FACTORS AFFECTING ACCOUNTS RECEIVABLES IN LOCAL AUTHORITIES 

NORLI ABD TALIB
ASMAH ABDUL AZIZ (PHD), PROF MADYA

Fakulti Perakaunan

Tingkat 11, Menara SAAS

UiTM 40450 Shah Alam

INTRODUCTION 

Uncollected revenues seem to be an important issue to be addressed by local authorities. The effort to reduce the uncollected revenues emerged as one of the most challenging tasks faced by staff of local authorities.  As the local authorities used accrual basis in their reporting, this item is shown as ‘accounts receivable’ in financial statements.  The size of local authorities’ current assets will be affected with the increasing in the accounts receivable.  Accounts receivable could be collected and uncollected, thus the management need to monitor that these accounts receivable do not remain in the balance sheet for more than a year; and later turning into bad debts.   Accounts receivable also could be used as one of the techniques to portray an organization to be better that it is supposed to be (misrepresentation).  Realizing that accounts receivable could be ‘abused’ to portray higher amount of current assets, the researchers conducted a research which is related to accounts receivable in the local authorities in Selangor and Perak. 

PROBLEM STATEMENTS 

Local authorities in Malaysia raise revenues from both internal and external sources.  The internal sources of revenue consist of various types of taxes, licenses and etc collected from public in their jurisdiction.   External sources comprised of receipts from the government such as equalization grants and other types of grants.  In delivering services, the local authorities are dependent upon the collection of various taxes and other revenue collected from the residences. These local residences should pay all services rendered by local authorities as this payment can be utilized in managing the local authorities.  However, it is found that many local authorities are facing the problems of uncollected revenue as presented in their balance sheet as accounts receivable. This has been highlighted in a study on audit incidents conducted by Asmah Abd. Aziz and Emelin Abdul Wahid (2003).  The study shows that the uncollected revenue is the most frequent audit incident in most local authorities based on the comments from auditors regarding the uncollected revenue.  Every year despite collecting taxes, local authorities receive a lot of government grants. The government assists the local authorities to help them in delivering services promptly in their jurisdiction. As stated in the New Straits Times (2004) the Auditor-General Tan Sri Dr Hadenan A. Jalil, noted the ‘glaring mismatch’. He said ‘many State Governments were in dire straits because their incomes were stagnant or dwindling.  On paper, their finances are in order.  In reality, several State Governments are on the brink of bankruptcy.’  He added further that “Some have clean auditing certificates but their financial positions are in a different state altogether” (Hadenan, 2004). The existence of receivables indicates that the company, instead of collecting cash, invested cash into receivables, which, in effect, are loans to customers (Robert, Dircks, Jr., 1996).  The reduction in accounts receivable means an improvement in the local authorities’ cash flow and more cash available for the local authorities to spend which result in better value for the residence (Peter, Buckle, 2003). The more cash available in local authorities also means the government could reduce the amount of grant and utilize it for other beneficial activities.  With the current issues highlighted from the previous research and comments from the government, the local authorities need to find ways in minimizing their accounts receivable.   

OBJECTIVES OF RESEARCH 

From year to year the local authorities in Malaysia not only experienced growth in revenues and demands but also face pressure to maximize revenue and provide the highest level of possible services in their jurisdiction. The increase in uncollected revenue problem will cause the government to increase the grant in assisting these local authorities.  With the reduction in accounts receivable, the amount of grant could be reduced and the government can utilize it in other beneficial activities.  Therefore the objectives of this research are: 

1.      To ascertain the trend of accounts receivables in local authorities.

2.      To describe the frequent contributing factors of accumulated uncollected revenues.

3.      To recommend necessary actions to be taken in reducing their uncollected revenues. 

Thus, this research will highlight the trend of accounts receivable and ways of managing the receivables will also be highlighted.  Improving the accounts receivable management ultimately means that more cash is available to spend. 

RESEARCH METHODOLOGY

Research Design 

This section covers the conceptual framework, sampling, data collected, questionnaires, data analysis, hypotheses of the study, measurement procedure and limitation of study. 

Conceptual Framework 

In performing this research, the trend of accounts receivable, revenue and average collection period will reveal the trend in these selected local authorities.  In analyzing the performance of the selected local authorities in managing their receivable collection, the average collection period will be used.  On the other hand, in describing the contributing factors of uncollected revenue, the following framework will be adopted.   

 Figure 1: Conceptual Framework for Contributing

   Factors of Uncollected Revenue 

The conceptual framework presented in Figure 1 above is to demonstrate the multifaceted factors, which affect the likelihood of uncollected accounts receivable. Factors such as existence of pay counters at various places, extended payment hours and method of payment are posited to influence the performance of accounts receivables collection from their local authorities’ jurisdiction. Payment facilities are an important element of plans and strategies to be carried out in a local authority (Peter Buckle, 2003).  By having these information as independent variables, the accounts receivable is used as dependent variable to study whether these information influence the behavior of the accounts receivable. This is the first research, which was conducted to describe contributing factors of uncollected revenue for local authorities in Malaysia.   These independent variables are used to reflect the residence performance in making their payments to the local authorities. 

Sampling

For the purpose of this research, the selected local authorities were chosen in order to represent the northern and central Malaysia. 

