You need enough money to pay your creditors, but you don’t want to overpay or underpay and be liable for interest and penalties. Find out how to avoid the 3 major risk areas and what controls you can put in place today.

• What are creditors?
• Why are creditors and creditor-related processes risky?
• 3 main risk areas with creditors
  • Creditor balances – unauthorised suppliers and inaccuracy of recording
  • Creditor balances – settling balances
  • Creditor payments – fraud / misappropriation
• Controls you can implement today
• 3 levels of controls you must implement
• 3 main areas that need to be controlled and what controls you can implement
• Example of a creditor reconciliation

What are creditors?

Definition :   Creditors  -  Companies that you owe money to.

Why are creditors and creditor-related processes risky?

Creditors are short-term liabilities (liabilities that will be settled within 12 months).  This means your business needs cash available to pay the accounts within the immediate future. You normally need to make payment within 60 days from the date of the transaction.  This places strain on cash forecasts if you don’t manage it correctly.

Errors in the creditor balance can result in these inaccurate payments:

• Over-payments, i.e. you’ll pay more than you owe the creditor.  This results in you paying more from your cash balance than you should.
• Underpayments, i.e. you’ll pay less than you owe the creditor. Interest and fines can be added to the balance not paid on time, which results in additional costs for you.

3 main risk areas with creditors

1. 1.   Creditor balances – unauthorised suppliers and inaccuracy of recording

Unauthorised suppliers are creditors that haven’t been approved by management to supply goods or services to the business, e.g. because of high sales prices, poor products or due to unfavourable payment terms.

Inaccurate recordings are errors that occur during the processing of the goods purchased in the accounting system.

1. 2.   Creditor balances – settling balances

You need to have sufficient cash available to pay creditors when the balances become due. You could be charged penalties and interest on late payments. An even bigger problem is over-spending. This is when you purchase more on credit than you’re able to repay in the future, which results in excessive debt.

1. 3.   Creditor payments – fraud / misappropriation

The payment of creditors can have many risks if you don’t have sufficient controls in place, e.g. banking details may be incorrect or the creditors that you’re paying may not even exist.

Controls you can implement today

You don’t need to increase your staff complement, or change your accounting system to increase the controls in areas where your business is vulnerable to risk.

In many cases, increased management awareness and supervision are a useful preventative measures. Increased authorisation requirements also go a long way to improve controls.

These controls mean that management will be required to increase their effort in these areas; however, the benefits will outweigh the inconvenience!

3 levels of controls you must implement

The more levels at which you apply controls in your business, the more assurance you have that your creditors are safe from the risks mentioned above.

1. 1.   Controls at management level

At this level, you must ensure that transactions aren’t executed without prior approval. Once recording has taken place in the financial records (e.g. the general ledger and creditors ledger), make sure that the information you approved has been appropriately captured by applying the controls listed below.

Review the creditors living and age analysis to keep track of the movements on creditors and your staff are following up on overdue accounts.

1. 2.   Controls at staff levels

At this level, don’t allow staff to approve and authorise transactions. They should sign documents to show they take responsibility for the information therein, or as a representation that they’ve performed the tasks necessary for that function. This will also help you identify who was responsible, if you have any queries.

Adequate stationery controls can also assist in reducing risks. Supplier application forms and creditor change forms create an opportunity to add fictitious creditors to the system. Distribute these only when necessary, rather than making them freely available
to your staff.

1. 3.   Controls at system level

We’re talking about your accounting systems. These controls will obviously depend on the accounting system you use. But there are some basic concepts that can be applied to most systems.

The easiest ones relate to the use of passwords, which you can use at various levels. You can use certain passwords that segregate the duties of staff. For example, the financial manager’s password will grant her greater access and give her different duties to the password for the bookkeeping clerk.

Create controls that don’t allow staff to change passwords. Depending on the functionality of your systems, it’s also very beneficial to use reports and login trails offered by different systems. That way, you’ll be able to see right away if someone who wasn’t authorised to access a particular system, did so.

Carrie-Anne Diniz

CentsAccountability

Source: Tax Bulletin – For more tax and VAT tips from some of SA’s top tax experts.

 

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