The Verification Process
One of the many ongoing procedures in the examination of asset based loan customers is the process of confirming accounts receivable balances. Although expensive and arduous, this process is necessary to detect potential fraud and monitor receivable collateral. The process helps keep borrower’s honest and receivables clear of unissued credits, in part, because the borrower is aware that the bank is sending out verifications. When field auditors receive poor results from shipping & invoice tests (unsigned bills of lading, missing documents), a more significant verification effort must be performed.
There are various methods of confirming accounts, the most common of which are negative and positive confirmations. With negative confirmations, a response from the customer is required only when a variance exists between their records and the statement. A more preferable method is the use of positive confirmations, which require a response regardless of whether there are discrepancies or not. Statements should be mailed using the return address of the audit company, i.e. the bank. In the event that there are fictitious accounts, the envelope would be returned unopened and signify a potential problem.
Businesses that have a large amount of customers with small balances may be better suited for the use of negative verifications. Conversely, large account balances should be confirmed using the positive method. Throughout the course of a year all customer balances should be verified and any exceptions should be resolved by the verification clerk or by the examiner in the field. Timing differences are often the cause of discrepancies and resolution of these discrepancies is best achieved through ascertaining proof of payment or proof of delivery by reviewing actual, not copied, shipping documents. Verifications have allowed auditors, including our firm, to root out significant cases of fraud and other potential problems.