I was hired to help a company collect on its accounts receivable.  They had been growing, and they had been carrying 8% of sales in receivables over a month.  The project was complicated in that incoming payments had always been applied to the outstanding balance in aggregate. 

The billing system gave automated journal entries at the end of each month, and these generated both the invoice and receivable.  Matching specific payments with specific invoices had never been part of the process, so my first job was to figure out what invoices were unpaid.

This had been underway for several years.  I could see where the auditors distrusted the ability to collect the receivables and had booked liabilities to counter the revenues in receivables.  The debits equaled the credits, and the audit had been signed off each year with no issues.

I first did a simple calculation.  I took the units sold to each company annually and multiplied it by the sales price and summed those totals across their entire customer base.  I came up with a number that was 7% below the annual booked revenue.  I went back two years and found the same situation.

It turns out the accounting system was generating a thirteenth bill for every twelve months of a client’s business.  No invoice was generated – the system would not bill more than twelve months in a year, but it would generate a journal entry for the sales of a thirteenth month.  Since the clients renewed on random calendar months, this issue was hidden.  

So instead of figuring out how to collect receivables that totaled about $10mm a year, I worked to identify the hallucinatory sales.  Fortunately, there were more cautionary liabilities booked than spurious sales.  By correcting the financials, a small operating profit was recognized but it was at the cost of three years of restated financials.

Financial accounting is not necessarily correct just because auditors sign off with debits equaling credits. One must know how the business works and ensure that one’s accounting staff and auditors know it also.

I ended up as the controller for this organization for a while.  I fired the lead accountant and previous controller.  I kept the auditor because I found that one young woman had consistently pointed out this disconnect for the past years, but the assigned partner did not listen to her.  I did demand a new partner, and I ensured that young woman was the lead auditor going forward.