Submitted by Bob Smith 12/10/01 OUTLINE OF SUBJECT This procedure is intended to cover an operational review and appraisal of the policies and procedures of the Credit and Collection Department. CUSTOMERS SUBJECT TO COLLECTION POLICIES AND PRACTICES Most customers are seldom exposed to the impact of a utility's collection policies and practices. A small number of customers-an estimated 20-25%-requires the attention of the Credit Department. The customers comprising this percentage must be reckoned with individually and not as a group. Fraud perpetrated by individuals against utilities has assumed such alarming proportions that many collection authorities now consider it the largest single element to be reckoned with in controlling uncollectible losses. The auditor should realize, however, that while the slow, the negligent and the fraudulent customer can be effectively dealt with, they can impose collection expenses of such proportions that the end result would be uneconomical. Thus, adequate collection techniques must be preceded by sound policy and practices with respect to granting credit to customers. The task of credit men is that of selecting the extraordinary credit risks, either at the time customers apply for service or at a later date, after being exposed to their paying habits. This selection process is indeed difficult because the soundest credit risk may become weakened by changing conditions or misfortunes over which neither debtor and creditor has any control. COLLECTOR'S CALLS There was a time in our industry when a collector's call was made on almost any delinquent accounts for amounts as small as $3 or 5$. Today, the cost of a collector's call to the utility is related to each customer's indebtedness and therefore telephone contacts have assumed a much more important role in collections. In many instances, house calls are made only as a last resort, which is usually immediately prior to prospective termination of service for non-payment. With the increase in collectors' salaries, companies, too, have progressively raised the dollar limits on accounts referred to collectors for field action. Most utilities permit collectors to accept payment of past-due bills, but some companies do not permit them to accept payments after certain have been ignored. Some companies have discontinued the use of collectors, substituting shop "turn-off" men, on the grounds that the effectiveness of collectors is limited. CHANGING CREDIT PICTURE The internal auditor should approach an operational audit of credit and collection policies and practices with maximum objectivity. In comparing uncollectible bills with prior years, auditors should take into account that average utility bills are constantly increasing; also, that uncollectible losses will vary between metropolitan and rural areas, states, and companies. CUSTOMER DEPOSIT POLICIES Utilities are looking more objectively at their policies with respect to obtaining deposits from customers as security for payment of service bills. Many companies require deposits only of those customers classified as poor credit risks and refund such deposits after good paying habits have been established. Ordinarily, deposits are required of commercial and industrial users only on the basis of a thorough credit investigation. A utility's deposit policy should be clearly defined in terms that are readily understood by customers and the regulatory authorities. Since the primary purpose of a deposit is to protect the utility against abnormal credit risks, each deposit theoretically should be proportionate to the maximum credit extended to the particular customer involved. The auditor should determine that the company's deposit policy is properly administered and is flexible enough to cope with the constantly expanding service demands of customers. UNCOLLECTIBLE ACCOUNTS PRACTICES In appraising the company's collection practices, the internal auditor should examine carefully the procedures and controls with respect to uncollectible charge-offs. Some utilities now maintain balanced "uncollectible" records which are segregated according to the year of charge-off. This practice provides greater protection against unauthorized entries than the mere memorandum type of record perpetuated by some companies. In addition to the uncollectible record, it is not uncommon for utilities to maintain fairly comprehensive credit or "old bill" files in customer name order and to post any uncollectible charge-offs to this credit file. Thus, if a customer whose utility service is terminated for non-payment later applies for service at another location, the utility can determine any uncollectible charge-off from the credit or "old bill" file and require that the customer arrange to liquidate such indebtedness before service is supplied at the new service location. (This practice is not allowed by some state public utility commissions). JUDGING CREDIT STANDING In appraising the company's credit and collection practices, the internal auditor should carefully review the extent of the credit information obtained from new customers when they apply for utility service. Most companies solicit comprehensive credit data from new commercial and industrial customers, including reports from local and national credit investigation agencies. However, credit information obtained from residential customers is often very limited. This is necessarily so because of the tremendous volume and very high cost. With the greater saturation of telephones, both public and private, gas and electric utilities generally are finding that the ratio of applications for gas and electric service received by telephone has increased appreciably. There is little doubt that a credit interview by telephone is largely impersonal. However, new customers should be given a full explanation of the utility's payment terms. In theory at least, the credit interview should produce sound credit information in order for the utility to appraise the extent of its credit risk. What may prove to be adequate credit information for a utility supplying largely a rural area, may be entirely inadequate for a utility supplying largely a metropolitan area. RECONNECTION CHARGES Some utilities now make a service restoration charge for service disconnected because of non-payment and subsequently restored for the same customer. Such charges are justified on the basis that the customer should pay for the extra expense he caused the utility; also, these charges are an inducement to the customer to pay his bills in accordance with the utility's payment plan. CREDIT DATA Many companies classify their customers according to their paying habits. For such classification of customers, some form of credit history is essential. Elements of a good credit record should include the payment history, how long an individual has been a customer, how often the account has been referred to the collection department, the number of bad checks he has given to the utility, and how many times his service has teen terminated for non-payment. OBJECTIVES OF AUDIT The principal objectives in auditing the Credit and Collection Department are to: 1. Determine compliance with company policy and procedures. 