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Taking charge of accounts receivable: proper controls over accounts receivable are an indispensable component of any government's overall financial management program.

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.


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.


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.

Solid Waste Services provides free refuse disposal to residents at drop-off centers throughout the county. However, commercial customers must pay for refuse disposal at a rate of $50 per ton, for which they are billed on a monthly basis. Annual revenue from commercial refuse is approximately $200,000. In the mid1990s, stepped-up enforcement of resident-only refuse service and the addition of staffed drop-off sites led to a sharp increase in the number of new commercial credit accounts. This resulted in escalating accounts receivable, including delinquent accounts. The allowance for doubtful accounts also increased each year, driving up the county's annual bad debt expense.

By 2002, accounts receivable for commercial solid waste services had reached $138,000, and the allowance for doubtful accounts balance was $83,000. At that point, the Finance Department stepped in to help. After analyzing Solid Waste's commercial receivables, Finance determined that 191 accounts totaling $118,000 needed to be written off. This amount was comprised of $111,000 in balances exceeding the three-year statute of limitations. $6.000 in penalties that should have never been assessed, and $1,000 in accounts under $25 and more than 180 days past due (the threshold specified in a newly established revenue policy). Much of the write-off was absorbed by a $10,000 reduction of the allowance for doubtful accounts.

Since the initial write-off, Finance has monitored Solid Waste much more closely to ensure that it is complying with the countywide revenue policies. Solid Waste now uses a standard credit application to register commercial customers for refuse disposal service, which has enhanced the collection of delinquent accounts. In addition, commercial customers can now pay for the service at remote locations via check or credit card, reducing the number of accounts receivable.

In 2001, the county passed a false alarm ordinance to serve as a deterrent to businesses that were straining law enforcement resources with a high volume of false alarms. These were caused primarily by faulty alarm systems, improperly set alarm systems, and owner negligence in responding to previous notice from the county. Under the ordinance, businesses are to be billed for false alarms beginning with the fourth instance. Like commercial refuse disposal, this program is managed by a remote department.

Initially, the stepped-up enforcement of false alarms generated a tremendous amount of bills. Perhaps not surprisingly, many businesses did not immediately pay these bills, causing an aged receivables balance to grow. Although the dollar amount of these receivables paled in comparison to that of commercial refuse services, the county applied the same policies in order to promote consistent billing and collection procedures throughout the organization. As a result, the county has kept potentially high bad debt expenses in check.


Hanover County's experiences illustrate how a revenue policy can enhance overall financial management. The recommended practice on revenue policies for accounts receivable, as well as a similar practice on revenue policies for cash receipts, are available on GFOA's Web site, The Committee on Cash Management is working on a sample revenue policy to be made available to the membership. Many of the concepts in this sample policy were used by Hanover County to establish controls over cash receipts and accounts receivable.

JOSEPH P. CASEY is director of Finance and Management Services for Hanover County, Virginia. He is past president of the Virginia GFOA, vice chair of GFOA's Committee on Cash Management, and an adjunct professor at Virginia Commonwealth University.
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Title Annotation:Best Practices; Government Finance Officers Association
Author:Casey, Joseph P.
Publication:Government Finance Review
Geographic Code:1USA
Date:Aug 1, 2004
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