The cash-strapped Harare City Council (HCC), which has failed to pay salaries to its workers for five months, is failing to collect over half a billion dollars from its debtors due to a worsening economy, an external audit seen by the Financial Gazette has disclosed.
The audit report by Grant Thornton for the financial year to December 31, 2016 said council had receivables from exchange and non-exchange transactions amounting to $622 692 879 before allowances for credit losses.
"With significant amounts of receivables overdue for payment and under the prevailing economic conditions, there is a likelihood that the full amount may not be recoverable," said the report.
Of the outstanding debt to council, $186 807 864 had already been provided for, with a possibility this could be written off in the event that council does not recover the debt, the auditors said.
"The estimation of the recoverable amount of receivables requires significant judgment and is accordingly a key audit matter," said the auditors.
They said they had evaluated the assessment made by management regarding the allowance for credit losses.
To ascertain the adequacy of the allowances for credit losses, the auditors had performed an independent assessment of the allowance and compared its results with those of management.
"We satisfied ourselves that the allowance for credit losses is adequate," said Grant Thornton.
Allowance for credit loss, also known as provision for bad debt, refers to an estimation of the debt that a company or organisation is unlikely to recover.
Along with regulatory demands, bad debts have been regularly regarded as a big risk threatening the ability of an entity to continue as a going concern.
The provision for credit losses is treated as an expense on the company's financial statements as expected losses from delinquent and bad debt or other credit that is likely to become default and unsatisfied (default probability).
The audit firm, however, rated HCC's credit standing as high, despite the local authority's inability to collect its own debts.
"The municipality only deposits cash with major banks with high quality credit standing and limits exposure to any one counter-party," said Grant Thornton
It said no financial assets were exposed to risk during the year under review.