ACCOUNTS PAYABLE A GUIDE
TO
RUNNING
AN
EFFICIENT DEPARTMENT
SECOND EDITION
MARY S. SCHAEFFER Executive Editor IOMA’s Report on Managing Accounts Payable co-creator The Accounts Payable Certification Program
JOHN WILEY & SONS, INC.
ACCOUNTS PAYABLE
ACCOUNTS PAYABLE A GUIDE
TO
RUNNING
AN
EFFICIENT DEPARTMENT
SECOND EDITION
MARY S. SCHAEFFER Executive Editor IOMA’s Report on Managing Accounts Payable co-creator The Accounts Payable Certification Program
JOHN WILEY & SONS, INC.
This book is printed on acid-free paper. Copyright © 2004 Mary S. Schaeffer and the Institute of Management and Administration Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data Schaeffer, Mary S. Accounts payable : a guide to running an efficient department / Mary S. Schaeffer.-- 2nd ed. p. cm. Includes index. ISBN 0-471-63690-8 (cloth) 1. Accounts payable. I. Title. HF5681.A27S28 2004 658.15'26--dc22 2004005531 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1
For my dear husband, Hal Schaeffer, who’s been there for me through the worst of times as well as the best.
CONTENTS Preface Acknowledgments
xxi xxiii
Part One Processing 1
2
1
Invoice Handling
3
1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20 1.21
Introduction The Invoice Purchase Orders Receiving Documents Proper Invoice Handling When Accounts Payable Receives Invoices Last Entry by Month-End Timely Approvals Unidentified Invoices Sent to Accounts Payable Use Best of Terms Strategies to Use When Short-Paying Invoices Goods Improperly Ordered Outside Purchasing Nonpurchase Order Buying Encouraging Others to Follow Accounts Payable’s Guidelines Invoices without Invoice Numbers Invoice Amnesty Day Keeping Difficult Invoices from Disappearing Using Vendor Statements: Theory Using Statements: Reality Filing: Batch versus Alpha Filing Reducing the Number of Invoices
3 4 5 6 7 8 9 10 10 11 12 12 13 14 14 14 15 16 17 18 18
1.22
Handling Bills with Remittance Advices
21
Alternatives to the Three-Way Match
23
2.1 2.2
Introduction Assumed Receipt
23 23
2.3
Evaluated Receipt Settlement
25
vii
viii
3
4
Contents
Check Preparation Printing and Filing
33
3.1 3.2 3.3 3.4
Introduction A More Common Approach Manual Signatures Authorized Signers
33 33 33 34
3.5 3.6 3.7 3.8 3.9 3.10
Proper Check-Signing Procedures and Control Limiting Time Spent Getting Checks Signed Mailing versus Picking Up Checks Check Filing Time-Saving Techniques in the Check Production Cycle Canceled Checks and Irate Vendors
35 37 39 40 41 43
Automated Clearinghouse and Direct Deposit
47
4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8
47 47 47 48 48 49 49
4.9
5
Introduction Direct Deposit Other Common Examples Combining Electronic Billing And Payments Terminology Check Truncation and Check Conversion What Companies Are Doing Today Case Study: How One Company Gets Suppliers to Accept ACH Payments The Future
Making International Payments
52
5.1 5.2 5.3 5.4 5.5 5.6 5.7
52 53 53 53 54 54 55
Introduction Foreign Exchange Bank Account Issues Payment Mechanisms International Payment Service Benefits of International Payment Services Payments to NAFTA Partners
Part Two Controls 6
49 50
57
Exception and Rush Processing
59
6.1 6.2
59 60
Introduction Dealing with the Issue
Contents
6.3
Hard-Line Approach
62
6.4
Identify Rush-Check Troublemakers
62
6.5
Modify Systems and Procedures to Reduce the Need for Rush Checks Publish a Newsletter
63 64
6.6
7
8
Errors and Duplicate Payments
67
7.1 7.2 7.3 7.4 7.5 7.6 7.7
Introduction Statistics Types of Erroneous Payments Low-Tech Solutions High-Tech Solutions Employees: Your Most Important Resource Tolerance Levels
67 67 68 68 69 69 70
7.8
Handling Discrepancies
70
7.9
Accuracy and Timeliness
71
7.10
Timing Issues
74
7.11 7.12
Eliminating Duplicate Payments without an Auditor Duplicate Pay Audits: The Future of Accounts Payable and AP Audits
74 75
Paying When the Original Invoice Is Not Available
79
8.1 8.2 8.3 8.4
79 79 80
8.5
9
ix
Introduction Who Pays from Copies Controls When Using Copies Common Techniques to Ensure a Second Payment Will not Be Made Controls When Paying from Copies
81 81
Master Vendor Files
84
9.1 9.2 9.3 9.4 9.5 9.6
84 84 85 85 86 86
Introduction The Data Cleanup Policies When to Set Up a New File Maintenance Policies Good Master Vendor Policies
x
Contents
9.7 9.8 9.9 9.10 9.11
Establishing Vendor Naming Conventions Tips on Setting Up the Master Vendor File New Vendor Setup Adjustments, Corrections, and Additions Maintaining the Master Vendor File
87 88 89 91 91
Part Three Cash Management
93
10 Terms and Taking Discounts
95
10.1 10.2 10.3 10.4 10.5 10.6
Introduction Should the Discount be Taken? An Ongoing Process Possible Problems When Paying Late Are All Possible Discounts Being Taken? Should You?
11 Cash Management 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 11.10
Introduction Why Discuss Cash Management in Accounts Payable? Payment Timing Maximize Float Purchasing Cards Bank Fees ACH Background ACH: Types of Corporate Payments Clean-Desk Syndrome Games Companies Play
12 Petty Cash 12.1 12.2 12.3 12.4
Introduction Petty Cash No-Nos Recommended Procedures Other Recommended Procedures
13 Payment Timing 13.1 13.2
Introduction Can Another Day be Squeezed out of Payables?
