Accounts Receivable Compliance Checklist for CFOs

Legal and regulatory compliance

Oftentimes, your highest priority in pursuing compliance is to ensure that you are meeting all established government regulations. If this is the case, you will likely want to begin by researching any applicable laws and reaching out to regulatory agencies to clarify requirements. For instance, the Federal Trade Commission (FTC) offers guidance tied to billing and collecting payments on its website.

These expectations will vary by region, meaning that if you engage in cross-border transactions, you’ll need to meet payment processing, data security, and reporting standards for each location. You’ll also be required to abide by industry standards, such as meeting Payment Card Industry (PCI) Level 1 compliance if you process more than 6 million e-commerce credit card payments in a given year.

Depending on where you operate, you may not be mandated to comply with outside standards for all the categories listed below. However, as a best practice, you should consider setting internal standards to cover any gaps, in turn, better protecting your business, your customers, and your reputation.

Anti-money laundering and identity verification

Government-driven AML requirements are predominantly focused on financial institutions and businesses within related industries. Their standards are based on recommendations from the Financial Action Task Force (FATF), an intergovernmental organization with ties to 200 governing bodies and 20 international observer organizations.

Even if you don’t have specific AML targets, you will likely need to align with know your customer (KYC) guidelines, as they are much more common and prove useful in preventing broader cases of fraud and criminality. These rules will require you to collect, validate, and store documentation that identifies your customers and their sources of payment.

Consumer protection regulations

Agencies like the Consumer Financial Protection Bureau (CFPB), the European Banking Authority (EBA), and the Financial Services Agency (FSA) maintain and enforce various regional guidelines designed to protect consumers during the purchase of goods or services. The rules set out by these agencies focus on establishing clear payment terms, restricting interest rates, requiring invoice accuracy, and generally avoiding deceptive business practices.

Data privacy and security mandates

Regulations tied to managing, protecting, and storing customer information and related financial data are the most prolific across the globe. While the United States doesn’t have any broad-reaching mandates in place, there are various state laws, for example, the California Consumer Privacy Act (CCPA), and industry regulations, such as the Health Insurance Portability and Accountability Act (HIPAA), that will ensure that your business complies with some standard.

 Conversely, some regions have rather far-reaching regulations in place, such as the European Union (EU) and its General Data Protection Regulation (GDPR). These guidelines not only touch businesses and industries within the member nations but also place requirements on any international organization that sells goods or services within the EU.

As previously mentioned, your business will also need to be mindful of any non-governmental industry-related requirements tied to data security (e.g., the aforementioned PCI Data Security Standard).

Debt collection practices

Any given region can limit how often and how aggressively you can pursue payments for outstanding invoices. If you predominantly deal with businesses-to-business (B2B) payments, you’ll likely have more flexibility, since these protections focus heavily on interactions with private consumers. Regardless, be sure to avoid any harassing language, threats, or misleading statements when sending reminder notices throughout your collection efforts.

Similarly, many regions have statutes of limitations in place that define strict timelines of when you can bring in outside collection resources or pursue legal action for outstanding payments.

Reporting standards

Most businesses across the globe are required to comply with some form of a government-mandated reporting standard that dictates how revenue is recognized and how financials are recorded and expressed to parties outside of the organization (e.g., investors, shareholders, tax authorities). For more than 100 countries and regions, including the EU, Australia, Canada, and Japan, these guidelines will follow International Financial Reporting Standards (IFRS). Still, some governing bodies require compliance for all businesses, while others only require these standards for public agencies.

In the United States, however, the U.S. Securities Exchange Commission (SEC) enforces a different standard, known as the Generally Accepted Accounting Principles (GAAP). Under this regulation, only publicly traded businesses, non-profit organizations, and public agencies need to comply with such reporting standards.

Tax assessment

As part of your billing efforts, you will likely need to collect and transmit applicable sales tax, value added tax (VAT), or some other consumption tax for each of your collected payments. In the U.S., this will involve coordinating with state and city revenue departments. For businesses operating within the EU, you’ll need to meet standards set forth by the VAT in the Digital Age (ViDA) initiative.

