VERIFICATION vs REPORTING – The Audit Question
This is the crucial distinction between what IRAC does, and what the Accounting Firms do.
IRAC queries the Client’s bank account/s, line-by-line, entry-by-entry, transaction-by-transaction. IRAC recalculates interest charged to the Client’s Loan and/or Overdraft Accounts. IRAC therefore certifies that the finance costs reported by the Client are accurate and legal vis-à-vis the Banking Facility Contract/Letter/s, and with The Banking Act and The Central Bank of Kenya Act.
Conversely, audit firms merely report Finance Costs. Clients pay these partnerships millions of shillings to just state what the banks have charged. What is merely stated is not queried, verified or recalculated.
This may not matter much if a Client has small exposure on Finance Costs. However, if a Client has large borrowings, and Finance Costs are substantial every year, the Client’s Audit Function is not complete if such a critical part of the Financial Statements has not been queried, verified and recalculated.
Why Query, Verify and Recalculate? Simple; banks make mistakes.
Interest overcharges are caused by a variety of reasons, including:
- Applying punitive rates for unauthorised overdrafts to the full amount overdrawn rather than the excess over the agreed limit.
- Where provided for, failing to or unjustifiably delaying in consolidating Account balances so that positive balances are offset against overdrawn accounts.
- “Loading” small increases in the charging tariff and interest rates published on loan and overdraft interest.
- Computerisation and Migration of systems in most banks. This has brought the focus on errors from the actual calculation to the basis of the calculation.
- Application of the UBR (unauthorised borrowing rate). This is the rate of interest charged when the client exceeds the borrowing limit negotiated with the Bank and set out in the Banking Facility Letter. It happens that a limit that has been agreed upon is not or has not been marked in the Bank’s Computer System. It would require a hawk-eyed person with a lot of time and working with a reliable calculator many months to spot and establish a trend where the applied interest is higher than the agreed rate.
- There is often miscommunication between the Sales end and the Operational end in banks. Once hands are shaken and a new Banking Facility Letter signed, the overwhelming majority of Clients go to sleep, placing their Trust in their bankers to get everything agreed on 100% correctly. ‘Mistakes’ happen.
- Sometimes the interest calculations are just plain wrong. After all, banking systems are not purchased from Heaven and delivered and operated by Angels.
- Other errors relate to Cheque-clearing cycles; use of credit balances in group interest calculations; the possibility of duplicate charges; inflated transactions; the use and application of standard bank tariff rates; compliance with legal requirements relating to The Banking Act, The Central Bank of Kenya Act, The Land Act and The Consumer Protection Act; incorrect application of Penalty Interest; and banks’ own correcting refunds being wrong – wrong as to accuracy and wrong as to the timing of the correcting credit applied.
To spot any of these errors, any company needs a dedicated, trained banking reconciliation Department that, additionally, has interest recalculation capability. This Department needs to scrutinise all items in the bank statements and postings line-by-line, entry-by-entry, transaction-by-transaction, every day.
The fact is, this is an impossible task, especially for Overdrafts and Current Accounts that have thousands of entries and high activity.
This is where IRAC’s specialised, custom-made, specific interest recalculation software – Credit Verifier! – comes in. It does what no Auditing Firm does. It obviates the need for an entire Department dedicated to second-guessing the bank/lender. It saves money where it most should not be lost – Finance Costs! It is a must-have to complete the Auditing end of Finance Costs.