95 95 98 99 100 101
104 104 104 105 106 107 107 107 108 109 110
111 111 111 112 113
114 114 114
Contents
13.3 13.4 13.5 13.6 13.7
Timing Payments in Difficult Times Stretching Vendor Payments Place Smaller Orders Talk to Vendors A Formalized Approach
14 Audits and the Outside Accountant’s Management Letter 14.1 14.2 14.3 14.4
Introduction Most Notable Payables Issues Using This Information Sarbanes-Oxley Effect
xi
114 115 115 115 116
119 119 119 122 123
Part Four Travel and Entertainment
125
15 Handling Travel and Entertainment Reports
127
15.1 15.2 15.3 15.4 15.5 15.6 15.7 15.8 15.9
Introduction The Problem Solutions How Much Checking Is Enough? T&E Manual Policy and Procedures Changes What About Electronic Receipts? Faster Employee Reimbursements E-Tickets
127 127 128 131 134 135 136 137 138
16 Handling Electronic T&E Reports
139
16.1 16.2 16.3 16.4 16.5
Introduction Advantages Homegrown Systems Third-Party Electronic Software E-Tickets
17 Automating the T&E Report Process 17.1 17.2 17.3
Introduction Making the Most of Direct Deposit Spreadsheet Approach
139 139 140 142 142
146 146 146 147
xii
Contents
17.4 17.5
One-Card Intranet-Based Solution In-House versus Third Party
18 Value-Added Tax Refunds 18.1 18.2 18.3 18.4 18.5 18.6 18.7
Introduction What is Vat? Assistance Available Vat Reclaim Companies Time Limitations: Deadlines Focus on Vat-Friendly Countries Focus on Vat-Valuable Expenses
148 148
150 150 150 151 151 151 152 152
Part Five Technology
155
19 Electronic Data Interchange
157
19.1 19.2 19.3 19.4 19.5 19.6 19.7 19.8 19.9 19.10 19.11 19.12 19.13 19.14 19.15 19.16 19.17 19.18 19.19 19.20 19.21 19.22
Introduction What Is EDI? TECHNICAL Basics: introduction Why EDI? Getting Started Business Infrastructure Requirements Managing Accounts Payable EDI Accounts Payable EDI Opportunities Accounts Payable EDI Success Factors Systems Requirements Trading Partner Directory EDI Standards Effect on Supplier Partnerships Convincing Management FEDI Applications Cost-Justifying FEDI Getting Up the EDI Learning Curve Internet EDI Web EDI: An Idea Whose Time Has Come Security and Standards Issues Why the Internet? Special Application: ACH Debits for Tax Payments
157 157 157 158 160 161 162 162 163 163 166 166 167 167 168 168 168 170 171 171 171 172
Contents
20 Imaging 20.1 20.2 20.3 20.4 20.5 20.6 20.7 20.8 20.9 20.10 20.11
Introduction Poor Man’s Imaging Planning for Full-Scale Imaging Using Full-Scale Imaging with E-Mail Imaging on a Smaller Scale Overview Imaging in Practice: Growing Pains Legal Acceptance Disaster Recovery Frequently Asked Questions about Imaging Preparing Documents for Imaging
21 The Internet, E-Mail, and E-Invoicing 21.1 21.2 21.3 21.4 21.5 21.6 21.7 21.8
Introduction E-Mail The Internet Case Study: An Accounts Payable Department Web Site What to Include on an Accounts Payable Web Page Electronic Invoicing Everyday AP uses for the Internet Case Study: Putting the Web to Work for Accounts Payable
22 Encryption and Digital Signatures 22.1 22.2 22.3
xiii
175 175 175 176 176 176 177 179 180 180 181 182
184 184 184 185 187 191 191 194 196
200
Introduction Basics Case Study
200 200 203
23 E-Marketplaces and XML
206
23.1 23.2 23.3 23.4 23.5
Introduction E-Marketplaces XML How Accounts Payable Professionals Can Prepare Themselves How to Participate in the E-Commerce Revolution
206 206 208 208 209
xiv
Contents
Part Six Specialty Topics
211
24 Purchasing Cards
213
24.1 24.2 24.3
Introduction What Is a Purchasing Card? How a Purchasing Card Differs from a Consumer or Corporate Card 24.4 Why Use a Purchasing Card? 24.5 How Does the Purchasing Card Work within the Company? 24.6 Plan Administrator 24.7 User Feedback 24.8 Vendor Feedback 24.9 Control Features 24.10 Maximizing Cost Savings 24.11 Considering a Program
25 Post Audit Firms 25.1 25.2 25.3 25.4 25.5 25.6 25.7 25.8 25.9 25.10 25.11 25.12
Introduction Why Are Accounts Payable Audit Firms Necessary? How Post Audit Firms Work Accounts Payable Benefits Costs Getting Money Back Selecting the Best Profit Recovery Firm Other Considerations Reaction to Profit Recovery Firms Self-Auditing Self-Auditing for Duplicate Payments Current State of Duplicate Payment Audit Industry
26 Benchmarking 26.1 26.2 26.3 26.4 26.5
Introduction What is Benchmarking? Sources of Benchmarking Data Benchmarking Applications Case Study: How to Start or Improve a Benchmarking Program
213 214 214 215 215 215 215 216 217 219 221
223 223 224 224 225 225 226 226 228 228 228 229 229
230 230 230 232 232 234
Contents
xv
Part Seven Regulatory Issues
239
27 Form 1099 and Form 1042-S
241
27.1 27.2 27.3 27.4 27.5 27.6 27.7
Introduction Background Best 1099 Practice What if the 1099 Is Not Filed? Who Should Receive a 1099? Letters Instead of W-9s B-Notices
241 241 242 242 243 244 244
27.8
Types of Payments Reflected on 1099S
246
27.9
More Help from the IRS
246
27.10 It’s 1099 Time: Changes Implemented in 2002
246
27.11 1042-S
249
28 Sales and Use Tax 28.1 28.2 28.3 28.4 28.5 28.6 28.7 28.8 28.9 28.10 28.11
Introduction Defining Sales and Use Tax Education Policies and Procedures Sales and Use Tax Audits Sales and Use Tax Terminology Types of Sales and Use Tax Keeping Up To Date Use Tax and Nexus Specialized Software Additional Learning Opportunities
250 250 250 251 252 252 254 254 254 255 255 256
28.12 Help Others Help Accounts Payable
256
28.13 Industry-Specific Sales and Use Tax Advice
259
28.14 Avoiding a Sales and Use Tax Disaster 28.15 Conclusion
262 263
29 Escheatment 29.1 29.2
Introduction What Is Escheatment?
264 264 264
xvi
Contents
29.3 29.4 29.5 29.6 29.7 29.8 29.9 29.10
What If You Do Not Escheat? Dilemma What Can Be Done? Necessary Documentation Software Solutions What Can Accounts Payable Professionals Do? What If You Have Not Been Escheating? Professional Organizations for Unclaimed Property Owners 29.11 Typical Unclaimed Property Experience 29.12 An Unclaimed Property Game Plan
265 265 266 266 266 267 268 268 268 270
Part Eight Management Issues
273
30 Ethics
275
30.1 30.2 30.3 30.4 30.5 30.6 30.7
Introduction Sections of Sarbanes-Oxley Act Pertinent to Accounts Payable Cascading Certifications Sarbanes-Oxley Act: A Case Study Foreign Payments Office of Foreign Assets Control What This Means to Accounts Payable
31 Disaster Recovery 31.1 31.2 31.3 31.4 31.5
Introduction Personnel Travel Policies Telephone Trees Computer Backups Protecting Paper
32 Outsourcing 32.1 32.2 32.3 32.4 32.5
Introduction Why Companies Do Not Outsource Accounts Payable When Outsourcing Makes Sense Hiring an Outsourcer Outsourcing: A Case Study
275 275 276 276 278 279 279
281 281 281 282 283 283
284 284 284 284 285 286
Contents
33 Management Techniques 33.1 33.2 33.3
xvii
289
Introduction Six Sigma Balanced Scorecard
289 289 290
Part Nine Department Management
291
34 Making Your Accounts Payable Department First-Rate
293
34.1 34.2 34.3 34.4 34.5 34.6 34.7 34.8
Introduction Typical Accounts Payable Department Who Runs the Department? Hiring Practices How to Assemble an Accounts Payable Dream Team Procedures Manual The Impact of Technology on Accounts Payable Departments Outsourcing
35 Managing the Staff 35.1 35.2 35.3 35.4 35.5 35.6 35.7
Introduction Training Finding Challenging Work for the Staff Listening Skills Hiring Staff Overtime: A Serious Issue Managing a Unionized Staff
36 Staff Motivation and Morale 36.1 36.2 36.3 36.4 36.5 36.6 36.7
Introduction Motivation Techniques Evaluating Your Motivation Skills Motivating the Seemingly Unmotivatable Using the Staff Knowledge as Company Resource Dealing with Poor-Attitude Problems Getting the Accounts Payable Staff to Take on More Work
293 293 294 294 296 299 301 303
307 307 307 310 310 312 313 314
319 319 319 321 324 325 325 327
xviii
Contents
36.8 36.9
A Realistic Approach to Motivating Accounts Payable Staff Improving the Image of Accounts Payable
37 Working with and for Purchasing and Other Departments 37.1 37.2 37.3 37.4 37.5 37.6
Introduction Why Interdepartmental Cooperation Is Important Basic Approaches Handling the Big Issues Getting a Customer Service Mentality in Accounts Payable Quick Answers to Common Problems
327 330
332 332 333 333 336 338 341
Part Ten Fraud
345
38 Check Fraud
347
38.1 38.2 38.3 38.4 38.5 38.6 38.7 38.8 38.9 38.10 38.11 38.12 38.13 38.14 38.15 38.16 38.17 38.18 38.19 38.20
