Willie Lowman is the internal auditor for Dead Salesman Printing, a book printing company. In the book printing business, a printer is constantly distributing books then taking books back in return. From an accounting perspective, the company is constantly creating receivables and crediting against receivables. And, if any books are printed with flaws, there will be a run of books which enable a customer to have a claim against the printing company. This is because the customer regards themselves as not obligated to pay the full amount of the original invoice.
The accounts receivable clerk at Dead Salesman Printing, who is a CPA, is constantly debiting and crediting receivables. They don’t know how many credits are valid and to what extent they are valid. The accounts receivable department is understaffed, so they don’t have the resources to determine the extent and validity of customers’ claims. Therefore, one of the more important jobs of the internal auditor is to ensure that the accounts receivable clerk is accounting for these appropriately.
While Willie is reviewing accounts receivable at Dead Salesman Printing, he finds many instances, especially in large accounts, in which a customer alleges a claim against the company for flaws in books, and pays less than the original invoice. For example, a customer might have been billed $100,000 but pays only $95,000, treating this payment as payment in full for the invoice. In accounting for the lower payment, it has not been credited against the original invoice, creating a shortfall. Instead, it has been credited against the receivable from a prior impaired transaction. This results in hidden potential write-offs. Willie looks further and finds that this has been going on for a while. The result is that the receivable balance has become less and less collectible.
In light of the lack of resources, the CFO of Dead Salesman Printing has ordered the accounts receivable department to treat all invoices as collectible and to apply payments to carried-over balances. The CFO further rationalized this policy because he doesn’t believe customers’ claims, assuming they lack basis. It also yields strong profits for the company, leading to large bonuses for the CFO, who is Willie’s boss.
Willie meets with the CFO and tells him that the policy is misguided and needs to be changed. The CFO, in reply, says “I can’t do that? Who authorizes and signs your paycheck, Lowman?”
Questions
- What should Lowman do? What are the issues at hand?
- Should Willie do what the CFO says, or do something else?