700,000 in refunds of prior year receipts for a net cash income of $7,000,000. PMRA accounts receivable collection and operation are functionally distinct from the other cost centres and are equivalent to a branch, in that they manage their collection of accounts receivable. We conducted a separate assessment of PMRA's accounts receivable, but for audit reporting, the results are combined.

At Health Canada, accounts receivable are processed through System Application and Products (SAP) which was recently implemented in the department.

Key Findings and Recommendations

Information for Decision-Making

Health Canada has not taken full advantage of the SAP system functionality that can be used to meet user requirements at the CSB Financial Management Operations (FMO) or at PMRA for proper receivables management. The system makes it very difficult to create a fast collection process. PMRA works around this and collects its accounts receivable in a timely and an effective manner by using previously accepted systems.

Staff responsible for creating and updating the client master files do not routinely obtain the most recent information of whom in the clients' organization is responsible for paying invoices. A lack of this information along with improper coding of Government accounts creates delays in receivables collection. These shortcomings result in information not being readily available for decision-making. The production of irrelevant information that is time-consuming to use is also a concern. This could be the result of the lack of knowledge or a need for more training on how to extract the appropriate information from SAP. The current impact is that if accurate information is not available to assess money collected and amounts owing, this could result in collection delays.

Recommendation

• 1. The Assistant Deputy Minister, CSB, and the Executive Director, PMRA ensure that the SAP system is used effectively to meet user requirements for the proper control and accounting of receivables.
• 2. The Assistant Deputy Minister, CSB ensures that staff responsible for creating and updating the client master files routinely obtains the most recent information of whom in the clients' organization is responsible for paying invoices.

Reporting

At PMRA, the estimates of fee reductions are valid due but are not reported accurately in the General Ledger Accounts. PMRA has made attempts to improve the recording of Maintenance Fee Reductions and Allowance for Fee Reductions in the General Ledger.

At CSB, the process to write-off amounts of more than $25,000 is inactive and some old balances that will not be collected are not written-off. The Treasury Board Debt Write-Off Policy is not being followed. The impact is that the accounts receivable balance on the General Ledger of Health Canada is overstated and contains amounts that will never be collected.

Under CSB accounts receivable some companies with amounts owing to Health Canada report identical sales every year or report sales just under the threshold amount or report zero sales. The sales values of companies are not audited. Since the sales value is used to determine the amount of some Health Canada accounts receivable, the department may be missing revenue opportunities. There is the consideration by the Health Products and Food Branch, Cost Recovery Sector to audit the sales of companies.

The total fee reduction provisions at CSB in one fiscal year are not readily available or reported to the extent necessary. This is necessary in order to ensure that accounts receivable are reported at their net estimated realizable value, which is the rule according to Generally Accepted Accounting Principles (GAAP).

Recommendation

• 3. The Assistant Deputy Minister, CSB, and the Executive Director, PMRA ensure that estimates of fee reductions are always valid through periodic monitoring of General Ledger Accounts and the recording of Maintenance Fee Reductions and Allowance for Fee Reductions.
• 4. The Assistant Deputy Minister, CSB, ensure that the fee reduction provisions are controlled and reported appropriately, in order to ensure that accounts receivable are reported at their net realizable value according to GAAP and government policies.
• 5. The Assistant Deputy Minister, CSB, ensure that the Committee responsible for write-offs of more than $25,000 is activated and some old balances that will not be collected are written-off.

Maximizing Revenue Collection

At PMRA there is no legal authority to discontinue registered products for non payment of annual maintenance fees.

For CSB collections, there is no legal authority to withhold services in cases of nonpayment. The only exception is Dosimetry Cost Recovery of Healthy Environments and Consumer Safety (HECS) Branch where services are withheld for nonpayment.

The collection of receivables from other Government departments is delayed because of incorrect coding of some source documents on Interdepartmental Settlement Notices (ISN). This results in receivable collection delays from other government departments.

Annual license or drug approval is granted without regard for payment. Accounts receivable staff do not know which accounts are in appeal or the status of the appeal. The impact of this is that clients, who already have a history of reluctance to pay, increase their outstanding accounts receivable. There is thus difficulty in collecting on accounts that are already long outstanding.

Recommendation

• 6. The Assistant Deputy Minister, CSB ensure that Financial Management Operations (FMO) and others involved are working closely with the staff of other government departments to ensure that the correct coding is obtained for timely processing and payment of ISNs.

Conclusions

Weaknesses identified were in the areas of uncollectible debt and debt write-offs, reporting of reduced fee requests and providing more accurate and timely information for decision making. In order to assure proper revenue recording, the department must place more emphasis on integrating the business process with the information technology infrastructure [SAP/Framework for Integrated Resources Management System (FIRMS)] to address critical success factors and reduce risk while maximizing revenues.

Senior management concerns should be related to clear responsibilities and accountabilities for the periodic monitoring of the performance of the accounts receivable function through analyses related to performance measurement. Inaction to adjust the status of residual risks could result in some items having higher levels of risk over the long-term. Some of these risks include misstatement of financial reports and material loss due to write offs of uncollectible accounts receivable. These are negative impacts that must be corrected in the short term, in order to give a higher level of assurance that the objectives of the accounts receivable function will be met.

Overall, the accounts receivable staff was motivated, experienced and knowledgeable as participants in the audit workshops. They are clearly interested in increasing the quality of their work and ensuring that high performance standards are met.

Based on the audit work completed, the department is performing at a medium level of assurance regarding the achievement of the objectives noted by the Accounts Receivable groups. Medium assurance indicates that there are some issues impeding the ability of the Department to reach its objectives for accounts receivable.