Introduction Check Fraud as Growth Industry Legal Issue of Reasonable Care Corporate Responsibility Controls If Preprinted Check Stock Is Used Check Security Features Short-Circuiting the Forger Taking Reasonable Care Positive Pay Reverse Positive Pay Ongoing Fraud Problems A Total Fraud Protection Program Identifying Fraudulent Checks Quickly Segregation of Duties Account Reconciliation Accounts Payable Controls Payment Pitfalls: What Your Banks May Not Tell You Laws Covering Check Fraud Positive Pay: The Next Generation
347 347 348 348 348 349 349 350 351 353 353 353 354 354 355 355 356 356 358 359
Contents
39 Employee Fraud 39.1 39.2 39.3 39.4 39.5 39.6 39.7 39.8 39.9
Introduction Be Aware of Typical Candidates What Can Go Wrong Steps to Prevent Cash Fraud Exercise Patience Call in the Professionals When Fraud has been Identified Dealing with the Aftermath Preventing Fraud in the Future
40 Vendor Fraud 40.1 40.2 40.3 40.4 40.5
Introduction Master Vendor File Con Artist Vendors Scam Solutions Vendor Profile Forms
xix
360 360 360 360 361 362 362 363 364 364
366 366 366 369 371 372
Part Eleven Accounts Payable Today and in the Future
375
41 Professionalism in the Field
377
41.1 41.2 41.3 41.4 41.5 41.6 41.7 41.8 41.9 41.10 41.11 41.12
Introduction Evaluating the Big Picture Leadership and Preparation Technology Communication Relevant Trends Gaining the Attention of Management How to Win Approvals on Accounts Payable Proposals Taking Control of Your Own Destiny Certification Conferences Accounts Payable in the Twenty-First Century
42 Salaries and Titles in Accounts Payable Today 42.1 42.2 42.3
Introduction Basic Data Bonuses
377 377 378 378 379 380 380 381 383 383 383 384
386 386 386 388
xx
Contents
42.4 42.5 42.6 42.7 42.8
Education Effects of Industry and Company Size Trends Reevaluating AP Positions for Grade-Level Changes Titles
Appendix Accounts Payable Resources Index
390 390 392 392 393
397 399
PREFACE
The fact that this book contains 42 chapters is indicative of the complexity of the accounts payable function today. While in the past many believed that accounts payable was no big deal and all the department did was shuffle paper and pay bills, most savvy executives now realize this is far from the truth. Today’s leading edge accounts payable departments are staffed by professionals who understand not only all the nuances of the invoice processing and payment responsibilities, but the implications of all the related functions, including unclaimed property (escheat), sales and use tax, issuance of 1099s and 1042s, check fraud, EIPP, T&E, p-cards, the ACH, benchmarking, VAT refunds, petty cash, post audits, and more. They also know what can go wrong if the master vendor file is not handled correctly, if reasonable care is not exercised when issuing checks, if escheat laws are not followed, if payments are made from invoice copies, if the petty cash box is allowed to run wild, if policies and procedures are not clearly communicated and followed, and if checks are returned to requestors. Of course, this is just a sampling of the things that come back to bite a company in the shorts if the accounts payable function is not handled correctly. But rather than focus on what can go wrong, let’s take a look at what goes right when savvy accounts payable professionals are allowed to implement the very best processes in their departments: Duplicate payments and check fraud are reduced when invoices are handled properly and efficiently. Proper handling of both the setup and maintenance of the master vendor file helps in this regard. • Invoice processing and check preparation costs are reduced when alternatives to the three-way match, e-invoicing, electronic payments and effective procedures are used. • Cash flow is maximized when early payment discounts are earned and payments are timed appropriately. • Travel and entertainment reporting costs are held in check when the process is automated. There are several ways to do this. •
xxi
xxii
Preface
Huge inroads have been made in making accounts payable departments more efficient and effective. Technology can be thanked for this. This has in many cases eliminated some of the more clerical functions from the accounts payable landscape. Imaging, workflow, e-invoicing, EDI, and the Internet are just a few of the tools being used today in accounts payable. • The reduction in the number of small dollar invoices in accounts payable is one of the best ways to make the department more efficient and professional. P-cards, e-invoicing, and the selective use of summary billing all help in this regard. • Effective use of post audits, after self audits, helps reduce duplicate payments and recover those few erroneous payments that are made. • Compliance with sales and use tax, unclaimed property, and 1099 rules minimizes the time state auditors spend reviewing a company’s operations, as well as any fines they may impose.
•
The goal of this book is to help accounts payable departments of all sizes achieve the goals described above and avoid some of the possible negative outcomes delineated at the start. It also provides information about benchmarking, Sarbanes-Oxley, OFAC, disaster recovery, Balanced Scorecards, and Six Sigma that will help the accounts payable manager run a first-rate operation. Additionally, it strives to show readers how they can run a first rate department, where the staff is happy, motivated, and respected throughout the organization. The book is laced with case studies and real life examples of organizations that have implemented the strategies discussed. Some are widely recognized organizations while others will only be known regionally. I appreciate hearing from readers, practitioners and experts alike–whether they agree with me or not. Feel free to drop me a line at
[email protected] and share your likes, dislikes, thoughts, and observations. August 2004 New York, NY
Mary S. Schaeffer
ACKNOWLEDGMENTS
This book would not have been possible without the input of hundreds, if not thousands, of mostly unnamed accounts payable professionals. For the last ten years I’ve been lucky enough to spend my days talking to both practitioners and experts about all things accounts payable. The results of those interactions have been first a newsletter, followed by this book, conferences, surveys, more books, audio conferences, and finally a certification program. This work has been supported by IOMA, a New York based newsletter publisher. Our accounts payable line was able to expand only because IOMA forged new ground, expanding from operating solely as a print publisher into new horizons as market forces demanded. This effort led by David Foster, the company’s president, and supported by an equally innovative publisher, Perry Patterson, has made it all possible. Finally, a special thanks has to go to John Wiley and Sons for agreeing to publish the book in the first place. When they stepped up to the plate initially, there was very little written about accounts payable, and virtually no books on the subject. The demand for a second edition of the book proves they made the right decision in the first place. The process of producing the book runs eminently smoother under the guidance of Sheck Cho, Wiley’s executive editor. He is a delight to work with.
xxiii
ACCOUNTS PAYABLE
PART ONE
PROCESSING On those rare occasions when most people give accounts payable a thought, they focus on some of the topics covered in this Part. Few realize the amount of work needed to get a simple check prepared to pay an invoice. Even fewer realize that their own careless actions cause accounts payable much unnecessary work while simultaneously putting the company at risk for a duplicate payment and possibly even fraud. So, what’s the big deal, most think, the company receiving the extra payment will return it, right? Wrong! Most will not and they do not even inform the payor of the mistake. What is worse is that companies that make one duplicate payment are apt to have poor controls and thus make many more errors. The chapters in this Part look at some of the traditional accounts payable processes and suggest ways to improve productivity while simultaneously tightening controls and reducing the number of errors.
