29th May 2020
The Chief Executive Officer
Fep Sacco Society Limited
P.O. BOX 72367 – 00200
NAIROBI
Dear Sir/Madam
RE: MANAGEMENT LETTER
We have completed the statutory Audit for the year ended 27th
May 2019 and now highlight some of the issues that came to light during the exercise.
- system.
We noted that the society doesn’t have an accounting system fit for day to day recording of transactions.
IMPLICATION.
Lack of an accounting system makes it difficult to have accurate records and smooth retrieve of documents when needed.
Recommendations
The management should adapt to a system that is fit for the society to have desirable output, timely records, thus reducing paperwork.
FEP SACCO BRANCHES
Observation
We noted that society has many branches across the country that are running, indicating significant growth of the society that reaching more people, especially in rural areas.
Implication
The increase in the number of branches across the country has led to a significant increase in expenses cost, which is not matching the value gain.
Recommendation
The management should find a way to minimize the expenses cost without affecting the operation of the business, thus leading to more gain from the society branches.
Management response
- ASSET FINANCE
Observation
The society finances a member to purchase a vehicle whereby the member and the society jointly hold the title to the asset, meaning the guarantee of the loan is the title of the asset. in this case, the loan becomes a longterm
Implication
Asset finance would reduce the interest that the society would have earned if it gave out short-term loans instead of the longterm one. There might be a delay in loan issuing as more money held on asset finance
again. It may reduce the society’s fund, thus making it challenging to satisfy the members.
recommendations
Managment should be that loans are short-term, issued on deposit, and adequately secured to increase return and society’s liquidity
.
Management response
- DEVELOPMENT LOANS
The development loans are almost nonperforming and are all bad debts as the time for recovery is long overdue. The amount held on the development loan is enormous, and in the face of the balance sheet, the asset is overstated.
Implication
The wrong impression of the balance sheet as the asset is overstated by the development loan, which is nonperforming.
The society loan book is misleading as it is full of bad debts
.
Recommendation
A provision should be made to initiate writing off the loans from the books.
Management response
- FEP HOUSING
In the debtors, we have a line item by the name FEP housing. These are expenses of FEP Housing financed by FEP Sacco.
Implication
The society is financing an activity which is outside their core activities.
The expenses are formation expenses which if the housing fails to kick off then the society will bear the expenses thus a loss to the society.
Recommendation
The society should always dwell much on the core activity and let Fep Housing members to meet the formation expenses wholly as Fep Society and Fep housing are two different entities and thus each should bear its costs.
Management response
- RETURN ON INVESTMENT
We noted that gradually, the society is unable to reward the investors. Society will be significantly affected, resulting in members being demoralized.
Implication
- High withdrawal of members from society is due to lack of a guarateed rate of return.
- The lessor the deposits from the members of the society will
- also reduce the capability to issue loans to its members.
- The i
- nability to issue loans due to lower deposits will greatly affect a guaranteed rate of return at the year-end.
Recommendation
The society requires a lot of marketing to mitigate withdraws and institute ways of making the society sound attractive to current and new members.
Management response
- FILING
During the Audit, we noted that files were not organized chronologically according to the transaction dates. An organized filing system makes it easy to retrieve documents and trace of transactions.
Implication
It is not easy to retrieve information when the documents are not accurately organized, and this may result in Auditor missing essential records while carrying out Audit.
Recommendation
The society requires proper filing and arranging documents in an orderly manner.
Management response
- OTHER DEBTORS
In the account, there are other debtors of Kshs. 3,000,000. The amount is constant from the year 2017 to 2018. The recoverability of the amount is not certain, and the society had no provision of the same at the close of the year.
Implication
- Trade debtors are overstated with an amount of Kshs. 3,000,000.
- Since no provision for bad debts is made, the profit of the society is overstated, leading to high reserves.
Recommendation
The society should provide for bad debts for a certain number of years to remove other debts from the books of account.
Management response
Conclusion
We consider it essential that the above issues, which are not the only shortcomings in your esteemed society’s system of internal control, be corrected in order to reduce the likelihood of fraud and accounting errors.
Yours faithfully,