Chargeback Accounting and the Sarbanes Oxley Act

With the SOX having imposed a number of restrictions on the preparation of accounting and financial records of public companies, complex issues like chargeback accounting pose a number of problems that have to be resolved effectively. As is evident from the narration in the previous section, chargeback accounting, though essentially a straightforward accounting process, can lead to serious accounting and financial differences between the actual situation on the ground and that appearing on the records.

Many chargeback accounting exercises are operated outside the central financial accounting system with the use of simple programs like Excel and even calculators. This makes it difficult to relate with overall financial figures. With faulty chargeback accounting leading to opaqueness in the order-to-cash process and to pricing mistakes, many companies are further unable to determine the fundamental reason for discrepancies in chargeback accounting because of the lack of a central database for supplier-distributor agreements.

Jensen and Grande, (2007) elaborate the case of the textile industry, where chargeback accounting issues have been impacted significantly after the passing of the Sarbanes Oxley Act. Small textile manufacturers typically sell to a mix of retailers, from small mom-and-pop shops to large department stores and discounters. Any deviation from the terms of an order, such as in price, fill rate, freight, markdown allowances, co-op advertising, and substitutes, results in a chargeback to the manufacturer.

This appears as a deduction on the check when the payment is made. While customers usually advise why a deduction has been taken, either before payment is made or as a claim attached to the payment check, prior to Sarbanes-Oxley (SOX) many retailers refused to comply with requests for documentation of deductions. The retailer would account for the additional monies as other revenues, an increase in their gross margin, or use them to reduce their cost of goods sold.

The manufacturer would issue a debit memo to their account which would sit on the books for a long time before being written off to bad debt, overstating accounts receivable and negatively affecting their gross margin. Companies, both distributors and manufacturers, could as such face the following problems under the new provisions of the SOX (Kohn and Others, 2004). • Revenues and costs could be misallocated • Figures of net sales and profits could be wrongly stated.

• Figures of Accounts Receivables/ Payables could be misleading • Chargebacks cannot simply be buried in suspense accounts. • Audit trails are inadequate • Certification of periodic and annual statements becomes problematic. • Certification of adequacy of internal controls becomes problematic • Whilst larger companies have the resources to manage the extra money and effort needed to improve chargeback accounting the situation could become extremely difficult for smaller public companies.