Data Collected  and  Questionnaires 

Data collected for this involves all local authorities from Selangor and Perak, which have complete information for six consecutive years i.e. the whole population of 27 local authorities, ranging from 1995 to 2000.  All the selected local authorities’ financial reports were obtained and analysed. Questionnaires were distributed by mail to Selangor and Perak local authorities.  Only 18 local authorities’ accountants’ questionnaires were received, representing 7 from Selangor and 11 from Perak, resulting 66.67% as the response rate. 

Data analysis 

The first stage in the process of analyzing the data is assessing, calculating and evaluating the accounts receivables and revenue from 1995 to 2000.  To ascertain the trend of accounts receivable, the arrears/uncollected amount of equalization grants and other types of grants from the accounts receivable were excluded to have a real picture of amount uncollected from public.  The average collection period is calculated to measure the efficiency of the asset management.  

In the second stage, questionnaires were distributed to respective local authorities’ accountants/person in charge by mail in describing the frequent contributing factors of the accumulated uncollected receivables emphasize on the management of collection. With some information from the answered questionnaires, three hypotheses were tested.  In this stage, the researchers assessed and evaluated each data that has been collected to describe the contributing factors of accumulated uncollected revenues.  The researches also use the descriptive analysis, T-Test and One-Way Anova with post hoc (Duncan) using the SPSS.  

Hypotheses           

Three hypotheses represented by_: 

H₁:       The existence of pay counters at various places affect collection of accounts receivable.

H₂:       Extended payment hours affect collection of accounts receivable.

H₃:       Methods of payment affects collection of accounts receivable. 

Measurement Procedure 

The questionnaires were analyzed using the statistical Package for Social Science (SPSS) version 11.00.  The following statistical measures were specifically used to interpret data for this study: Descriptive statistics, T-Test, One-Way Anova with post hoc (Duncan) were used. 

Limitation of the study 

This research was conducted in Selangor and Perak local authorities.  Financial Reports of selected local authorities were analyzed and this research only concentrated on the accounts receivables and revenue. 

EMPIRICAL FINDINGS

 Description of Local Authorities in Perak and Selangor

There are 12 local authorities in Selangor and 15 local authorities in Perak.  Both of the states have one local authority status as city council.  Selangor has 6 local authorities with status town council and the remaining 5 with status district council while Perak has 2 local authorities with status town council and 12 with status district council.

Overview on Findings

With the increasing trend in accounts receivable and revenue, it can be implied that most of the Selangor local authority and more than half of the Perak local authorities are facing problem in collecting not only with the aged receivable but also the latest receivables.  This may reflects that these local authorities did not take action seriously to minimize their accounts receivable.  In other word, for internal comparison, it shows that the efficiency in managing the receivables collection is deteriorating for these local authorities. The increasing trend of average collection period indicates that the number of days taken by these local authority keep increasing and is a reflection of the local authority’s collection management efficiency. The finding from this study also shown only 13 out of 27 selected local authorities provide the provision of doubtful debts in their financial statement. Accountant must be prudence when preparing the financial reporting and it is one of the accounting concepts.   Thus, these findings provide the answer for the first objective in this research that is to ascertain the trend of accounts receivables.   

Findings on Contributing Factors of Uncollected Revenue 

The revised accounts receivable is used in determine the contributing factors by conducting T-Test on four hypotheses to know whether there is significant difference to collect the receivable of local authorities.  Three hypotheses were tested in describing the factors. There is significance difference between local authorities that have pay counters at various places as compared to those that have lesser pay counters. There is also significance difference between local authorities that have extra hours for making the payment as compared to those operate within office hours. Finally, the last hypothesis shows that there is significance difference between local authorities that have various methods of payment to those have less methods of payment. The T-test was conducted at 95 percent confidence level.  The hypotheses tested show that there is significant impact on reducing the collection of accounts receivable.  Therefore, the adoption of the conceptual framework to demonstrate the multifaceted factors, which affect the likelihood of uncollected accounts receivable, is parallel in this study.  Thus, these findings provide the answer for the second objective of this research that is to describe the frequent contributing factors of uncollected revenues.   

RECOMMENDATIONS AND CONCLUSION 

The research is important because it reveals the trend in accounts receivable and contributing factors of uncollected revenue.  The trend of the collection figures is acknowledged and has clearly requires corrective action to be taken. Petaschnick (2005) highlighted that proper management of accounts has a huge impact on the financial operations. The contributing factors of the uncollected revenue provide evidence that improving the contributing factors can reduce the accounts receivable.  It is recommended that local authorities improve their debt management.  Therefore, the following recommendations are proposed to ensure sustained improvements in the accounts receivable collection:

1. Efficient receivable system should be maintained.

2. Aging list should be prepared.

3. Provision for doubtful debts should be provided.

4. Measure their performance using average collection period.

5. Conduct workshops and seminar on accounting issues.

6. Pay counters should be placed at various places so that the public can make their payment at their own convenience. 

7. Extend the hours of making payment so that the public can easily pay at their convenience.

8. Various methods of payment should be continued as its gives significant impact in reducing accounts receivables.

It is important for the local authorities to improve their current condition because they are accountable to the jurisdiction residences. In future this research could be extended to other local authorities in southern and eastern states of Peninsula Malaysia, and East Malaysia. It could be encompassing more states in Malaysia.