Reserve shortages found on routine audit
Our audit team has made a number of recommendations to an asset based lender after a routine audit uncovered a shortage in reserves and potential risks.
The routine audit was of a multi-million pound turnover company in the oil and gas sector, in relation to their invoice discounting facility.
Unfortunately the audit revealed a number of issues which, left unaddressed, could pose a significant risk to the lender. These included:
- Significant levels of pre-billing & assignment, averaging 28 days
- High value free issue materials
- Reworks were not uncommon, with the original invoices remaining open while vehicles were back in-house being reworked
- Assignment lags on credit notes to the lender
- Contra reserves needed updating
- The lender was unreserved for rebates
What was recommended?
With our experience of appraising companies in the oil and gas sector, we were able to make a number of useful recommendations that would reduce the level of risk to the lender and ensure they could continue funding the client in confidence.
First was that the client manager should discuss the pre-billing and assignment issue with the client, and consider obtaining bill and hold waivers from the applicable customer base. Ideally, assignment wouldn’t occur until the physical despatch had occurred, although this would likely be unpopular with the client.
Where reworks are required, the client should either credit and re-bill only when resolved and despatched, or the respective invoices are alerted to the funder and reserved for accordingly. The client should be made aware that funding items where goods are back for reworks cannot continue, and ensure that these items are tracked and maintained so the lender can assess which invoices these affect at any given time.
It was also made clear to the lender that, in the event of a collect out, all free issue materials would need to be returned, with the potential that customers would need works to be completed given the lack of alternatives in the market.
In addition, we recommended that credit notes should be assigned as raised, with lags not tolerated, and that sufficient reserves are put in place for rebates and contras.
