Internal control & Risk management

What does internal control cover?

• Fixed Asset
• Inventory
• Petty cash
• Custody
• Cash receipt
• Approval and authorized write off
• Credit Note
• Credit control
• Billing/unrecorded income
• Payment
• procurement
• vendor selection
• pricing
• quoting
• investment appraisal
• Capital Expenditure
• Discretionary Expense Control
• Bank Reconciliation
• Inter-company balance reconciliation
• Claim reporting
• Contract management
• Deadline management
• Segreation of duty
• What are the special features of  accounts Payable for logistics companies
• withholding payment
• On time payment
• Holding payment
• advance payment

What are necessary before payment?

• approval
• proof of service
• GRN
• acknowledge of payment
• set of against AR, credit note received
• document of title, tax invoice, contract

How to avoid duplicate payments by freight forwarder

How to avoid duplicate payment by carrier?

What are the control for on time payment?

• cashflow planning
• negotiate necessary fund for financing business

What are the necessary conditions for effective internal control?

• information system to record
• reward system
• remove imbalance
• detailed investigation if necessary
• reporting to senior management
• alert system to avoid and mitigate
• independent internal audit
• training to ensure complete understanding

What are key elements for quotation control?

• Effective period to avoid frequent price review
• Clear total costs charges
• No dispute item or conflict item
• Standard format & sequence
• Matching customer specification with vendor
• Check all costs are well covered
• Vendor selection
• Identify change in price for the same vendor
• Quotation reference number
• Single rate book
• Payment term
• Full name of signatories

How to exercise quotation control?

• Quotation should be prepared promptly before deadline asked by customer to avoid the extra workload on operation and finance (Issue credit note and CCA)
• Accuracy on quotation is important to avoid delay payment
• Quotation should be authorised by customers at appropriate level of seniority
• Quotation should be updated regularly to avoid under-charge or/and omission of charges
• Quotation should be distributed promptly to  Operation and Finance  and customers
• Quotation should be complete to cover all new routing and all new prices, surcharge
• Quotation should be effective until cancellation to avoid  the case that the customers refuse to pay on the ground there are no effective contract
• Quotation should be confirmed in writing with customer
• Quotation should include credit term, payment term and prices including min. charge, surcharge, exchange rate, inclusive or exclusive of bank charge, business tax, business tax on business tax and clear unit of measurement, KG and conversion rate Eg: NCT 30days(tax inv date), DEE 30days (statement date).
• Clear Credit term and payment term includes billing and payment SOP
• Selling prices should be easily agree with supporting documents which are evidence of carrying out of particular service/HAWB/HBOL/Pick up note/GRN/confirmation of ad hoc service or special service such as empty load and overtime or all in rate should be applied as much as possible
• Rejected unnecessary billing requirement asked by customers
• Ask weekly or bi-monthly billing monthly payment from customers instead of monthly payment if possible
• Ask partial payment and adjustment on next payment from customers to avoid late payment on the ground of small mistake/dispute on a particular shipment/invoice
• Third party billing on behalf of other companies, domestic and international is not legal and granting credit term for import CCX is not all appropriate unless we can confirm with Origin office or we will take the bad debt risk for such shipment
• Have the quotation confirmed first if it is difficult to have whole contract and quotation confirmed at the same time
• Have a clear effective date for new rate to avoid dispute for misunderstanding.
• The quotation of round trip should be considered for return shipment in the contract to avoid the query on excessive price.
• Regularly review the contract and update the expired the contract on time

What can quotation audit do?

Likely Recurring Problems: overcharge (do not agree with Incoterm or shipping order) or over-pricing by vendors for various reason such as frequent change in quotation or charging unnecessary cost or hidden mishandling, fraud or commission to operation staff or management, no volume discount, underpricing to customers, over-specification to vendors, over-pricing to customers, lack of update pricing for E-bidding by BD, selling price cannot cover costs plus taxes plus overhead, foreign exchange rate risk, between vendor and customer selling prices, no proper approval on costs or amendment on costs, misappropriation of confidential cost and selling prices

Existing Control methods: Analysis on Gain or Loss of customers, Gross Profit analysis, reporting exception margin by data warehouse (by routing by vendor or customers), Confirm Margin in U21 by operation, Passing updated costs to BD by operation staff, exchange rate risk management , volume discount in contract & quotation, standard cost plus pricing method

