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Managing Risk: If it is Not in Writing, it Really Does Not Exist

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If it is not in writing it does not exist.  This is audit speak that is premised on the belief that if an auditor does not see documented evidence of something, then the assumption is that it did not take place.

Documentary evidence is used when auditors are reviewing accounts. It is the basis with which they raise audit queries as well as classify expenditure as disallowed. Hence the need to know if you have your order in writing to manage the risk of non-payment or incurring ineligible expenditure as is happening to various businesses – small and/or medium businesses that have done business with the various counties.

According to the recent report from the Office of Auditor General, county governments owed Ksh30 billion to Kenyan businesses in the form of pending bills as of 18th December 2019. Pending bills are invoices that have not been paid during the financial year that the expenditure was incurred.

The top three counties with the highest pending bills include Nairobi, which owed Ksh 3.77 billion, Wajir Ksh1.94 billion and Mombasa with Ksh1.57 billion. The counties with the least amount of pending bills included Laikipia Ksh78m, Makueni Ksh33 million and Baringo with Ksh24 million.

The report further states that out of the Ksh30 billion owed, Ksh1.7 billion is ineligible expenditure. The government constituted an Ineligible Pending Bills resolution committee to solve the issue. The committee confirmed that Ksh1.7 billion of the bills were ineligible, meaning no records or documents are presented or are irregular.

Irregular meaning, they are not able to do a three-way matching of the invoice, quotation or tender and delivery note, assuming this is what they used based on best practice.

This essentially means that there are business reporting credit sales of Ksh30 billion but the monies remain uncollected, sitting in county treasuries. It also means that there are businesses reporting profits but the profits cannot be distributed as the amount remains uncollected.

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These businesses have huge amounts in receivables which take more than one year to collect. It also means that there are businesses that may be taking loan facilities to finance government activities.

One would then ask, what does it cost to do business with county governments? Do these delays in payments also affect the pricing of the goods and services that are supplied to county government? Is this the reason why the business owners are shying from providing goods and services to counties?

A contract or a local purchase order is a legally binding document that you can rely on when payment for your supply is not forthcoming. [ Photo / Urban Kenyans ]

Out of the Ksh30 billion held up in counties, Value Added Tax (VAT) is Ksh4.8 billion. VAT is payable on or before the 20th of the following month when vatable goods or services were received. These means that these businesses are expected to pay the VAT even before the payment is received from counties.

Failure to remit VAT attracts a penalty of (whichever is higher) Ksh10,000 and 5% of the tax due and an additional tax of 2% compounded per month. How does any business stay profitable with these challenges? What strategies should business owners put in place to comply with the tax regime under such circumstances?

Mitigating Risk – the Bare Minimum

There is no doubt that doing business with counties is high-risk. To mitigate this risk, businesses should consider the auditors’ mantra— it is all written down. Besides, you need to be a prequalified supplier in the county and in the specific area that you are supplying whether goods or services.

You should have responded to a request for quotations or tender depending on the procurement process; you should be issued with a notification of award and issued with a Local Purchase Order (LPO) or contract, which indicates the terms of the contract and the amount payable to you.

Upon delivery of your goods, they should be inspected by the inspection and acceptance committee and a certificate of completion or goods received note issued.  It is equally important to know that what you are supplying should be in the budget since government only pays for items that are in the budget.

Best Practices to Manage Risk

Being in business requires that you learn the dynamics of your client; how they operate and how you serve them without taking you out of business. Profitable businesses have closed down because they are unable to pay for their operational costs. This is because their monies are held up in receivables or in some unfortunate instances, you incur ineligible bills.

The business owner should maintain all the correspondences and documentation with the county government. The evidence you have is what will make your payment eligible or ineligible. Best practice in business is that you only commence the supply of goods and or services based on a valid contract or local purchase order.

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A contract or a local purchase order is a legally binding document that you can rely on when payment for your supply is not forthcoming. You can use it to defend your case in a court of law if it gets to this level.

The documents required to effect payment will include the following: Request of goods and services from a user department, the advertisement of the goods or services, an evaluation report or bid analysis, notice of award, a contract or Local Purchase Order, a delivery note and goods received note or certification of delivery.

These are the documents that will make your invoice eligible or not. The individuals processing your payments will be a different team from those who requested for your goods and or services.

The documentation that you will maintain will save you from the list of ineligible bills.

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CAROLINE GATHIIhttp://www.businesstoday.co.ke
CPA Caroline Gathii, IRMCert, is an International Certified Risk Expert with FirstIdea Consulting Limited. Email: [email protected]
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