1
CHAPTER
1
INVOICE HANDLING
1.1 INTRODUCTION The primary function of any accounts payable department is to pay the company’s bills. This deceptively simple concept can, and usually does, get complicated. When the invoice is presented for payment, most companies match it against a purchase order and a receiving document, and if all three match, the invoice is paid on or after its due date. This is what is referred to as the three-way match, a term accounts payable professionals know as well as they know their own names. Note Bills for businesses come in the form of invoices and will be referred to as such for the remainder of this book.
Some might say that this match is where the problems start, but in actuality, the problems can and often do start long before it takes place. Incomplete purchase orders, purchase orders never completed, purchase orders never sent to accounts payable, inaccurate purchase orders, lost invoices, late invoices, early invoices, inaccurate invoices, incorrect receiving documents, receiving documents not checked, and invoices sent in for payment two or more times are just some of the problems that can occur before the match takes place. You will note that all of these problems are caused outside the accounts payable department, but will all have to be rectified by someone in accounts payable. And, as you read this book, you will see that this is just the beginning of the issues faced by the professionals who work in the department. When it comes to accounts payable, there is definitely more than meets the eye. 3
4
Ch. 1 Invoice Handling
1.2 THE INVOICE Invoices are usually sent by the supplier as soon as the shipment is made. However, a few crafty vendors predate them. The reason for this is simple: The invoice does not have to be paid until a set number of days after the invoice datealthough some in the field say the set number of days is after the receipt of the invoice. Regardless of which approach is used by your company, it is in the best interests of your supplier to get that invoice in your hands as quickly as possible to start the clock ticking. Where the invoice is sent is also an issue. Some companies have them sent straight to the accounts payable department for processing. This makes a good deal of sense if purchase orders are filled out entirely and correctly. In fact, if there are good controls on the purchase order, thenin theorythere would be no reason for the invoice ever to go anyplace other than accounts payable. However, in many organizations, there are problems with the purchase order, so the invoice goes to the purchaser for approval before payment. Even in those organizations where an approval is needed in order to make payment, invoices are sometimes sent first to accounts payable. Why? So they can be logged in and accounts payable can follow up to make sure they are returned on a timely basis. It seems that in many organizations invoices have a way of disappearing into thin air, with no one ever admitting to having received them. Then, when the supplier calls looking for payment and the invoice cannot be located, the supplier is asked to provide a copy, which it gladly does. While at first glance this may not seem to be a big deal, it is. First, much time is wasted looking for the missing invoice. When it cannot be found and a second is sent, the possibility of a duplicate payment has just been exponentially increased. For those who think a mountain is being made out of a molehill, reserve judgment until Chapter 7, “Errors and Duplicate Payments,” is read. Delays of this sort also mean that any discount that might have been available is lost. But perhaps the biggest problem occurs when the missing invoice suddenly appears. In many cases, both the original and the copy end up in accounts payable approved for payment. Depending on the controls in place, the second payment may or may not be caught! The phenomenal growth of payment recovery firms (see Chapter 25, “Post-Audit Firms”) gives testimony to the fact that this is a serious issue in corporate America today.
1.3 Purchase Orders
5
1.3 PURCHASE ORDERS In the best of all worlds, the purchasing department fills out a document known as the purchase order (PO) when ordering goods. This document should contain every tiny detail regarding the order, including the price, quantity, payment terms, and all other pertinent details. A copy of this should be sent to accounts payable, where it will wait to be matched with an invoice and receiving document. Problems with purchase orders can include: not sent to accounts payable, not filled out correctly, and so on. The other issue regarding POs is that there are many goods ordered in an organization for which no purchase order is completed. Magazine subscriptions, conferences, interest expenses, and rent are just a few examples; the list is endless. In these instances, a check request may be completed, or the invoice may simply be approved for payment and forwarded to accounts payable. These non-PO purchases represent a major headache in many organizations. Some companies, especially those that insist on having a PO for every invoice, use blanket POs, which cover multiple orders and shipments and, typically, are used for repetitive purchases. When it comes to blanket POs, accounts payable professionals either love them or hate them; there seems to be no middle ground. Payables and purchasing managers like to use them with vendors from which they buy many times a month, to streamline the process. Others dislike them because of the lack of control. Either way, all seem to have strong opinions. Here is what some accounts payable professionals have to say about them: •
Jay S. Wood of GTE Worldwide Telecommunications uses blanket POs extensively. Wood notes, however, that due to the manner in which blankets are established, verification of receipt for goods and services remains a manual process. Wood also points out that they issue uncommitted blankets, but they do not commit those funds to the vendor. The blanket can be closed, reduced, or upgraded at any time. The funds on the blanket PO are similar to funds in a checking account. They are there to pay the vendor, but GTE can discontinue the relationship with the vendor at any time and close the blanket hence, the reason the funds are uncommitted to the vendor. On some occasions, Wood said, “We issue committed funds for a particular vendor, when we contract with the vendor for a particular service or supply at a preset price.”
6
Ch. 1 Invoice Handling
Any invoice received against a blanket PO requires an approval and verification from an authorized individual responsible for the goods or services on the PO. Adds Wood, “Once they approve the invoice, we process it and decrement the PO. Each PO has a life of one year, if it is not canceled sooner. Funds can be added to extend the life of the blanket, so long as it has not expired. We use blanket POs for such things as office supplies, equipment leases, office cleaning, and maintenance.” •
Vicki Lindsey, accounts payable manager of RPC Inc., is another admirer. “We use blanket purchase orders for places that we buy from many times during a month. We give the vendors a purchase order number at the beginning of the month and tell them that everything we buy through the last day of the month should have that number. At the beginning of every month the vendors call us for a new purchase number. When our people pick up the merchandise during the month, they bring a delivery ticket back with them. We attach it to the purchase order; and when the invoice arrives, we simply match it with all the delivery tickets. [This] works well for us; we’ve done this for many years. You can also do weekly purchase orders, if preferred.”
•
An anonymous accounts payable manager from Chicago does not seem to agree. “I think they’re a dumb idea! They simply tell a vendor that someone may order up to some amount from you, but often there are no controls in place to check to see whether expenditures are adding up to or exceeding the approved amount. Purchasing people like them because they think it helps control expenditures. All they do is create paperwork.”
As can be seen from these radically different points of view, blanket POs can work in some organizations but are not without their inherent problems (i.e., the control issues). Review your own operations before deciding whether blanket POs will work in your organization.
1.4 RECEIVING DOCUMENTS The third part of the proverbial match, the receiving documents are, most often, the weakest link in the whole process. The reason is that the receiving departments in many organizations do not accurately check the goods that
1.5 Proper Invoice Handling
7
come through the department. Whatever is marked on the packing slip is often marked off as having arrived; no one in the receiving department actually counts.
1.5 PROPER INVOICE HANDLING Those wishing to reduce the time spent with the receiving documents need to determine what changes can be made in the way their invoices are handled. The following suggestions offer accounts payable managers strategies to become more efficient in dealing with their company’s invoices: •
Insist that all items sent for payment be coded. Many accounts payable clerks end up taking on the responsibility for coding something that is supposed to be done either by an accountant, a purchasing agent, or the person submitting the bill for payment. Insist that all invoices sent for payment include a valid general ledger (G/L) code.
•
Enter invoices one at a time. Batch entry can cause problems. Entering invoices grouped by vendor as one invoice can cause problems. When there is a question about an individual invoice, it will be difficult to answer under such circumstances. It will also be difficult for the vendor to determine which invoices have been paid and which ones have had deductions taken.
•
Assign complete responsibility for accounts alphabetically. This approach clearly delineates who is responsible for what and makes it easy to forward vendor inquiry calls, as well as invoices for payment.