Proposed Additional Control methods are as follows:

Before accepting quotation from vendors,

check change in costs against the existing costs, ensure that 3 independent quotations from 3 vendors from independent sources, vendor’s company chop, logo, contact name and telephone number to provide audit trail for double checking

check rate book/all routings offered by vendors (vendor are suggested preparing rate booking regularly in the format required by us)

check the completeness and accuracy of costs by both operation and finance, Rate book, Min. charge, clear unit of measurement, unnecessary costs such as demurrage, empty load cost, unusual costs, customs inspection and surcharge such as CAF, GRI, Security, Oil

check the validity of quotations by operation and finance, quotation as part of a contract, original copy in writing, vendor company chops, printed names, legal representative or authorized person’s signatures are required. Check that all e-mail confirmation be put in writing within a month for urgent arrangement.

check the effectiveness of the contract by legal or finance, noting termination time, sending reminder to BD, contract remains effective until cancellation, price subject to change, effective period is reasonable taking into account the inflation rate and market rate in China

check that there is no over-specification and overcharge of particular item of service charged by vendors. Surcharge should only be applied if pre-approval has been obtained

check that there is vendor management policy for cost saving opportunity and regular review on cost price

check that the cost is reasonable taking into account the service offered. For example, trucking cost should be in terms of KM, no. of pick up and delivery points, type of truck

check that there is a mechanism helping the comparison of cost prices offered by different vendors

check that volume discount has been included into the quotations offered by vendors

check that no hidden mishandling costs by overpricing

Operation should follow that quotations should agree before shipments to avoid the case that selling price cannot cover costs plus overhead plus taxes

Check that the quotation fits the purpose of combined transportation for the transportation costs to be tax deductible by finance

Operation should set up standard operating flow in agreeing and approving  quotations with vendor with timeframe so that updated and confirmed costs information can be passed to BD for fast response to pricing queries from customers

Operation should set up a control on change in versions of quotation, sequential control number should be assigned on each change to save administration costs

Segreation of duty for Cash receipt

• The responsibility for collection and deposits is separate from the recording of cash receipts and general ledger entries;
• The responsibilities for cash receipts and cash disbursements are separate;
• The responsibilities for preparing checks and approving checks is separate from the recording or entering of invoices in accounts payable and the general ledger;
• The responsibility for disbursements approval is separate from the purchasing functions;
• The responsibility for making entries in the cash receipts and cash disbursement systems is separate from making general ledger entries;
• The closing cash of registers is done by a person not involved in cash collection;
• The collecting of cash and reconciliation of the bank account are separate functions;
• The independent check should be conduct periodically.

Petty cash internal control

The department head must appoint an individual to be custodian of the department’s petty cash fund. Petty cash custodians must be salaried employees of a position no lower than a supervisor in the Company. Custodians must are required to complete Petty Cash Training and written agreement to abide by the terms of use of the petty cash listed in this manual need to be signed before being allowed to commence the duty. The custodian remains accountable for the petty cash fund until another person is officially designated as the new custodian or the fund is closed.

Check payment internal control

1. Cheques and bank transfers should be prepared based on the determination that the transaction is valid and is in accordance with the following the Group procedures;
2. determination that the transaction is valid should be accomplished by reviewing the following supporting documentation as applicable:
   • Payment vouchers
   • Invoices (together with corresponding booking orders)
   • Payroll records
   • Petty cash vouchers
   • Remittance advices
   • Cheque requisitions
   All supporting documentation should be signed and verified by responsible officials indicating proper authorization. Before issuing the cheque, all supporting documentation must be signed by the CEO & the corresponding responsible official;
3. Cheques and bank transfers should be prepared by persons other than those who initiate or approve any documents that give rise to the disbursements;
4. Cheques and bank transfers should be designed or completed in such a way to make subsequent unauthorized alteration difficult through the use of cheque imprint, and so on;
5. The following procedures are prohibited:
   • Cheques payable to “bearer” or “cash”
   • Cheques signed in blank
   • Altered cheques and bank transfers.

Cheque Signing

1. All cheques must be signed by the responsible director according to the Group authorized limit;
2. Each signatory should examine the original supporting documentation to ensure that each item has been checked and approved in accordance with the Group's procedures;
3. There should be adequate control over the custody and use of the signer. Only cashiers have the physical access to the safe where un-issued cheques are kept.

