Case Study 13

Overpayment by Customers

Intended audience: Professional Accountants in Business


You are the newly appointed Financial Controller in X Pte Ltd, a large private engineering company. This is your first appointment in the industry having undertaken your training at a large accountancy firm where most of your experience was gained in the audit of clients listed on the Mainboard of the Singapore Exchange (SGX). X Pte Ltd makes components which are used in the manufacture of various household products and it has a wide customer base from large household names to small local private businesses.

One of your first tasks is to undertake a review of aged debtors. Whilst undertaking your review, you find that a small number of customers have credit balances on their sales ledger accounts. Whilst most of these are for small amounts, two of these are for sums of S$21,234 and S$34,456 respectively. These amounts relate to invoices which are now over 9 months old and which appear to have been paid twice. You find this odd and decide to raise the issue with your boss, Mr Y, the Finance Director, at your next meeting.

The following morning, Mr Y calls you into his office and asks you how you are settling into your position. You respond that, although you are still finding your feet, you have been making a major effort to get up to speed with the company’s business, systems and controls. Mr Y appreciates your enthusiasm and is pleased that he has managed to recruit someone so enthusiastic.

Mr Y then asks whether anything has come to your attention so far. You advise him of what you have found in relation to the customers who appear to have paid twice. Mr Y laughs and advises:

“It did not take you long to show your auditing skills – but remember that an auditor is a watchdog not a bloodhound. This sort of situation is commonplace in the industry and as with refereeing decisions in football, some you win, some you lose, but at the end of the day it all balances itself out.”

Furthermore, he produces copies of letters from a file which are addressed to the Finance Directors of the respective customers informing them of their company’s overpayment.

“There, everything is above board and you have no need to worry. If these customers cannot act on such letters then who are we to do anything further? If they ask for the money then they can have it back.”

Mr Y thanks you for popping in and you return to your desk, though rather bewildered by his comments. Customers have overpaid and he knows this to be the case, yet he has no intention of returning their money unless prompted by the customer. You also think of the finance staff within the respective customers and how they managed to process a payment for the same invoice twice and even worse, why the Finance Directors of these respective customers have not sought payment having been advised by Mr Y. You decide to put this all down to the rather steep learning curve of adjusting to life in industry: it is most unlikely that this scenario will repeat itself. You also decide to review the company’s sales system. What you discover is that the company does not actually send statements to customers but rather a list of any outstanding invoices on a monthly basis.

A couple of months pass when, whilst undertaking another review, you notice that a customer, Z Pte Ltd, has once again paid the amount due by them twice. You decide to discuss this with Mr Y with a view to issuing an immediate repayment or at the very least, a credit note, as the company is a regular customer. Mr Y advises you that he will deal with this by personally writing to the Finance Director at Z Pte Ltd – he advises you that at this stage there is no need to issue a credit note or make a repayment. He adds that:

“X Pte Ltd did not ask to be paid twice -it is the customer’s own fault for doing so and they would be wise to employ better people in their finance department but are probably not willing to spend sufficient cash to attract the right quality of person – however I will deal with it – don’t you be wasting time working for our customers – remember they do not pay your salary.”

What do you do now?

Analysis of Scenario: What are the readily-identifiable ethical issues for your decision?

I. For you personally

Can you continue to ignore these overpayments without contacting the customers personally? Is it sufficient that your boss has informed you that he has informed the respective customers? How do you know that the Finance Director has actually sent the letters to the customers?

Is the company’s policy of merely sending a list of outstanding invoices transparent? Does the company’s sales system need a detailed review?

How have these payments been treated in the financial statements – are they included in the list of trade creditors or lost within the overall trade debtors balance?

Is there anyone else in the company that you could discuss this matter with? Does your company have a code of conduct that may provide guidance on such matters?

II. For the Company

Is there a supportive environment for open discussion of practical dilemmas without a recriminatory, or ‘blame’, culture?

III. Who are the key parties who can influence, or will be affected by, your decision?

‘You’, the FD; the other directors; the employees; the shareholders; and the respective customers.

IV. What fundamental ethical principles for accountants are most applicable and is there an apparent conflict between them?

-            Integrity: If such matters continue to occur, and at a later date come to light, will you be held to have been in complicit agreement with your boss?

-            Objectivity: Can you continue to be objective if nothing is done?

-            Confidentiality: Can you discuss this matter with someone else in the organisation? Does your company have a policy of supporting people to do so?

-            Professional behaviour: The need to ensure that the company is complying with all applicable legislation and regulations.

V. Is there any further information (including legal obligations) or discussion that might be relevant?

Did the Finance Directors at the respective companies actually receive the letters sent by your Finance Director i.e. have they actually been informed of their double payments? If not, the company may be in breach of legal requirements.

VI. Is there a conflict between the ‘Guardian’ and ‘Commercial’ strands of an accountant’s responsibilities?

Commercially, the company is better off in the shorter-term not repaying these amounts. However, from the point of view of the company’s reputation and the accountant’s ‘Guardian’ role, is this type of corporate behaviour acceptable?

VII. Based on the information available, is there scope for an imaginative solution?

Possibly encouraging your boss as to the benefits of sending monthly statements to your customers rather than mere lists of outstanding invoices.

Acknowledgement: This case study was published by the Technical Policy Board of The Institute of Chartered Accountants of Scotland (ICAS), and adapted by the Institute of Singapore Chartered Accountants (ISCA) with the permission of ICAS