Internal compliance and control

Beyond the expectations of outside regulators and governing bodies, you’d be wise to instate internal governance policies that outline what acceptable and unacceptable behavior is within your business. Moreover, you’ll want to take measures to ensure that your staff treat these internal expectations with equal diligence and reverence.

Your internal controls will likely focus on establishing clear performance standards, mitigating overall risk to your business, and encouraging high levels of customer satisfaction.

Credit and invoicing policies

Effective accounts receivable processes demand a high level of consistency and accuracy, meaning your invoice processing guidelines should set clear timelines for sending out initial invoices and subsequent dunning messages. The sooner these payment requests are passed along to customers after product or service delivery, the more likely you’ll be paid on time and in full. 

In addition, you’ll want to place hard limits on the frequency of disputes, chargebacks, and revisions in your invoicing efforts. If your payment requests are repeatedly derailed by errors, you’ll not only end up damaging your reputation, but you’ll also run the risk of violating downstream legal and financial reporting guidelines, which can earn you harsh penalties.

Payment processing

Your efforts tied to receiving payments from customers should also be tracked, verified, and recorded in your compliance documentation. In particular, you’ll want standards in place regarding the accuracy of your cash application. One strategy to encourage valid processing is to leverage AI and automation to drive these efforts.

Risk management and account reviews

To protect your operations and your bottom line, you’ll want clear, auditable guidelines in place for extending credit to your customers. Before allowing a new buyer to make a credit-based purchase, you should have a clear understanding of their credit and payment history to limit the risk of bad debt accruing on your books. In turn, these details should determine what payment terms will be available to them.

Beyond the initial purchase, you should also set standard review periods for these accounts in which you verify that their credit rating is still in good standing and whether they have an uncomfortably large number of aging or delinquent invoices.  

Auditing and policy implementation

Whatever guidelines and standards you have in place are meaningless if your organization doesn’t actually follow them. As such, a comprehensive monitoring and auditing solution is mandatory for your A/R compliance efforts. Ultimately, you should be able to trace your performance against each of these standards and offer clear, inarguable proof that you’ve met all operational thresholds.

Internal audits and documentation

While you may not be able to control when you’re audited by an external governing body, you can take measures to better ensure that you’ll pass any financial inspection when it occurs. Set up a schedule to perform regular internal audits to vet your overall performance and verify compliance with all external and internal standards.

As part of this auditing effort, you should also put together reports and other documentation that outline your continued and consistent compliance.

Performance metrics and KPIs

To build the aforementioned reports, you’ll need to closely monitor and capture various key performance indicators (KPIs) within your accounts receivable. Ideally, you’ll gather this information in real time, making it available in centralized dashboards that offer direct insight into the health of your financials.

With this heightened visibility, you’ll also be able to identify when performance standards are fluctuating and take action before any operations fall outside of mandated guidelines. The metrics you’ll want to track will vary by location, region, and industry, but in general we recommend that you keep an eye on your:

• Accounts receivable turnover (ART)
• Average days delinquent (ADD)
• Bad debt-to-sales ratio
• Collections effectiveness index (CEI)
• Days deduction outstanding (DDO)
• Days sales outstanding (DSO)
• Earnings before interest, tax, depreciation, and amortization (EBITDA)
• Number of revised invoices
• Right party contacted (RPC) rate

Policy maintenance and updates

As with most things, when it comes to compliance, the only constant is change. Today’s regulations and guidelines can update quickly, demanding a whole new set of performance and reporting thresholds to meet these revised standards. To stay up to date, you’ll want to keep a constant eye on which regulations and industry guidelines affect your business, regularly reviewing them for any changes.

Sample accounts receivable compliance checklist

Given the variance of standards that you might need to face, it’s impossible to create a comprehensive compliance checklist that would be useful for all businesses. Instead, we recommend that you look at the template below to help you get started on developing an accurate checklist that meets the unique standards for your organization. From there, you can add in sub-categories that cover each regulatory standard.