Disbursement of Cheques

1. After signing, all cheques should be forwarded directly to the payee (or to the bank with the bank transfer authorization, or have the payee to arrange a pick up) without being returned to the originators or others who are in a position to introduce documents into the cash disbursement system.

Cancel Supporting Documents

1. The supporting documents should be cancelled by the signatory (or under the control of the signatory) to prevent subsequent reuse. "Cancelled" must be printed on the face of the cheque and record to the cheque control log.

Maintenance of Cheque Control Log

1. A separate record of cheques being processed should be maintained by using a control log.  The control log should contain
   • the sequence of cheques issued;
   • the name of the person to whom the cheques are issued;
   • the date the issue was made;
   • the signature of the custodian in charge of the supply of unissued cheques;
   • if applicable, the sequence of cheques returned and/or voided;
   • the signature of the person who has returned voided or unused cheques;
2. All cheques must be sequentially pre-numbered so that it can be established that all cheques have been accounted for;
3. The usage of cheques should be accounted for by reconciling the quantity of cheques issued to cash disbursement records.  This should be performed by persons other than those who have custody of unissued cheques;
4. Supplies of unissued cheques should be properly safeguarded. Only in charge cashier has the physical access to the safe where unissued cheques are kept.

What is the highest risk of no signed contract?

unlimited liability

What is the risk of no operating license?

stop run, compensation or stop service to customers, idle space

What is the risk of no tax invoice?

pay extra tax

What is the risk of using existing vendor profile?

wrong vendor performance, KPI

What is the risk of doing business not in your jurisdiction?

excessive legal cost and more uncertain on the successful rate of legal case

What is the risk of no volume discount for big shipments?

lower profitability

What is the risk of no approval before payment?

Risk of excessive costs

What are critical risks for freight forwarder?

currency risk, negligence, bad debt,  loss making price

What are critical risks for carrier?

idle space

What are critical risk for warehouse service providers?

long term contract commitment

What is business risk?

Loss of recurring revenue

What are financial risk?

1. Currency
2. Interest
3. Excessive bank interest (factoring)  and charge
4. Credit, late payment or/and bad debt
5. Cashflow due to long payment term or late payment or foreign exchange control
6. Collection, foreign exchange control
7. Wrong investment assessment
8. Wrong P&L for business decisions

What does operation risk cover?

• Manpower
• Raw material
• License
• Utility
• Space
• Transportation
• Network
• Poor KPI
• Compensation

What are liability risk?

• Compensation
• Resource tied up in dispute
• Legal cost
• Interest on outstanding debt

What are pricing risk?

• Based on outdated cost or wrong exchange rate or
• Based on wrong assumption
• Fail to take into account competitor action
• Single source of buying cost & cost plus pricing

What are risk specific to logistics industry?

• Cash flow from overseas agent and to shipping line by advanced payment
• Holding right by agents
• Billing currency in US$
• Dominated business by a single customer
• Legality of transportation of a particular product
• Custody of POD by agent
• Dominated agent with network
• Selling price pressure
• Difficult to tie customer by volume discount
• Release cargo by faked bank remittance advice
• Credit risk with Various Incoterm & 3rd party billing and collection risk
• Sub-contractor risk

Charter risk & Co-loading

• Insurance deductible or over max. covered amount
• Excessive buying cost fraud by agent, vendor and employee
• Compete for business by agent
• Change in customer’s service requirement and unabsorbed costs

How to identify risk?

court case, complaint, query and site visit

How to manage risk?

Avoid, limit, bill back, indemnity, transfer, self-insurance, insurance, SOP and mitigation procedure

What are tax risk?

• Withholding tax
• Deferred taxation
• Worldwide income
• Capital gain tax, land appreciation tax
• Deductibility of operation cost
• Share of cost
• Transfer Pricing

What are risk specific to customer?

• unlimited liability
• performance pricing
• dual sourcing
• was acquired by another company
• poor customer KPI

What are examples of business risk?

1. Transfer of risks including error free compensation , e.g. transportation legal duty
2. Lifting maximum liability by customer
3. Impose Penalty on consequence loss, penalty based on KPI without identify controlled and uncontrolled reasons
4. Performance related bonus
5. The emerge of 4PL who eat our margin due to poor performance
6. Double taxation and Transfer pricing risk in China
7. Outsourcing is limited by license & taxation
8. Change from domestics air freight to trucking
9. Underpricing due to complication in pricing under changing environment
10. Over cost results in loss of customers

What are the risk by change from the mode from air to truck?

