Accounts receivable help: Look for these red flags in your aging report

If you manage a billing and collection system, then you have an important report to consider – the accounts receivable (A/R) aging report. As auditors, we regularly ask about your review of certain reports and when it comes to accounts receivable, we find a lot of value in this one. In this blog post, we’d like to explain why an A/R aging report is so important and why you should review it.  

An A/R aging report is a list of customer account balances – typically broken out in 30-day increments. It can highlight red flags, such as in the following table with Customer B who has aged receivables in every category, and a higher amount owed, especially over 90 days.  

You can compare aged receivables to prior years to better understand today’s data. For example: 

Using this simple data set, you can see that 2023 balances are higher than prior years, for everything over 31 days.  

If your aged receivables are increasing, then you might want to consider the following: 

• Do any large accounts need attention? If you have large accounts in arrears, management should review the collection efforts taken to-date. You should understand the reason for the delinquency and advise staff if they should take additional steps. You may want to involve legal counsel, depending upon the circumstances. 

• Are you understaffed? If you have many accounts in arrears, you may have an understaffed collections team, or staff busy with other priorities. You may need to re-prioritize or hire additional people. Some people use technology to help lighten the load. For example, a simple automated text to customers about past-due balances can help provide results. 

• Are your collection actions effective? You should periodically reevaluate whether your collection procedures are effective. For example, you might be waiting too long to notify customers of past-due amounts, your late fees may be too high (creating an obstacle for repayment), your policy might be too rigid regarding payment plans, or you might be too lax in escalating consequences for non-payment.  

• Do you monitor for potential fraud schemes? One cause for an increase in aged receivables is employee theft of customer payments. One example of a fraud scheme is called “lapping,” where the employee steals the payment from Customer A and then applies Customer B’s payment to Customer A’s account. This continues with Customer C, as their payment is then applied to Customer B’s account. The more the employee steals, the older the receivables will become. To read more about this risk and controls you might put in place, refer to the accounts receivable chapter in our Segregation of Duties guide.   

• Are you writing off uncollectible accounts? When you do not write off uncollectible accounts, it distorts your aged receivables data. And you do not want staff wasting time and resources trying to collect the uncollectible.  

For additional accounts receivable-related resources: 

• Accounts Receivable Guide – This comprehensive resource can help you develop policies and identify best practices and other ways to improve your billing and collection process. Leadership, managers, supervisors and accounts receivable clerks can all find information tailored to them in this guide. 

• Internal Control Checklist for Accounts Receivable – This checklist can help you self-assess your government's internal controls over its billing and collection processes. 

• Segregation of Duties Guide – This guide contains a chapter on accounts receivable and how to segregate duties (see Section 2, Chapter 2). It also suggests compensating controls when it's not possible to segregate duties due to the size of your staff. 

For help 

Remember, we are here to help. If you have specific technical accounting questions, please submit them using our HelpDesk in the client portal. 

We also have financial management specialists at SAO's Center for Government Innovation available to talk with you about best practices, resources or internal controls. For assistance, reach out to us at Center@sao.wa.gov.