Prepared by Coby Harmon University of California, Santa Barbara Westmont College Chapter 8-1 Revenue and Cash Collection Processes and Controls Chapter 8-2 Study Study Objectives Objectives An introduction to revenue processes Sales processes and the related risks and controls Sales return processes and the related risks and controls Cash collection processes and the related risks and controls An overview of IT systems of revenue and cash collection that enhance the efficiency of revenue processes E-business systems and the related risks and controls Electronic data interchange (EDI) systems and the related risks and controls Point of sale (POS) systems and the related risks and controls Ethical issues related to revenue processes 10 Corporate governance in revenue processes Chapter 8-3 Staples®, the large office supply company, sells not only in retail stores, but also to other large corporations Top management at Staples realizes that these corporate sales are dependent upon customers’ satisfaction with their buying experience Staples must have sales processes that maximize customer satisfaction, because the sales processes are what make up the buying experience However, customer satisfaction depends on the whole range of activities from ordering, to product delivery, to efficient billing and collection, and facilitation of product returns Staples must have, monitor, and improve all of the internal processes that generate the sale, deliver to the customer, and collect the payment These processes must be able to handle walk-in sales, telephone orders, and web orders To improve performance in filling customer orders and collecting the cash, Staples monitors the following performance measures: • Order entry accuracy • Order fill rate versus unit fill rate • Percent of items mispicked • Percent of orders delivered next day • Products delivered undamaged To perform efficiently in these areas, Staples must have processes within the company to enter customer orders, pick the correct items from the warehouse shelves, package and ship the items correctly, bill the customer correctly, and collect the payment as quickly as possible If these processes are inefficient or poorly managed, the result may be unhappy customers and reduced Chapter 8-4sales This chapter describes these types of revenue processes and the internal Real Real World World Introduction Introduction to to Revenue Revenue Processes Processes Companies sell products and/or services Examples: Retailers: Manufacturers: Record the sale, Sell product to other companies collect cash, update inventory status all at the time of the sale Deliver goods and bill customer at a later date Collect payment Chapter 8-5 SO An introduction to revenue processes Introduction Introduction to to Revenue Revenue Processes Processes Systems and processes must be in place to capture, record, summarize, and report sales transactions Processes include: Polices and procedures employees follow in completing the sale Capturing customer data and sales quantities Routing sales documents to the right departments The Accounting System uses this flow of sales documents to various departments to record, summarize, and report the results of the sales transactions Chapter 8-6 SO An introduction to revenue processes Exhibit 8-1 Revenue Processes within the Overall System Introduction Introduction to to Revenue Revenue Processes Processes Chapter 8-7 SO An introduction to revenue processes Introduction Introduction to to Revenue Revenue Processes Processes Business processes common in company-to-company sales transactions are: Collect order data from customer Deliver goods Record receivable and bill customer Handle product returns Collect the cash Update records, such as accounts receivable, revenue, and cash, cost of goods sold inventory, Chapter 8-8 SO An introduction to revenue processes Sales Sales Processes Processes Terminology Chapter 8-9 Purchase Order Packing Slip Sales Order Bill of Lading Price List Shipping Log Credit Limit Sales Invoice (Bill) Pick List Sales Journal SO Sales processes and the related risks and controls Sales Sales Processes Processes Exhibit 8-2 Sales Process Map See next slide for larger image Chapter 8-10 SO Sales processes and the related risks and controls Real Real World World Northern Telecom (Nortel) switched to an Internet EDI system in the late 1990s Nortel has customers all over the globe, and the use of the Internet by Nortel customers to transmit purchase orders is a low-cost transmission option for those customers This was especially beneficial to Nortel in expanding its customer base in Europe and Asia As Nortel works to gain new customers, a low-cost way to order is an enticement to those customers There are also other benefits to Nortel The use of Internet EDI eliminated the need for customers to fax purchase orders or supplier information to Nortel Michael Keef, the senior manager of electronic business solutions at Nortel, said, “Errors occur when people fax things We won’t have to rekey shipment notices.”3 Details of Internet EDI are described in a later chapter on e-commerce Chapter 8-47 SO Electronic data interchange (EDI) systems and the related risks and controls Electronic Electronic Data Data Interchange Interchange (EDI) (EDI) Systems Systems and and The The Risks Risks and and Controls Controls Risks in an EDI system include: Security and Confidentiality Unauthorized access Trading partners gaining access to unauthorized data Hackers or other network break-ins Repudiation of sales transactions Chapter 8-48 SO Electronic data interchange (EDI) systems and the related risks and controls Electronic Electronic Data Data Interchange Interchange (EDI) (EDI) Systems Systems and and The The Risks Risks and and Controls Controls Risks in an EDI system include: Processing Integrity Invalid data entered by trading partners Incomplete audit trail Errors when integrating data into back end systems Availability Hardware and software system failures that block customers from access to the EDI system Chapter 8-49 SO Electronic data interchange (EDI) systems and the related risks and controls Electronic Electronic Data Data Interchange Interchange (EDI) (EDI) Systems Systems and and The The Risks Risks and and Controls Controls IT controls can lessen these risks Controls are: Chapter 8-50 Authentication Control totals Encryption Acknowledgment Transaction logging SO Electronic data interchange (EDI) systems and the related risks and controls Electronic Electronic Data Data Interchange Interchange (EDI) (EDI) Systems Systems and and The The Risks Risks and and Controls Controls Concept Check The use of electronic data interchange (EDI) to conduct sales electronically has both risks and benefits Which of the following is a benefit of EDI, rather than a risk? a.Incomplete audit trail b.Repudiation of sales transactions c.Unauthorized access d.Shorter inventory cycle time Chapter 8-51 SO Electronic data interchange (EDI) systems and the related risks and controls Point Point of of Sale Sale (POS) (POS) Systems Systems and and the the Related Related Risks Risks and and Controls Controls Point of Sale systems, features that assist accountants and managers: Touch screen menus Bar code scanning Real-time access to inventory and price data Credit card authorizations during the sale Real-time update of cash, sales, and inventory records Immediate summaries and analyses Integration with the company’s general ledger system Chapter 8-52 SO Point of sale (POS) systems and the related risks and controls Point Point of of Sale Sale (POS) (POS) Systems Systems and and the the Related Related Risks Risks and and Controls Controls Point of Sale systems can reduce some processing integrity risks within revenue and cash collection: Pricing errors for products sold Cash overage shortage errors Errors in inventory changes—less chance of an incorrect product number Erroneous or invalid sales voids or deletions Chapter 8-53 SO Point of sale (POS) systems and the related risks and controls Point Point of of Sale Sale (POS) (POS) Systems Systems and and the the Related Related Risks Risks and and Controls Controls Concept Check An IT system that uses touch screens, bar coded products, and credit card authorization during the sale is called a(n) a electronic data interchange system b e-commerce system c point of sale system d e-payables system Chapter 8-54 SO Point of sale (POS) systems and the related risks and controls Ethical Ethical Issues Issues Related Related to to Revenue Revenue Processes Processes Intentional revenue inflation is unethical, and many types of revenue inflation are illegal Two ways to inflate revenue: Channel stuffing Leaving sales open http://www.sec.gov/litigation /litreleases/lr17001.htm Chapter 8-55 SO Ethical issues related to revenue processes Real Real World World In the early days of personal computers, one of the manufacturers of hard drives was MiniScribe Corporation The chief executive officer of MiniScribe, Q.T Wiles, was convicted of fraud in 1994 and subsequently served 30 months in prison for falsifying revenue To inflate revenues, Q.T Wiles came up with a novel idea He made the employees ship bricks, rather than hard drives, in boxes that were sent to distributors The company also shipped scrapped parts in boxes that were labeled as hard drives The company inflated revenue by recording completely fictitious, fraudulent sales of these bricks and scrap materials In addition to the CEO being sentenced to jail time, the chief financial officer, a CPA, was disciplined by the SEC The company ultimately failed Chapter 8-56 SO Ethical issues related to revenue processes Real Real World World In 2008, the Coca-Cola Company agreed to pay a $137.5 million settlement related to accusations of channel stuffing After an eight-year SEC investigation, Coke agreed to the settlement but admitted no wrongdoing The company had been accused of pressuring bottlers to buy more soft drink concentrate than necessary This overselling technique added sales, and therefore higher profits, to Coke’s financial reports, and it kept the stock price artificially inflated Those who purchased Coke stock in a short period in late 1999 to early 2000 were entitled to a portion of the settlement In a similar case, the SEC investigated McAfee, Inc in 2006 McAfee, a software seller, was accused of selling its software products to its distributors in quantities greater than end-consumer demand The company admitted no wrongdoing but ultimately agreed to a $50 million settlement Chapter 8-57 SO Ethical issues related to revenue processes Real Real World World http://www.usdoj.gov /opa/pr/2003/July/03 _crm_436.htm A recent example of accountants being involved in revenue misstatement in an accounting fraud scheme occurred at HealthSouth Corp Richard Scrushy, the CEO, and five different financial officers were accused of inflating profits by $1.4 billion The accountants involved claimed that Scrushy held so-called “family meetings” to help devise and cover up earnings falsifications In June of 2005, to the surprise of federal prosecutors, Scrushy was found not guilty of all counts against him even though the five other HealthSouth officials had plead guilty and testified that Scrushy ordered the actions Although a jury found him not guilty, Scrushy’s job prospects as a CEO are severely damaged At a minimum, he tolerated and failed to prevent unethical behavior, even though it was not proven beyond a reasonable doubt that he participated in the events Chapter 8-58 SO Ethical issues related to revenue processes Corporate Corporate Governance Governance of of Revenue Revenue Processes Processes Four primary functions of the corporate governance process: Management oversight Internal controls and compliance Financial stewardship Ethical conduct Establishing proper processes, internal controls, and ethical guidelines leads to better corporate governance and, therefore, good financial stewardship Chapter 8-59 SO 10 Corporate governance of revenue processes Corporate Corporate Governance Governance of of Revenue Revenue Processes Processes Concept Check Which of the following is not a method of unethically inflating sales revenue? a.Channel stuffing b.Holding sales open c.Premature recognition of contingent sales d.Promotional price discounts Chapter 8-60 SO 10 Corporate governance of revenue processes Copyright Copyright Copyright © 2013 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 8-61 ... related risks and controls Sales Sales Processes Processes Exhibit 8-2 Sales Process Map Chapter 8-11 SO Sales processes and the related risks and controls Sales Sales Processes Processes Exhibit... Processes Exhibit 8-2 Sales Process Map Chapter 8-12 SO Sales processes and the related risks and controls Controls Controls and and Risks Risks in in Sales Sales Processes Processes Common procedures... Shipping and/ or recordkeeping at multiple Chapter 8-14 locations SO Sales processes and the related risks and controls Controls Controls and and Risks Risks in in Sales Sales Processes Processes