•
Use adjustment letters to describe discrepancies to vendors. Many of the calls from vendors to accounts payable stem from differences between the amount of money they believe they are owed and the actual amount they receive. Formulate adjustment letters to vendors and subcontractors to explain any deductions taken. This will greatly reduce the number of phone calls asking for explanations, and will make it easier for the accounts payable clerk when such calls do come in. The clerk will be able to easily determine why the deduction was taken in the first place. Another side benefit to these letters is that statements from these vendors will no longer contain open items that the company has no intention of paying.
8
Ch. 1 Invoice Handling
•
Work more closely with suppliers. By letting suppliers know what the accounts payable requirements are for invoice processing, you will be able to streamline the voucher processing. This effective move can also lead to better relations with those suppliers.
•
Make better use of computer systems. Paper-based systems are timeconsuming and often inefficient. Teach people to look up invoices on the system, to wean them off the need to see the paper. The result will be a decrease in time spent both processing and searching for invoices in the files.
•
Enter data directly from invoices. In some organizations, much time is gobbled up entering data into a data entry form. The information is then taken from these forms and entered into the computer system. This often-unnecessary step is just one more example of an unneeded process that can introduce errors into a system.
•
Require all invoices be sent directly to the accounts payable department. Doing this one simple step, rather than having the invoice sent to the department that actually initiated the purchase, can save an enormous amount of time.
1.6 WHEN ACCOUNTS PAYABLE RECEIVES INVOICES LAST Whether invoices should all be sent first to accounts payable and then to the person who needs to authorize the transaction, or vice versa, is an issue for debate. The traditional view is that if the invoices come to accounts payable first, the department can then track the invoices and follow up when they are not returned in a timely manner for payment. But why should accounts payable have to spend its time making sure others do what they are supposed to do? A small, but growing, number of companies are shying away from the traditional route and insisting that other departments handle their own invoice-processing responsibilities, without the accounts payable department overseeing their workflow. When this happens, accounts payable often gets invoices late, long after the company has any reasonable chance of qualifying for an early-payment discount. Worse, the invoice frequently gets lost, and when vendors call accounts payable looking for payment, they are told the invoice was never received (a) CHANGING PHILOSOPHIES.
1.7 Entry by Month-End
9
and that another copy should be sent. Ultimately, in some companies, both the original and the copy end up being paid. There is some hope on the horizon, thanks in part to technology, which is playing a big role in the changes in accounts payable. In those instances when invoices are received electronically, it almost doesn’t matter who gets them first, as they can be forwarded effortlessly. With online lookup capabilities, everyone can check. (b) ORDER OF BUSINESS. Although accounts payable would like to receive invoices first, this procedure is no longer followed by many companies. Either a new accounting system is installed or a change in corporate philosophy necessitates the change. Whatever the reason, accounts payable professionals should insist that the following procedures be instituted should their company take the accounts-payable-last route: • • •
•
•
Vendors should be supplied with new bill-to addresses that reflect the name and/or the department of the authorizer. Calls about payment status should be referred to the authorizer, unless there is a good online tracking system. Even with a good online tracking system, payment calls may still be routed to the authorizer, as accounts payable may be able to tell the caller only if a payment is scheduled, not why it has or has not been scheduled. Other departments must understand and fully accept their responsibilities in regard to vendor payment and stop blaming payment delays on accounts payable. Ongoing communication between accounts payable and approving departments is essential.
Don’t be surprised to find some resistance to a move to the accounts-payable-last route. Other departments may not want accounts payable to get invoices last; many like the comfort of having accounts payable keeping track of payments for them.
(c) CLOSING THOUGHTS.
1.7 ENTRY BY MONTH-END Month-end cutoffs can cause real problems for the accounts payable department. Items that are not entered may not be paid on a timely basis,
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Ch. 1 Invoice Handling
resulting in lost discounts or, worse, late fees. Those who deal with this issue on a regular basis know this is often the result of an invoice sitting on someone’s desk either until the last minute or until the vendor calls looking for payment. In addition, many executives let the bills pile up, then send a big batch down to accounts payable at the last minute. When this coincides with a month-end cutoff, it is almost guaranteed to cause problems. And, if this should happen at quarter- or year-end cutoff, tensions are bound to increase, especially if the vendor needs to show the payment on its quarteror year-end reports. There are ways to avert this type of crisis. They include: Ask other departments that might have a lull at deadline time if some of the data entry work can be shifted there. • Hire temporary workers to help with the overflow. • Ask key suppliers to send the invoices a little earlier.
•
1.8 TIMELY APPROVALS How often have you lost a discount because, although the invoice was received on a timely basis, you didn’t have the necessary approval to pay it equally promptly? Once the invoice is received in accounts payable, it has to be sent to the appropriate party for approval. E-mail can be used to facilitate this process. Some companies report success with using a transmittal sheet for control purposes. However, the best way to draw attention to this is to set up a special general ledger account for late fees. This draws attention to this largely hidden matter. Because the late fees will be aggregated in one place, it is relatively easy to show the financial impact. Of course, this account only shows part of the effect; the amount of lost discounts will not be similarly quantified. Still, it gives accounts payable professionals a starting point for quantifying the results of sloppy practices.
1.9 UNIDENTIFIED INVOICES SENT TO ACCOUNTS PAYABLE A real time-waster for accounts payable professionals is the invoice that shows up bearing no clue as to who ordered the goods and whether the items were ever received. These are generally for items ordered without a purchase order. This puts accounts payable managers on the spotif they
1.10 Use Best of Terms
11
allow it. A number of professionals indicated they do not pay such invoices, nor do they spin their wheels trying to determine who placed the order. When vendors call looking for such payment, they are simply told to contact the party who ordered the goods. This solution may not be acceptable in all organizations, but it makes life a little easier in those accounts payable departments where it is used. It should be noted, however, that the lack of the desired information on the invoice may not be the fault of the company employee. It may simply be due to carelessness on the part of vendors that often are not fastidious in preparing invoices. Why should your staff be responsible for another company’s slipshod practices? Whether or not the severe approach is used, the following steps can alleviate headaches caused by unidentified invoices. 1. Send a memo or an e-mail to everyone in the company asking that all invoices include the name of the party ordering goods. This enables the accounts payable department to obtain necessary approvals and track down other needed information. 2. If managers agree, inform the appropriate staff that invoices received without this information will not be processed for payment. 3. Make sure that your policy is explained to all new hires. Accounts payable professionals who are successful in getting their invoice handling under control will have taken one step on the path to a smoother-running department.
1.10 USE BEST OF TERMS Pay according to the terms recorded on the purchase order and the quantity received. Some suppliers include terms on their invoices that, if not checked, would result in payments made earlier than the date agreed to by the purchasing department. Others include terms that are more stringent than those agreed to with purchasing. These are two reasons why getting a completely filled-out purchase order is so important. Always pay according to the purchase order, unless the terms on the invoice are better. Then use the terms on the invoice and inform purchasing so they can use this information the next time they order. Using this approach will result in the best of both worlds for the company.