• Change to unlimited liability but our vendor may have limited liability due to the nature of company, limited company, no maximum liability has been set up in contract
• No open bid and personal relationship delay regional sourcing
• Handled air shipment by truck using faked airway
• Vendor do not provide service at peak season
• Continuous breach, coloading, accident, fire, loss
• No reliable trucker in China (plenty are small in size without proper control)
• No heavy penalty and exclusion from vendor list on breach of contract
• Error free compensation imposed by customer
• Can't hold enough payment from trucker even in the case of heavy compensation and penalty
• Customer do not have to make use of its insurance policy due to the error free compensation principle
• Adjustment of selling price or compensation by vendor results in no formal investigation and no senior management ‘s review , approval and comment on positive action
• No clear profit sharing scheme for trucking within China
• Loss quotation due to incomplete information for the China
• Customer requests LCL trucking which lengthen the time, extend the routing/ pickup points and increase the risk involved

What are important checkpoints for secured logistics?

• Confidential of information flow
• Recruitment control, own staff, vendor employee, customer employee
• No apparent loophole in operation
• Alert of latest logistics crime

How can you really exercise risk management?

• Comprehensive checklist on hand
• Can avoid the risk by providing training to managers before contract negotiation
• Can identify the potential risk by advanced ERP system, e.g.  logging and reviewing query, complaint and the purpose of site visit by sales
• Can identify the risk by finance reporting

What are business risk?

• Loss making shipments
• Lost customer of huge volume
• Lost customer of high margin
• Bad debt
• Unfilled orders
• under absorption of price adjustment factors (CAF)
• Idle from Charter agreement

What are the risks for a freight forwarder?

• Financial risk
• Operation risk
• Contract risk
• Contingent Liability risk
• Reputation risk
• Political risk
• Economic risk, fluctuating demand & supply, idle, competitor
• Credit limit risk
• Tax risk
• Excessive Cost risk, no consolidation
• Unnecessary cost risk
• Revenue management risk
• Pricing risk
• Sub-contractor risk
• Nominated agent risk
• Cashflow from overseas agent
• Fraud risk

What are excessive cost risk?

• Long term contract for
• Excessive risk
• unnecessary cost due to selection of unsuitable software
• No consolidation software, no trucking software
• Uncontrollable overtime
  • Over-specification
  • Penalty
  • Overdue
  • Interest
  • Volume discount

What are the finance risk of a logistics group?

• Currency, GSSA contract to be paid in Singapore dollar
• Interest, poor cash flow problem, do not borrow the lower interest guaranteed by government, idle IPO proceed
• Billing in HK$ and payment in RMB
• Credit control on new agent, late payment by top carrier due to uncontrolled billing procedure or/and bad debt, long payment term do not have direct relationship with pr
• Cashflow due to long payment term or late payment
• Collection, foreign exchange control
• High effective interest cost, overdraft
• Wrong investment assessment
• Wrong P & L for business decisions
• Double counting of revenue by summary invoice

What are common contract risk?

• Uncontrollable risk, Maximum liability
• Consequence risk
• Subcontractor risk
• Imbalance of information
• Contract liability
• Capital commitment
• Loss making quote
• Commitment to employee in return for restraint of trade
• No SLI
• No general lien
• Overdue interest
• Penalty term

How to classify risk?

• Controllable or uncontrollable
• Ad hoc or recurring

What are risk specific to freight forwarding industry?

• Cash flow from overseas agent
• Release cargo before cash receipt
• Holding right by agents
• Long payment term for paying on behalf
• No strict definition of COD
• Dominated business by a single customer
• Legality of transportation of a particular product
• Custody of POD by agent
• Dominated agent
• Selling price pressure
• Difficult to tie customer by volume discount
• 3rd party billing
• Sub-contractor
• Co-loading
• Insurance deducible or over max.  covered amount. Insurance deductible too high
• Fraud by agent, vendor and employee, not at arm length price
• Compete for business by agent by past employee
• Change in customers’ service requirement and unabsorbed costs, fuel cost, mishandling, waive charges

How to mitigate risk?

