Customer Contracts Missing 480

  • Has anyone dealt with the issue of missing contract documents (signed) and the resulting deficiency severity? I am struggling with the severity rating that should be applied to this deficiency and whether it rises to the level of a significany deficiency or material weakness.

  • We are indeed in the same situation at least regarding European subsidiaries. In some cases, there are no contracts, in other case, we may have them in house but not shared with Finance people in order to forecast the proper commissions or month end bonuses. Pricing or special quotations are instructed by the sales agent directly to the customer services, and the evidences of agreement with the customer (signed) are most of the time absent from our office. In some cases, we would know about the wrong pricing when customer is not paying. Then generating the need to future credit notes.
    In our documentation, we have not referred to the step of pricing establisment… We covered the creation of customer profiles (duly approved), the pricing set up …but never referred to contracts. We have not yet filed the 10K of 2004. However, during the audit of one of the big 4 no significant weakness has been higlighted.
    Just try to figure out the risk of not having contract and find the controls you have in place, if none please imediately design a process and controls that remediate the risks…
    I personally requested to have the copies of contracts and any further amendements in the finance department to avoid later year end surprises. But we are still long way to go to reach completness
    Good luck

  • What is the FINANCIAL STATEMENTS impact of not having contract documentation?
    In most of our processes issues around contracts were excluded from scope.

  • Dear Denis,
    In fact if in these contracts, there is commission, bonus or other financial clauses, it always has impact in financial at least by the time these are due and paid, which in fact is already too late to have them included in the financial statements - matching principle and specialization of the accounting years are application in any GAAP I know a bit about…

  • Yes, but what is to stop you paying commissions, bonuses, etc without as contract? Contracts are certainly important commercial documents but if they are wrong or not done your financial statements will not necessarily be wrong.
    If the contract is not there will your financial statements be incomplete or inaccurate? Can you evidence controls over the financial statements risks without contract documentation?

  • May be,
    But the question is based on what and how timely do you capture that data?
    Any suggestions because I am still strugling with huge surprises coming from customers, though instructions were sent to agents to provide with the information?
    bye and thanks

  • I reread your first post and it seems you are referring to commission accruals here, right?
    Probably your auditor had no issue based on materiality. Either that or they accepted something like review of customer ageing/credit control as a control.
    I also think you have a, predominantly, operational issue here.

  • If a company is paying sales incentives, or upfront subscription bonuses to new customers, the lack of a signed contract supporting these payments would have to be a deficiency. There are controls to ensure the receipt of a signed contract prior to the data being input into the applicable system, but weak controls to ensure retention of the original contractual document. If the signed contractual document can not be found, how can the validity of the data entered into the system be effectively tested?

    Not necessarily.
    Whilst not wanting to suggest that contracts are unimportant it does not follow that because they are missing you have a deficiency in either control design or control effectiveness. There are a number of controls that could/should exist that would allow the financial statements assertions to be met without referring to the contract document.

  • Such as?
    Any possible examples of controls that could ensure timely and complete capture of commissions, rebates or other special conditions signed and agreed with customers?
    Sorry for the incredible ignorance of mine :?

  • Possible controls for completeness of commission could include:

    • supplier invoices are reviewed and authorised
    • system generated self-billing
    • commissions can only be within certain parameters
    • reconciliation ot sales agent documentation
    • management review of commissions
    • gross margin review
      Remember that we’re talking about internal control rather than audit here. That you cannot take a commission transaction and (easily) tie it back to a hard-copy contract does not necessarily mean you have a failing in your system of internal control. If contract entry/agent set-up is adequately controlled and invoice authorisation and payment are adequately controlled you may not have an issue.
      Flipping the argument round the other way. It is entirely possible that your commissions could be completely wrong even if you do have a nice fat file of contracts.

  • Thanks.
    Fine for me. At the end, all depends on the environement and the process design, right?

  • Angie,
    All of the above is correct BUT, as a general concept a signed contract is the only thing that can be relied on.
    If there is no contract (for anything, not just commissions etc.) how do you know that payments made in accordnce with that contract are correct? Is it possible for someone to apply different criteria? Either in error or fraudulently, in exchange for cash or to a company or individual in which they may have a vested interest,? If you have an answer to the first question and the answer to the second is no, you have a control. Document it and move on.
    Please bear in mind that section 404 does not concern itself with materiality, the joint arbiters of what is material must be the executives who sign the section 302 certification (form 20-F) and definitely no-one who subscibes to this forum. If your answers to the above have such limitations (say, we check everything over USD1000) say so in your documentation.
    Your auditors will have their own criteria to decide what, to them, is material.

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