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Ch. 1 Invoice Handling
1.11 STRATEGIES TO USE WHEN SHORT-PAYING INVOICES Accounts payable managers often pay an invoice for less than the amount on the original invoice. They take a discount if the invoice is paid early and make deductions for short shipments, defective goods, promotional programs, or for a variety of other reasons. The result of these actions is another phone call into the accounts payable department, requiring research time to determine the reason for the short-pay. Add these phone calls to the already overworked accounts payable staff, and the workload threatens to defeat even the most dedicated members. Fortunately, there are effective solutions to this problem. Several accounts payable professionals have found techniques to eliminate this phone call simply by sending a letter or issuing a debit memo or “just say no.” (a) LETTER. The simplest way to handle short-pays is to include a letter along with the payment explaining why the invoice was paid short. Accounts payable professionals who use this approach successfully use a form letter. The letter contains a long list of common reasons for shortpaying an invoice, and the accounts payable professional simply checks the appropriate box. These letters also typically include several lines where someone can add any appropriate additional comments. Those who use this letter are advised to keep copies of them, because collection managers who do not agree with the conclusions noted in the letter are likely to call to argue their cases. Having the letter readily at one’s disposal will make handling of such calls much easier. (b) DEBIT MEMO.
Require debit memos for payment deductions taken on
invoices. (c) JUST SAY NO! A small group takes the view that no invoice should be paid until it is prepared correctly. This group of accounts payable professionals is well aware that any time an invoice is not paid for the original amount, but manually changed, the odds of a duplicate payment increase tremendously. Rather than put their companies at risk, they require an original corrected invoice.
1.12 GOODS IMPROPERLY ORDERED OUTSIDE PURCHASING One of the areas ripe for overpayments (and duplicate payments as well) is that of goods ordered outside the purchasing umbrella. While it is
1.13 Nonpurchase Order Buying
13
sometimes appropriate for departments to order goods, many professionals recommend that a purchase requisition be filled out at the time of order to notify the accounts payable department of the upcoming bill. Purchasing may then create a purchase order and mark it as “bill only”no receiver forthcoming. Unfortunately, most people wait until the invoice arrives and then do an after-the-fact purchase order. This is a waste of time and only serves to paper the file, to make the auditors think there are controls in place. For starters, there is a big pricing issue. Most companies negotiate contracts with lower per-item prices to take advantage of the volume of goods purchased. When employees buy something outside of this contract, they usually end up paying more for the item than they would have if purchasing had arranged the transactions. Sure, it may only be a few dollars each time, but those few dollars have a way off adding up real fast. This type of ordering can also circumvent company pricing guidelines. If everything goes through purchasing, information can be accumulated so as to negotiate better vendor pricing.
(a) WHY SHOULD A COMPANY CARE?
Communication and management backing is the key to eliminating this type of behavior. In order to make sure that everyone abides by the ground rules, consequences must determined, and then be paid, by those who go outside the proper channels. This, of course, is very difficult in the corporate environment; but perhaps a charge could be leveled against the personal bottom line of the executive who is ultimately responsible. Or if a bonus is tied to bottom-line profitability, this might be an effective route. Getting such a policy implemented will be virtually impossible for an accounts payable manager without strong upper management backing. The accounts payable professional can spell out for management the actual effect of the purchases made outside the channel, if executives resist.
(b) HOW CAN A COMPANY STOP THIS ACTIVITY?
1.13 NONPURCHASE ORDER BUYING There are times, however, when it is appropriate for a party other than the purchasing department to acquire goods or services for the company. The overriding principle in such instances is that there be someone who is ultimately responsible for authorizing and monitoring such expenditures.
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Ch. 1 Invoice Handling
Check requests are the way most companies handle this issue. These requests should, however, be kept to a minimum. If complete coding information is required on the check request, accounting will have the necessary information to include for complete vendor analysis. 1.14 ENCOURAGING OTHERS TO FOLLOW ACCOUNTS PAYABLE’S GUIDELINES Many accounts payable departments have trouble getting the rest of the company to follow their payment procedures. To help with this, draft an easy reference guide for all standard procedures, to make them not only more user-friendly, but easier to locate. Such a guide can help reduce the enormous amount of time spent educating other professionals in the organization in the proper procedures for disbursements. 1.15 INVOICES WITHOUT INVOICE NUMBERS An invoice missing an invoice number often leads to duplicate payments. Many accounts payable professionals, when paying an invoice with no invoice number, simply make one up. While dummying in an invoice number might make the system work, it does have its pitfalls, especially for those who routinely use the date as their invoice number. A better way to make up a dummy number is to include some unique identifier that references the vendor; for example, a combination of digits from the vendor’s phone number and the date. And, when paying an invoice with no invoice number, check to make sure it hasn’t already been paid to prevent making duplicate payments. Companies that are serious about avoiding duplicate payments on the invoices that arrive without invoice numbers incorporate an invoice numbering scheme into their processes. Such a scheme should be uniform and designed to ensure that duplicate invoice numbers are never assigned. Additionally, the scheme should be shared with everyone who might possibly have a need to assign an invoice number. 1.16 INVOICE AMNESTY DAY One of the dirty little secrets in most accounts payable departments is that invoices with problems tend to disappear. Rather than pretending that this
1.17 Keeping Difficult Invoices from Disappearing
15
doesn’t happen, successful department heads are introducing an “invoice amnesty day,” free of finger-pointing and recriminations. Once a year, on invoice amnesty day, each staffer is asked to clean out his or her desk and submit invoices that have been sidelined for whatever reasonno questions asked. By instituting an invoice amnesty day, you will be surprised at the number of invoices that crawl out from under rocks. Such a move may also improve morale as the hidden invoices often weigh heavily on staffers’ minds. 1.17 KEEPING DIFFICULT INVOICES FROM DISAPPEARING Whenever an organization finds itself inundated with paper, some of it is bound to get lost in the shuffle. This is especially true if that paper requires action to be taken and the appropriate action is not clear. Accounts payable professionals handling difficult invoices fall into this group. Many accounts payable managers complain that invoices have a way of disappearing into never-never land. Some techniques in use today that minimize this problem are: •
Rotate desk assignments every six months or so. It helps improve training and backup, prevent fraud, and brings a lot of potential problems to the light of day.
•
Have an invoice amnesty day! With no questions asked, allow staffers to return all problem invoices to the manager. If there are no repercussions, staffers will feel free to return work they do not know how to handle.
•
Maintain a database of discrepant invoices. When it becomes apparent that the invoice is discrepant, the processor can create an e-mail to send to the buyer. This serves two purposes: (1) You know what kind of hidden liability you have out there; and (2) it requires purchasing to take ownership of the problem. The processor then files the invoice in a discrepant file until the buyer e-mails back that the invoice is “repaired” and ready for payment. This allows the processor to “transfer” responsibility and keeps the invoices out of the black hole. Processors are also required to register their backlog each week. (Obviously, if the processors do not comply, there will be a problem.)
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Ch. 1 Invoice Handling
•
Do spring cleaning. Sad to say, there is no method more effective than cleaning out someone’s desk in his or her absence. Although it may be embarrassing at times, doing so nails the point home. Some accounts payable clerks have a penchant for hiding problems and thinking they are resolved by keeping them out of sight. But keep in mind that desks, invoices, credit memos, statements, and related documents are all company property, hence available for review. That said, assign each person one drawer for personal use and never go in that drawer.
•
Set up the desks uniformly. Assign one place for statements, one place for problem invoices, one place for credit memos, and so on. In this way, you can tell at a glance how someone is doing just by looking at his or her desktop. This encourages the clerks to keep current.
•
Check the desks. This approach is very controversial, as some feel it is an invasion of privacy. One accounts payable professional relayed a humorous anecdote about this issue. “I had an accounts payable clerk (one of my best) tell me that she thought the rummaging of desks was intrusive, demeaning, and totally unnecessary. I eventually promoted her to accounts payable manager. One of the first things she did was inspect the desks once she found out how many items were being hidden.” The same clerk also said, “There is no such thing as ‘pending items.’” All that means is that nothing is getting done about the problem. Delete the “pending” file.
