Understanding the Collection and Write-off Process A major retailer has proprietary (in house) credit cards. Customers who wish to make purchases are encouraged to take out a credit card. The credit card will have the name of the retailer on the credit card and only the retailer will accept the credit card for purchases. The cardholder cannot use this credit card at any other store other than the store on the credit card. You could say this credit card is very much like an accounts receivable in the name of the customer, except the retailer has credit terms. If the balance is not paid in 30 days after the statement is sent out, the retailer will charge 1.5% monthly interest (18% per annum). The retailer has policies in place to handle cash receipts. All collections are sent to a central processing center and none of the retailers employees handle the cash or checks received. Periodically, the external cash collections processor is audited. All audits to date suggest that the provider is properly handling the cash collections. Statements are sent to customers monthly. If there are discrepancies, a separate department handles the disputes. Occasionally there is a problem with a sale posting to the wrong customer credit card or a lost payment, however, there are procedures in place to resolve the issues. The standing policy of the company is that once an account has not had a payment on a balance owed for 270 days, the account is written off. Prior to write-off an in-house department phones the customer and tells that customer that the account is in arrears and should be paid. The calls become automated after the initial call. A note taking system is employed which provides a way for both the live phone calls and automated phone calls to be recorded. Letters are also sent to the cardholders. One letter informs the cardholder that if payment is not promptly made, a collection agency will take over the account. Another letter informs the cardholder that the delinquent account will be reported to a credit agency and the cardholders credit rating may be affected. All the actions are recorded in the note taking system. Monthly, the credit department prepares a listing of uncollectible accounts. This listing includes those accounts that have just become 270 days delinquent and should be written off. Also included is a listing of accounts that are not current. The credit manage prepares a formal report that compares this months delinquent accounts to those of prior months and the same month of the prior year. Year to date reports are also made. These reports also include any changes in credit policies (easing of credit) or new sales promotions (zero payments/zero interest programs), etc. At end of month, the credit manager meets with the controller to discuss the credit department. One topic always included in the meeting is the collectability of accounts receivable. The credit manager discusses the collection efforts and changes made in collection procedures. Formal notes are taken in this meeting and a copy of the minutes are retained by the accounting department. Trouble in collections Once accounts are written off, the in-house collection efforts cease. The credit manager has a friend who runs a collection agency. He asked for and received permission to place accounts with his friends agency. The agency retains a 10% finders fee for any collected accounts. In a recent meeting, the controller noted that very few of these accounts placed with the collection agency are being paid. The controller is considering placement with another agency. The credit manager tells the controller that this is quite standard. After all, if they deemed they were uncollectible and wrote them off, why would they expect someone else to be able to collect? The controller suspects something is amiss. The controller talks to friends who are also controllers and notes that often the collection rates from an outside agency are up to 25% of accounts placed...in other words, 25% of the written off accounts when placed with an outside agency get paid. The credit managers friend is reporting only a 5% collection rate.

3.Why is this new design better (from perspective of the individuals involved)? What problems did you address? You can go back to the control activities in your response or discuss any other perspective you have. You not only need to give me a better system but justify that system as being better.