• Best service for maintaining and expanding customer
• Training to staff, KPI rewards, SOP
• Inter ship for talent and flexible cost structure
• Appropriate level of outsourcing
• Alliance with customer and other vendors
• Cost reduction to set off Price pressure
• Growth strategy to reduce cost

What are risk management method for remote offices?

• Contract management/backing, insurance cover , business license, statutory and tax compliance checklists on hand for remote site or/ and small sites
• Deadline management checklists on hand for remote or/and small sites
• Proper cashflow planning and contingency plan  on hand for remote or small sites

What is common risk for a manufacturing company?

• Cost plus pricing for new market/ service which involves additional risk
• Breakeven pricing or penetrating price for breaking into market (rely on cost leadership)
• Activity Base Costing to remove all unnecessary cost to customers (have set up ABC cost model )
• Life time cost and total ownership of costs in quoting to avoid unabsorbed costs by customers
  • The increase in the purchasing cost of raw material may not be passed to customers
  • Selling price pressure due to unbalanced competition
  • Short of fund to expand and to invest
  • Bill in non RMB but pay in RMB
  • Stop run due to shortage of labour in South China
  • Increasing in labour costs in South China
  • Idle capacity as a result of change of domestics sales in China

What are risk elements for new technology company?

• Can't rely on bank overdraft or bank loan with restriction clause to fund the risky business
• Cancelled order without penalty to customer
• Order to design, make, test and sales are at different times and time gap may be long
• Difficult to control high research and development costs
• Can't not meet customer quantity demand due to order to make and outsourcing
• Bill in non RMB but pay in RMB
• Stop run due to staff turnover, dispute with JV partner’s, breach of trade patent right
• Difficult to protect IP and potential loss of business
• The increase in the purchasing cost of raw material may not be passed to customers
• Problem in apply listing rules for a China enterprise
• Reputation may be affected by customers  who provide service to the final customers  as well as vendors who provide raw material or component
• Price pressure due to the characteristics of optical networking
• Short of fund to expand and to invest in Research & Development

What are operation risk for a not well managed freight forwarder

• Manpower, no successor for key staff, no SOP and exceptional handling SOP
• No double check or review by supervisor
• Concentrate on cargo flow, not information flow, billing flow and cashflow

• What are pricing risk?
• Based on outdated cost, lack of central filing and control
• Based on excessive cost, lack of clear evidence of vendor selection, audit and assessment
• Fail to take into account competitor pricing action as there is no analysis on lost customers
• No analysis on loss making shipment

What are tax risk for  foreign owned freight forwarder in Hong Kong ?

• Salary tax for Foreign Staff in HK
• Individual income tax for Staff in South China
• Salary tax for legal representative in China
• Withholding tax

What is the solution for customer concentration risk?

Superior service and one stop shopping service supported by other BU is important to create barriers to other competitors. Suggest rotation of duty between Foxlin group and other BU, successor plan for key staff and clear SOP

what are critical risk for warehouse service providers?

• Commission base industry. Difficult to manage staff integrity
• Due to the Agency business, revenue protection is difficult. Suggest restraint of trade by all key staff, senior management, vendor and all staff should sign confidential agreement. Profit margin information should be kept within the management
• Sub-contractor risk, no contract to manage. Heavy penalty should be imposed to avoid losing of reputation to customer. Suggest KPI and analysis of claim and compensation by vendor. Ensure sub-contractor has insurance policy and ability to compensate
• Rental contract commitment for multi-user warehouse, add exit clause, flexibility to expand to avoid idle and overflow risk
• Capital commitment even there is no signed contract or letter of intention. Suggest using urgency to press the customer to confirm and use short duration of contract period with extension right to mitigate the risk

What are the risk for a trading company?

• Reliable supply, On time delivery and Transportation capacity due to cyclical in nature and difficult to forecast demand
• Procurement not at lowest buying costs
• Loss making Quoting
• Currency loss
• Bad debt
• Accident and security issues
• Accounting compliance
• Transfer pricing
• Commodity
• Concentration on particular customer
• High interest cost

What risk should be considered for trucking operation?

• Unlimited liability for trucker in China, bought extra insurance off China
• Willful conduct by employee not covered by insurance, recruitment audit on subcontractor
• Loss of reputation
• Unable to deliver on time
• Not at the best available cost
• Loss of critical customers
• Idle capacity/low loading factor  for insourcing truck
• No transportation insurance cover
• Overload alert