Non-collection one big issue
Continued from: From the Auditor General’s Report 5.
In financial year 2013-2014, Government collected tax revenue of $634.4 million from the Inland Revenue Department representing 27 per cent of the total Government revenue. It should be noted that the Government has recorded declining revenues from taxes collected by the Inland Revenue Department over the last three years as shown in Table 3 below.
Whilst revenues are declining, accounts receivable are increasing.
The Financial Management and Audit Act requires collectors of revenue to forward the outstanding balance of receivables to the Audit Office at the end of each financial year for verification, this information was however not provided.
The objective of the audit was to assess the effectiveness of the management of the accounts receivable of the Inland Revenue Department in Barbados, specifically whether the Department had adequate systems, policies and procedures in place to collect the taxes owed to the Department and reliably measure and report on the effectiveness of the collection efforts.
The audit focused on the management of the accounts receivable process for the Inland Revenue Department over the period April 1, 2011, to March 31, 2013. It should be noted that most of the information was gathered through the interview process, since most of the physical documentation requested was not provided.
Audit methodology. The review included examination of the Income Tax Act, Cap. 73, internal reports for financial years ended March 31, 2012, and 2013, and interviewswith senior personnel in the department. Reviews of taxpayer accounts, administrative policies, and systems descriptions for the Compliance Unit were also undertaken.
Research was also conducted on accounts receivable management practices in Australia, Canada, United States, and Britain for best practice. These were compared with the practices of the Inland Revenue Department.
The audit was conducted under the provisions of Section 113 (2A) of the Barbados Constitution, which allows the Auditor General to “carry out examinations into the financial management of ministries, departments,statutory authorities and Government-controlled entities, including the manner in which those ministries, departments, statutory authorities and Government-controlled entities use their resources in discharging their functions in regard to the efficiency and effectiveness of the use of those resources”.
Strategy for managing accounts receivable. Effective management of accounts receivable allows entities to achieve a strategic advantage through improvements in customer service, cash management and reductions in costs. The primary objective of such receivable management is to collect monies due, which will assist in meeting cash flow requirements.
Personnel from the Compliance Unit of the Inland Revenue Department indicated that there was no documented strategy for accounts receivable management. An effective management strategy for receivables was essential to the department. It would have ensured that all receivables are managed fairly, efficiently, effectively and minimize the risk of loss due to the department’s inaction or tardiness.
In the absence of such a documented management strategy, the audit examined whether elements of the best practices outlined below were found in the work carried out by the Compliance Unit of the department.
The features of an accounts receivable management strategy should incorporate the following:
A strategy for communicating information to the stakeholders;
An ageing analysis policy;
A risk profiling policy;
Operational guidelines which include targets and objectives for each process, a procedures manual for all processes, and a measuring tool for receivables collected through the various collection methods;
A training policy including training manuals
and methods for identifying the skills required; and
Procedures for monitoring, evaluating and reporting on accounts receivables to the various stakeholders.
The results of the assessment are noted in the following paragraphs.
Communication of the Accounts Receivable Management Strategy. The department indicated that information was accessible to taxpayers through the following methods via the Government Information Service (GIS), discussions and/or advertisements on television, as well as through the printed and electronic media. This information highlighted the consequences of not filing and not paying taxes. Information was also posted on the department’s website.
There were no performance indicators relating to the management of the accounts receivable. No evidence was provided to show that mechanisms were in place to measure the performance of the collection of outstanding taxes.
Ageing analysis. Personnel from the Compliance Unit indicated that no aging analysis of the receivables was conducted. They further indicated that no requests were made to write off any of the balances which can be deemed uncollectible.
Not having an aging analysis schedule indicates another weakness in the collection process. The ageing analysis schedule could have been used to determine specific interventions based on the age of the taxes outstanding.
It would be expected that the department would have analysed the nature and structure of the accounts receivable with a view to taking specific action on the ageing debt. This could have been facilitated by conducting the aging analysis of the outstanding receivables.
Risk profiling of accounts receivable. In determining which accounts to pursue, personnel from the Unit indicated that there was no written risk profiling policy for accounts receivable. Instead, the practice exists whereby historical data derived from past experiences with known taxpayers, including repeat offenders, was used to determine which taxpayers would be pursued by the Unit.
Operational guidelines on accounts receivable management. There were no written operating guidelines in place. However, the methods for collecting the accounts receivable as outlined in the legislation were utilized. It was observed that “demand to settle arrears” letters, garnishments, and unpaid tax certificates were used when collecting receivables. Furthermore, no evidence was provided to indicate that there was monitoring or evaluation by management to determine if the collection process was effective.