2. Determine the effectiveness of the policy and procedures. 3. Review and appraise the operations performed by the department. 4. Determine the accuracy of reports generated by personnel in the department. 5. Evaluate the adequacy of internal controls. 6. Determine compliance with Federal regulations of the Fair Credit Reporting Act, effective 4-25-71. PRINCIPLES AND PRACTICES An operational audit of this type is not necessarily performed annually. It is a periodic appraisal undertaken for the purpose of measuring and evaluating the effectiveness of collection personnel and collection methods and practices. In compliance with the audit objectives the following program should be observed, but not limited to the following: 1. Review and appraise policies, records, reports and procedures in terms of their adequacy and effectiveness. 2. Ascertain that there is a clear definition of responsibilities. 3. Ascertain that practices are in accordance with prescribed routines. 4. Review and appraise personnel performance. 5. Recommend such changes as appear advisable. A. Policies 1. Determine that policy is adhered to. 2. Determine procedures for requesting service. 3. Determine if all requests for service are reviewed by the Credit Department. 4. Review collection routines in general to see whether they are necessary, effective and properly controlled. 5. Examine forms and flow of paper work in the department. 6. Obtain an organizational chart and manuals to determine if they are up-to-date. 7. If organizational charts and manuals are not in use, determine how policy, authority and responsibility are resolved. B. Collection of Delinquent Accounts 1. Determine if a collar minimum for a collector's call is a part of the collection policy. Has this minimum been evaluated in relation to the cost of a collector's call? 2. Determine when a collector's call is made. 3. Determine if a collector is authorized to discontinue service if the delinquent customer does not make payment. 4. Schedule the number of collectors as of the audit date and compare with same period for the prior year. 5. For collectors' calls to be made, schedule a number of accounts to be visited. Make particular note of those accounts to be shut-off if payment is not made. At the end of the day obtain the collectors' cards and review them. Note the collectors' remarks about amount of payment, promise to pay, shut-off, etc., on your schedule for follow-up to customer accounting records. 6. Determine if collectors are permitted to accept payments for reconnect charges and customers' deposits. 7. Determine if management has considered eliminating collectors and using shop "turn-off" men to discontinue service. 8. Determine effectiveness of collection notices sent to customers. 9. Determine if supervision receives information in order to permit an evaluation of the routing and dispatching of collectors' calls. 10. Determine whether non-productive travel time is held to a minimum. C. Customers' Deposits The A.G.A. - EEI Internal Auditing Procedure Manual contains an audit procedure for Customers' Deposits. While a detail review of policy, procedures and controls applicable to Customer Deposits is made at the time of performing that audit, certain basic elements should be reviewed in connection with the audit of credit and collections. 1. Determine the policy applicable to restoration of service for those customers shut-off for non-payment. 2. Determine the basis for establishing the amount of a deposit. Is the basis in conformity with regulatory requirements? 3. Ascertain that deposits are applied to final billed accounts prior to charge-off. 4. Determine that all customer deposits issued are properly accounted for. 5. Review customers' deposits applied to final billed accounts for a representative period. 6. Determine that a deposit is promptly refunded after a customer has established a favorable credit rating, if this is the policy of the company or a requirement of the regulatory commission. D. Reconnect Charge 1. Determine that the reconnect charge is a part of the collection policy. 2. Determine when the reconnect charge was last evaluated for a possible increase. 3. Review billing procedures for reconnect charges. 4. If prenumbered receipt books are used for reconnect charges, account for issues for a representative period. 5. If a reconnect charge is not now a part of the collection policy determine if the company has considered such a charge. 6. Determine that waivers of reconnect charges are properly approved. E. Use of Collection Service Organizations 1. Determine if written contracts are in effect between the company and collection agencies. 2. Determine that all terms and conditions of the contracts are adhered to. 3. Ascertain that customers' accounts are transferred to collection agencies in accordance with company policy. 4. Determine if the company continues collection efforts for accounts transferred to collection agencies. 5. Review collections remitted by collection agencies to verify promptness of reporting to the utility and the accuracy of collection fees. F. Review of Personnel Performance and Supervision 1. Review performance records of clerks, account reviewers, and collectors. If performance records are not maintained, determine what techniques are used for evaluating performance. 2. Determine whether records are available to show effectiveness of individual account reviews. 3. Ascertain what action is taken to improve poor performance. 4. Determine if collection notices are producing the desired results. Is there evidence from performance statistics that an increasing rate of collection cases are referred to collectors? 5. Examine the time limitations imposed by collection notices to determine if the time is too short to permit maximum payment responses or too broad to permit an extension of service use. 6. Determine if the collection notice routines are flexible to allow selective handling of customers. 7. Determine to what extent telephone calls are used in lieu of collectors' calls or collection notices. 8. Observe whether personnel have a clear understanding of, and appear familiar with, their responsibilities and duties. 9. Note whether employees work harmoniously within the department. G. Reports 1. Obtain samples of all existing reports. 2. Analyze sample reports to determine: a) Their purpose and usefulness. b) If reports can be improved upon. c) What the recipient does with the report. d) Whether the number of recipients can be reduced. 3. Test check the information in the reports for accuracy. 4. Observe that prompt and accurate filing of reports is in effect. 5. Note that proper facilities and equipment are provided for filing all records. 6. Ascertain that storage and destruction policies are followed. Copyright (c) 1972, American Gas Association -------------------------------------------------------------------------------- CREDIT AND COLLECTION DEPARTMENT Filename: t:\library\audprgm\coll2.doc Ref.: AGA C-6 CREDIT AND COLLECTION DEPARTMENT Filename: t:\library\audprgm\coll2.doc Ref.: AGA C-6