1.18 USING VENDOR STATEMENTS: THEORY Vendor statements can be useful tools for accounts payable professionals, if used correctly. Used improperly, they can lead to duplicate payments definitely not a desirable outcome. Given the controversy and interest that surrounds their use in the accounts payable field, a review of best vendor statement practices, as well as commentary from accounts payable professionals who use vendor statements on a regular basis, is in order. “Never pay from statements” is the mantra in many accounts payable departments, the reason being that statements often contain invoices that have been paid or that have been issued and possibly mailed but not cashed. One variation on the never-pay-from-statements best practice occurs with those vendors that send numerous small-dollar invoices to the
1.19 Using Statements: Reality
17
company. Typical examples might include overnight delivery services, messenger services, and so on. In these cases, some companies have decided to pay only from statements. Once a month, or week, or whatever time period is appropriate, the vendor sends a statement and the company pays it. Any invoices received from statement vendors are discarded. Vendors whose payments are based on statements are never paid from an invoice. The other best practice regarding the use of vendor statements is to periodically request a vendor statement showing all activity. In this manner, the accounts payable professional can identify any outstanding credits. Many suppliers do not list credits on their statements unless specifically requested to include them. And, if companies don’t know about a credit, they are unlikely to utilize it.
1.19 USING STATEMENTS: REALITY Here’s a look at how some companies are using statements: •
To reconcile vendor statements. This will make you aware of any discrepancies on your account. Sometimes invoices never reach the accounts payable department at all. If you do not have an invoice that is listed on the statement, call and request a copy. Also, the statement will show a credit balance if a duplicate payment is made. Reconciling vendor statements has always been a useful tool.
•
Review statements for any items older than 30 days. Assume anything fewer than 30 days crossed in the mail. Call for copies of invoices older than 30 days.
•
Use the evaluated receipt settlement, also known as pay-on-receipt. The staff does not look at any invoices. Instead, target 100 of your largest and/or most strategic suppliers and reconcile these statements on a rotating schedule of 50 per quarter. Also reconcile other suppliers as the need arises. Remember, some suppliers send a “statement” of only the outstanding invoices. No overpayments of cash on account items are listed. Or you can request an “aging” of your account, and this usually lists all open items.
•
Review statements. Doing so helps maintain a quality relationship and resolving issues.
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Ch. 1 Invoice Handling
As can be seen, reviewing statements is a worthwhile task and can pay big dividends when previously unknown credits surface. Identifying these items is one way that accounts payable can make a positive impact on the bottom line. 1.20 FILING: BATCH VERSUS ALPHA FILING The need to quickly and easily research invoices, as well as route, pull vouchers with special attachments, and handle remittance stubs, all build off a process that can make or break your department. Ultimately, how you handle the process essentially boils down to whether you want to use a batch or alpha filing system. Some companies file invoices (with check copies attached) by vendor. This is a timely process that adds little value. Alternatively, if a good tracking system can be incorporated into the accounting system, backup is not filed alphabetically by vendor, but with the batch it was processed with. Then, should the backup be needed, a quick check of the system reveals where the information is filed. 1.21 REDUCING THE NUMBER OF INVOICES As anyone even remotely involved with the accounts payable function can tell you, payables departments are being inundated with an increasing amount of work. Companies acquire other companies, or simply expand, and the workload grows. Yet in many cases, the accounts payable department is expected to handle additional responsibilities with no extra staff. In fact, at some companies they are expected to handle the increased workload with a smaller staff. In the doing-more-with-less environment permeating most of corporate America today, accounts payable professionals are adopting a variety of techniques to reduce the number of invoices coming into their departments. In most organizations, these initiatives are long-term projects and require approval from upper management. So before implementing any of the following initiatives, review your options: First decide which will not only work in your organization, but are most likely to fly; only then begin a campaign to educate and implement. Most accounts payable managers are loathe to pay off a statement. They want an invoice that can be used for the (a) SUMMARY STATEMENTS.
1.21 Reducing the Number of Invoices
19
three-way match. In fact, some wish they could eliminate statements because occasionally they are used, in error, in place of an invoice, resulting in a duplicate payment. However, there are circumstances when paying from a statement makes a lot of sense. If you do a good deal of business with a given supplier and most of the transactions are small-dollar amounts, you might consider ignoring invoices with that particular vendor. A number of accounts payable managers report that, instead of paying many small invoices from the same vendor each month, they pay once a month from the end-of-month summary statement. This can greatly reduce the number of small, bothersome invoices in the department. It also helps reduce errors, as small invoices are the ones that tend to get paid twiceand are never uncovered. It also makes things easier for the supplier. Instead of getting many small checks from your company during the month, they receive one larger one. And, if you are remitting to a lockbox, the supplier will save banking fees. You might make this point when trying to negotiate such a deal. In addition, if your supplier knows when to expect that single check, it will be better able to predict its cashflow. By pointing out the benefits, you may even be able to get your terms stretched a little! Perhaps even more bothersome than many small payments to a few large vendors are many small payments to a wide variety of vendors. Most companies find that over 90 percent of invoices paid represent less than 10 percent of funds disbursed. In growing numbers these companies are turning to corporate procurement cards. Use of these cards will drastically reduce the number of invoices sent to accounts payable for processing. This application will work with some of the large vendors discussed previously in the summary billing section. If you can get them to accept credit cards, your life will be made quite a bit easier. Only one payment will need to be made to cover payments to a variety of vendors. And, best of all, these payments are typically made at the end of the billing period. Most accounts payable professionals using these cards report that once the original reluctance to their use is overcome, the cards are embraced wholeheartedly. When management realizes that the strict controls that can be imposed limit their exposure, they are more likely to go along. It is also a positive experience for employees who are empowered to use the cards. As card issuers continue to refine their cards, and solutions are found to some of the accounting issues that cloud this usage in some corporations,
(b) CORPORATE PROCUREMENT CARDS.
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Ch. 1 Invoice Handling
you can expect use of the cards to skyrocket. (See Chapter 24, “Purchasing Cards,” for more details on this subject. Evaluated receipt settlement (ERS), also called invoiceless processing, is a concept that a few companies swear by and the rest avoid like the plague. ERS requires partnering with your supplier and cooperation from both the purchasing and receiving departments. The concept is simple: Normally, accounts payable waits for an invoice, matches it to the purchase order and receiving document, and then processes the invoice for payment if everything is in order. With ERS, the accounts payable department simply mails the payment to the vendor at the agreed-upon time if the purchase order and receiving document match. The invoice is never mailed or included in the process. Obviously, this can be done only with vendors that agree to implement this process. It also requires accuracy on the purchase order and in the receiving department. Goods arriving from a vendor must be checked carefully before receiving signs-off, as the receiving document will be the only one received from the vendor. Also, purchasing cannot be sloppy about filling out its purchase orders; the POs must include the payment terms spelled out in detail. If you don’t have your house in order, don’t even consider implementing this technique. (See Chapter 2, “Alternatives to the ThreeWay Match,” for more details on this technique.)
(c) EVALUATED RECEIPT SETTLEMENT (ERS).
In growing numbers, companies are turning to electronic invoicing, sometimes called e-invoicing or Web invoicing. This process removes paper from the accounts payable department; improves accuracy in the process, as human rekeying is eliminated from the process; and allows for tracking of the paper through out the chain. Thus, these invoices tend to be approved more quickly and paid on time. As a side benefit, e-invoicing helps companies qualify for a greater number of early payment discounts. (d) E-INVOICING.
Thanks to falling prices, companies that just a few years ago found imaging too expensive are now reevaluating it. This is not to say that this technology is cheap, but that it is now more affordable for certain organizations. Those companies that have been most successful with imaging use it to scan an invoice into their system the minute it enters their door. The (e) IMAGING AND WORKFLOW.
