Infra companies: Unbilled receivables can trip banks

Traditional audit methodologies relying on documentary evidence will not be enough to identify value of unbilled receivables (UBR) accruing to an infrastructure company, inflated values of which can vest it bloated drawing power without adequate security, according to Yuvaraj Associates, a leading chartered accountant firm.

This ultimately leads to the account becoming a non-performing asset, says Yuvaraj Viriyambakkam, chartered accountant specialising in forensic and investigative audit. The infrastructure sector is in constant need of additional funding, and considers UBR as their equivalent of work-in-progress stock, he explained to BusinessLine.

Estimating value of UBR

He proceeded to delineate some tools which could estimate the real value of UBR and stop potential inflation in value of collateral, thereby safeguarding the concerned banks’ assets. Most bankers consider UBR as difficult to audit given there is no documentary proof to cross verify.

It is looked at as one cumulative figure across all projects (no matter cost escalations), making it difficult to assess its true values. Inflated UBR allows additional drawing power without any cost incurred, providing a double boost to excess funds with the company.

Identifying misrepresentations

“We need to identify such misrepresentations in two steps; one, split various projects and look at them at the individual level and collect project value, estimated cost, revised estimated cost and cost incurred for each project separately; two, calculate the billed receivables plus UBR as a percentage of cost incurred. Any deviation from the agreed profit margin indicates inflation of UBR.”

This, according to Yuvaraj Viriyambakkam, is one of the more common ways for infrastructure companies (EPC to be more specific) to inflate receivables. Given reduced scrutiny and difficulty in ascertaining the true value using traditional audit methodologies, UBR goes undetected and gets accumulated over a period of time, affecting quality of collateral provided.

“We also need to be wary of fake bills (accommodation bills), in which case the percentage margin will be maintained but the base value of cost incurred would have been falsified,” he added.

Collecting individual data

Borrowers rely on project's technical complexity, number of projects they are currently working on, diverse geographical locations of project sites and constant revisions to cost to hide the clear auditable picture on UBR to bankers and auditors. This complexity can be broken down by collecting data on project value, cost estimate, revised estimates, costs incurred, billed revenue, completion date and estimated date.

“This will help us ascertain the actual margin that was intended for each project and establish the relationship between the cost incurred and the total billable value of the work done. This also provides us the opportunity to cross verify the progress of the project, and actual amount billed,” Yuvaraj Viriyambakkam pointed out.