Audit reveals several risks for lender
A routine audit of a major alcohol wholesaler uncovered a number of potential issues for the lender, including being significantly under-reserved for rebates.
The invoice discounting client is using its £3 million facility for operational cash flow support. However, its latest audit – conducted by Hilton-Baird as part of the lender’s routine audit cycle – found several issues that posed a real risk to the lender.
For example, there were around £100,000 of direct receipts outstanding to the funder – some going back many months – with the funder unaware of a further £60,000 of debit notes.
The credit insurance policy in place didn’t include the funder, with overtrading to limits commonplace, while the company had PAYE arrears totalling £175,000.
While the funder was reserving £30,000 for rebates, the true figure they required was over £200,000.
Our team’s task was made more difficult by the main accounting staff being relatively new to the business and still finding their feet, with the accounting system in a poor state. But by working closely with the client we were able to find the reports we needed to gain the required information.
What was the outcome?
With the information obtained, we were able to make a number of suitable recommendations to help the lender and client ensure the smooth running of the facility going forward.
For example, we proposed that the client and lender reconcile their respective positions in regards to direct receipts, with the necessary balancing payment made to flatten this out. Going forward, the client should repatriate direct receipts within 48 hours.
Debit note reserves should also be applied, with the client providing debit note information as part of the monthly reconciliation pack.
Clearly the lender needed to ensure they were named as joint insured on the credit insurance policy, and to request evidence that PAYE arrears were brought up to date.
In-house reserves should also be reviewed to ensure they are accurate and up to date, with the rebates reserve updated on a monthly basis and accrual workings to be supplied with the monthly reconciliation pack.