3. You deviate from good stewardship of trade receivables

Considering that bad debt expense is probably the most important non-cash expense in a financial report, the lack of congruity can produce two adverse effects.

Many write-offs equal a large amount of bad debt expense, which would eventually show up on financial statements and come under close scrutiny. To soften the blow, only parts of the write-offs make their way to the reports in most cases.

Considering that bad debt expense is probably the most important non-cash expense in a financial report, the lack of congruity can produce two adverse effects.

  1. The immediate effect is misstatements in reporting due to the accounts receivable being exaggerated.

2. The later effect is an increase in write-offs including accounts that could still be collected – for it is an easier option and there are no consequences of writing off frequently in the first place.

As a result, writing off becomes the preferred choice whenever the circumstances allow it. This consequently raises the written-off balances, which would not be fully presented in financial reporting because of their large number. In this way, the vicious circle repeats itself. 

Such outcomes could prove seriously damaging, especially to multinationals where it is possible for more than one local operating entity to abandon effective financial controls and governance.

Read the true impact of write-offs on the next page