In 2003, the GFOA Executive Board approved a recommended practice entitled "Revenue Policy: Accounts Receivable Controls." This recommended practice was initiated by the Committee on Cash Management to underscore the importance of written policies and procedures for managing accounts receivable. This article describes the guidance contained in the recommended practice and how one government is striving to put it into practice.
POLICIES AND PROCEDURES
Governments sometimes provide services on credit, creating the need for written policies and procedures governing the management of receivables. Governments must establish proper controls over receivables, controls that are consistent with authoritative standards such as generally accepted accounting practices and state laws. Some variability exists among the states in terms of charging penalties for delinquent accounts and writing off outstanding debts. However, all governments should establish certain baseline internal controls, including the following:
* The various activities associated with 2the accounts receivable process should be performed by different individuals (segregation of duties)
* Receivables balances should be reconciled to the general ledger and other supporting ledgers in a timely manner
* Where possible, automated systems should be used to facilitate the processing and reconciliation of accounts receivable
* Any suspicion of fraud or noncompliance with internal control directives should be immediately reported to management and properly investigated
* Standard billing practices should be established for payment terms and timing of bill issuance
Accounts receivable should be managed in such a way as to permit aging analysis. Governments should establish a system for notifying customers of delinquent accounts and suspending future services until the account is current. They should also set thresholds to govern when additional collection efforts should be pursued (for example, accounts in excess of $25 that are 180 days past due).
When an allowance is made for doubtful accounts, the allowance should be based on some defensible method, such as a percentage of aged receivables and recent history of write-offs. The allowance for doubtful accounts should be recalculated at least annually. Governments should have procedures in place for writing off immaterial balances in a timely manner. For example, the finance manager might be authorized to write off any balances under $25 that are more than 180 days past due. For balances that exceed the established threshold, collection efforts should proceed for a period equivalent to the statute of limitations (or sooner, if circumstances dictate), at which point the delinquent amounts should be written off.
CASE IN POINT
Hanover County, Virginia, offers an example of how a government has used the guidelines in this recommended practice to better manage receivables. With $200 million in annual revenues and $43 million in accounts receivables, the county has long-standing policies and procedures governing the management of its two primary billed revenues--property taxes ($80 million in revenues, $34 million in receivables) and water/ sewer user fees ($15 million in revenues, $3 million in receivables). The collection rate for both revenue streams combined is 99 percent.
As the county continues to diversify its revenue base, leverage grants, engage in public-private partnerships, and provide new fee-based services, managing accounts receivable is becoming more challenging. Many services are provided at remote locations by departments that do not have the resources to employ financial staff. Left to their own devices, these departments are susceptible to poor financial management practices. Two specific examples from the county illustrate the need for effective controls and policies over receivables. …