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How traders can avoid losing cash to counties

By Caroline Gathii | February 26th 2020

Deputy Auditor General Alex Rugera when he appeared before National Parliamentary CDF Committee to answer Auditor queries on CDF usage. [File, Standard]

“If it is not in writing it does not exist.” This is audit speak that is premised on the belief that if an auditor does not see documented evidence of something, then the assumption is that it did not take place. Documentary evidence is used when auditors are reviewing accounts. They use this to raise audit queries as well as classify expenditure as disallowed.

According to the recent report from the Office of Auditor General, county governments owed Sh30 billion to Kenyan businesses in the form of pending bills as of December 18, 2019. Pending bills are invoices paid during the financial year the expenditure was incurred. The top three counties with the highest pending bills are Nairobi, which owes Sh3.77 billion, Wajir at Sh1.94 billion and Mombasa with Sh1.57 billion. Counties with the least amount of pending bills include Laikipia, with Sh78 million, Makueni, Sh33 million, and Baringo with Sh24 million.

The report further states that out of the Sh30 billion owed, Sh1.7 billion is ineligible expenditure. The government constituted an ineligible pending bills resolution committee to resolve the issue of pending bills. The committee confirmed that Sh1.7 billion of the bills were ineligible. Ineligible pending bills are those with no records or documents presented or are irregular. They can be irregular because auditors are unable to do a three-way matching of the invoice, quotation or tender and delivery note, assuming this is what they used based on best practice.

This essentially means that there are business reporting credit sales of Sh30 billion, but the monies remain uncollected, sitting in county treasuries. It also means there are businesses reporting profits but the profits cannot be distributed as the amount remains uncollected. These businesses have huge amounts in receivables, which take more than one year to collect.

It also means that there are businesses that may be taking loan facilities to finance government activities.

One would then ask, what does it cost to do business with county governments? Does this delay in payments also affect the pricing of the goods and services that are supplied to county governments? Is this reason why the business owners are shying from providing goods and services to counties?

Out of the Sh30 billion held up in counties, Value Added Tax (VAT) is Sh4.8 billion. VAT is payable on or before the 20th day of the month following the one when vatable goods or services were received. These means these businesses are expected to pay the VAT even before the payment is received from counties. Failure to remit VAT attracts a penalty (whichever is higher) of Sh10,000 and 5 per cent of the tax due and an additional tax of 2 per cent compounded per month. How does any business stay profitable with these challenges? What strategies should a business owner put in place to ensure they comply with the tax regime under such dire circumstances?

There is no doubt that doing business with counties where delays that could even take more than a year to pay is high risk. To mitigate this risk with the counties, businesses should consider the auditors’ mantra — it is all written down. Besides this, you need to be a prequalified supplier in the county and in the specific area that you are supplying whether goods or services. You should have responded to a request for quotations or tender depending on the procurement process; you should be issued with a notification of award and issued with a Local Purchase Order or contract which indicates the terms of the contract and the amount payable to you.

Upon delivery of your goods, they should be inspected by the Inspection and Acceptance Committee and a certificate of completion or goods received note issued. It is equally important to know that what you are supplying should be in the budget since government only pays for items that are in the budget.

Being in business requires that you learn the dynamics of your client, how they operate and how to serve them without taking you out of business. Profitable businesses have closed down because they are unable to pay for their operational costs. This is because their monies are held up in receivables or in some unfortunate instances, you incur ineligible bills. 

The business owner should maintain all the correspondence and documentation with the county government. The evidence you have is what will make your payment eligible or ineligible. Best practice in business is that you only commence the supply of goods and/or services based on a valid contract or local purchase order. A contract or a local purchase order is a legally binding document that you can rely on when payment of your supply is not forthcoming. You can use it to defend your case in a court of law if it requires to proceed to this level.

The documents required to effect payment will include request of goods and services from a user department, the advertisement of the goods or services, an evaluation report or bid analysis, notice of award, a contract or local purchase order, a delivery note and goods received note or certification of delivery. These are the documents that will make your invoice eligible. The individuals processing your payments will be a different team from those who requested for your goods and or services in haste.

Ms Gathii is an international certified risk expert with First Idea Consulting Limited. [email protected]

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