Training in accounts receivable management operations. Personnel from the Compliance Unit indicated that there was no training policy in place. However, ad hoc training was carried out by the principal inspector and the senior inspector (acting). Training was also conducted by the training officer in the event of changes to the Income Tax Act. In addition, there was no training manual.
It would have been advantageous to have training programmes in place for the unit to ensure that personnel involved in the collection process were properly trained. The training of staff allows them to be aware of their responsibilities and how to perform their duties effectively. Having no training policy or manual may lead to new staff not being aware of all operating procedures, resulting in inefficient performance of tasks.
The lack of any management plan to manage the accounts receivableprocess was a weakness in the department. Without a clear direction as to the policies and procedures to be used in collecting outstanding monies, there was a high risk that these outstanding sums would increase.
An inadequate collection process will result in reduce cash collected and this will impact the Government’s ability to fund its operations.
Furthermore, without the necessary processes and procedures in place, the ability of the Compliance Unit to effectively and efficiently collect the receivables would have been negatively impacted.
Recommendations. It is recommended that:
(1) The Barbados Revenue Authority develops and implements an accounts receivable management strategy. It should align with the key aspects of the relevant legislation and include the following:
Performance indicators for the Debt Collection Unit;
An aging analysis policy;
A risk profiling policy for pursuing the accounts receivable;
Operational guidelines for the staff of the Debt Collection Unit;
The setting of targets and objectives for the Debt Collection Unit;
A measuring tool for the receivables collected through the various collection methods;
Operational plans for the year;
Training policy and manuals; and
A communication strategy for ensuring that all stakeholders are kept abreast of the receivables management strategy.
(2) Action should be taken to have amounts deemed uncollectible written off.
Enforcement, monitoring and reporting.
The effectiveness and efficiency of the process of collecting receivables is determined by the organizational arrangements and compliance with the relevant legislation. If such arrangements are in place and management’s strategy is functioning as intended, the collection process should be effective and efficient.
Compliance with the relevant legislation.
Methods of collection include Request To Settle Arrears letters, Demand To Settle Arrears letters, garnishments and unpaid tax certificates as outlined in the Income Tax Act, Cap. 73. However, due to the inaccuracies in the information received from the computer system, officers of the Unit reported they had to investigate and reconcile taxpayers’ accounts to verify the accounts receivable before taking action. The collection process began with Request To Settle Arrears letters being sent to the tax payers.
The Demand To Settle Arrears letter indicated that “failure to comply with the request to settle arrears would result in the Department taking legal action or initiating other compulsory action as required by the Income Tax Act, Cap. 73”. It should be noted that Section 72 of the Income Tax Act states that unpaid tax certificates should have been issued if the amount payable remained unpaid for a period of 30 days.
There was no indication that this threat of legal action was carried out. No information was provided to indicate the number of unpaid tax certificates issued over the three-year period. Neither was information provided for the amount of monies collected from garnishments.
No documentation was provided on the results of the collection methods being used and there was no follow up to determine the effectiveness of each collection method.
Monitoring and reporting.
Evaluation and monitoring of the operations of the accounts receivable management strategy allows management to identify weaknesses in the system and correct them immediately. It also ensures that any changes or updates to the operations are recorded and communicated to staff in a timely manner.
There were no written reports received from the Compliance Unit on whether the operations were reviewed, findings documented, recommendations made and action taken to improve operations.
Investigations also revealed that there was no evaluation of the effectiveness of methods used to collect receivables. The Compliance Unit was not aware of the amount of monies collected thro through each method utilized. No information was provided to indicate that there was evaluation and monitoring of the activities of the Compliance Unit by Management.
Failure to review and report on the operations of the Compliance Unit was a major weakness in the governance of the Department. Accounts receivable are an integral part of Government’s assets and more attention should be given to their collection.
Even though methods outlined in the Income Tax Act were used to pursue taxpayers, the lack of analysis of these methods and their effectiveness is a weakness. The performance of the Compliance Unit was not monitored nor evaluated, and as a result weaknesses in the process were not identified and corrected in a timely manner.
Best practice requires that executive management be responsible for ensuring that an accounts receivable management strategy is enforced. The rise in the accounts receivable balances indicates that the enforcement of the various processes by management was not effective.
It is recommended that the Barbados Revenue Authority should:
Implement procedures and policies to ensure that the Debt Collection Unit is monitored and evaluated for efficiency and effectiveness;
Ensure that operations are monitored and reviewed on a regular basis by an independent person;
Ensure that findings of reviews are documented and reported to executive management on a regular basis; and
Ensure that recommendations made on review of the operations are actioned in a timely manner.