Accounting Advice

Recently, a few of my clients have identified structural issues within agency management accounting systems. I won’t pretend to understand all the technical factors within these systems.

The net effect is that gross numbers may be materially overstated while the net numbers are correct. That is a problem, and absolutely no one should ever accept the response, “Well, the net numbers are correct so don’t worry about the gross numbers.”

For example, agencies often run aged accounts receivable reports on a net basis. The pre-collection will offset the old debts, and management therefore thinks they’re in good shape. But that is not accurate. The agency does not own or have any title whatsoever to any monies collected prior to the effective date. Therefore, those amounts should never be applied to old receivables. This is the same as someone trying to offset their bills against their neighbor’s bank account.

The same goes for credits. Maybe credits offset monies owed, but the agency never owns the credits. The client has title to the credits.

An aged receivables report must be run on a gross level because that is the only way to separate the numbers by who has title, who owns the monies involved.

If there is an accounting mistake that involves these reports, cash, or premiums payable, the distortions can cause management to make incorrect decisions. A very serious mistake is believing the agency’s trust ratio is materially higher than it is, and then withdrawing or distributing cash that should not be withdrawn.

A partial but essential solution is to learn your agency management system’s accounting module in detail. But that by itself might not solve the problem.

One thing to look for in particular is contra accounts. Many of the contra accounts I see on agency balance sheets are largely nonsensical. In a good accounting model, agencies would rarely have contra accounts. If you have a contra account, I strongly recommend analyzing why it exists and whether the amounts are correct.

Reconciling your statements monthly is a wise practice. At a minimum, have a third-party reconcile your accounts (this is separate from reconciling commission statements). An agent recently learned they had about 20% less cash than their monthly balance sheet indicated. A third-party audit identified an oddity and asked pertinent questions before they had spent the money. If they had spent it, they would have been out of trust.

(And for anyone who thinks they don’t live in a trust state, ALL STATES ARE TRUST STATES! The Federal Government requires agencies remain in trust 365 days a year. Some states allow commingling of trust and operating monies, but even those states require agencies to be in trust at all times.)

This is a good reminder to pay close attention to your financial reports, especially your balance sheet, your aged accounts receivable report, and your trust ratio reports.

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NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.