1.22 Handling Bills with Remittance Advices
21
original paper document is never touched by human hands again. The imaging system indexes the information, allowing for easy document retrieval at a later date. The necessary information is taken from the invoice electronically. This drastically reduces rekeying errors. The document can then be passed around the organization as needed, and can be accessed by different individuals and departments. Copying costs are eliminated and storage costs greatly reduced. The conversion to an imaging system can, however, be time-consuming. But it can also prove a valuable expenditure of time, as many take this opportunity to review their current workflow processes and eliminate unnecessary steps. Employees will have to be retrained to use the new machines, and some may be resistant to the changes. But once the system is up and running, most are pleased with the results. The accounts payable world is, as is the rest of the business community, changing quickly. It is no longer cost-effective to do things the way they have been since time immemorial. Anything that reduces the ever-growing volume of paper crossing accounts payable managers’ desks is welcome. The techniques just discussed are a few of those sweeping accounts payable departments.
1.22 HANDLING BILLS WITH REMITTANCE ADVICES Bills for services such as telephone and utilities often require that a stub be sent, along with the check, so the receiving company can apply the payment correctly. This is something that most accounts payable professionals do as a matter of course when paying their personal bills. However, it can be a major time-waster when paying such bills for a company. Many companies have found solutions to this annoying problem, some of which may work in your organization. They include: •
Eliminate the process of sending payment stubs with your utility and telephone bills. Reference the account number and the invoice number with the invoice date.
•
Contact the utility company and ask for a consolidated statement of all accounts. Cut one check for all accounts and return the stubs to the utility. This does not completely eliminate the problem, but it does limit the extent of the damages.
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Ch. 1 Invoice Handling
Use a subscription service. This technique works well for those organizations that have many subscriptions. • Pay electronically. Some companies are starting to use automated clearinghouse (ACH) debits for this process. •
CHAPTER
2
ALTERNATIVES TO THE THREE-WAY MATCH
2.1 INTRODUCTION As companies look to streamline their operations and eliminate nonvalueadded tasks, they turn their focus to the proverbial three-way match described in Chapter 1, “Invoice Handling.” The process can introduce errors in situations where there were no problems, which is costly and time-consuming. Few would object to spending time and money to make sure a large bill is paid correctly, but spending $40 to make sure a $425 invoice is paid correctly just doesn’t make good business sense. Consequently, innovative professionals studying the situation devised alternative solutions to address this issue. The obvious answer is to eliminate small bills. This is not as ludicrous a solution as it might appear at first glance, and companies are switching to corporate procurement cards in droves as a means of eliminating small-dollar invoices. (The use of these cards has become a leading topic of discussion among accounts payable professionals, one that is examined in detail in Chapter 24, “Purchasing Cards.”) Assuming the invoices remain, however, companies are using a technique called assumed receipt for small-dollar invoices and evaluated receipt settlement for both large and small invoices. Both require procedural changes. 2.2 ASSUMED RECEIPT When accounts payable receives an invoice, it assumes that the goods have been received, and rather than go through the tedious three-way matching process, the department processes the invoice for payment. Some also call the approach negative assurance because copies of the invoices are sent to 23
24
Ch. 2 Alternatives to the Three-Way Match
the appropriate party, and if that individual does not tell accounts payable not to pay, the payment goes out as scheduled. A number of innovative companies are beginning to send the notification by e-mail rather than the traditional paper copies of the invoice. While this approach may seem new to many, some companies have been using the process for several years. This technique is also sometimes referred to as positive receiving. As might be expected, milliondollar invoices are rarely paid without in-depth verification, even at companies using assumed receipt. Most companies set guidelines for the verification procedure. For example, at one company, the policy applies to all invoices less than $5,000 that do not have an associated purchase order (PO) or any other preapproval mechanism in place. At Tandem, the policy applies to all non-PO-based invoices of less than $1,000. As part of the assumed receipt process, a system-generated paper notice, along with a copy of the relevant invoice, is sent to the person who ordered the goods or services. The recipient then has 10 business days to respond to accounts payable to indicate that the invoice should not be paid or should be recoded. If there is no response, the system releases the invoice to pay against its payment terms. Some take this a step further and don’t send copies of invoices for amounts less than $500. Another innovation is the move to an intranet/e-mail delivery of the notice, with image availability of the invoice via the intranet/e-mail platform. With this mechanism in place, no copies need to be sent; but if the recipient had any questions about the item, he or she can view an image of it on the company’s intranet. Not only does the policy allow accounts payable professionals to simplify and speed up the approval and payment process for small-dollar invoices, it frees the staff to spend a higher proportion of their time managing the payment of large-dollar invoices, which represent the bulk of spending.
(a) HOW ASSUMED RECEIPT IS BEING USED.
The major concern for most companies considering such a program is the increased possibility of fraud. However, if good controls are in place and all participants regularly check the information accounts payable provides, the likelihood of this is minimal.
(b) DISADVANTAGES.
(c) GETTING STARTED. Obviously, the first step in getting an assumed receipt program up and running is to educate users. But because this is a
2.3 Evaluated Receipt Settlement
25
relatively new process, few in management will know what this entails. Thus, your first task will be to educate those who will ultimately make the decision to go forward. A clear and comprehensive communication process across the company is key to a successful implementation. Developing a system-generated notice is also a critical step in the project implementation process. Management is not the only group that will need to be educated. Once you’ve gotten the green light to implement the program, you will have to make sure that all the participants understand the program and know exactly what they are supposed to do. It won’t hurt to point out how the program will benefit them, as well. To help in your efforts to educate all those involved, gather information about other companies that have implemented this policy, regarding their experience and any associated risks. And if your company is uncomfortable with this approach, use a smaller-dollar limit to start the process; and increase it later, as appropriate. Significant benefit could be derived from using even a $500 cutoff for the policy. (d) RESULTS. How effectively do these programs work? Is there an increase in duplicate and fraudulent payments associated with their use? One company using assumed receipt estimates that no more than 100 payments (under $5,000) have been put on hold or removed from the system. There have been no instances of paying for merchandise that had not been received (departments would have seen the charge on their monthly accounting statements). How does the company know this? It brought in an audit recovery firm in September 1996 to do up to a three-year study of its accounts payable system. It stopped after reviewing only four months’ worth of invoices, stating that any further time spent would be wasted, since the firm found only one error, where the vendor had accidentally calculated an extra item into his handwritten invoice for $123. The accounts payable manager reports that based on the fact that check runs for these four months were in the tens of millions, and that this was obviously a human error, the company determined that its system was working very well. Few would disagree with her.
2.3 EVALUATED RECEIPT SETTLEMENT Whether due to reengineering initiatives or at the behest of a large and powerful customer, more accounts payable managers are being directed to adopt
26
Ch. 2 Alternatives to the Three-Way Match
evaluated receipt settlement (ERS), also known as paperless invoicing, invoiceless processing, and pay-on-receipt. “Although most reengineering concepts will reduce the cost of processing an invoice,” argues Mark Becker, a senior consultant with Soltec, “they do nothing to eliminate the single largest inefficiency in accounts payable the invoice itself.” To illustrate the uselessness of the invoice, Becker poses the question: “What value does an invoice add to the procurement and disbursement process?” In theory, this is true. It assumes, of course, that purchase orders (POs) are filled out completely and that terms of sale are included on the PO. For ERS to work, this is essential. The underlying principle behind ERS is simple. When a company receives something it ordered, it pays for it as agreed in advance with the seller. Becker explains the concept in a little more detail, as follows: (a) HOW ERS WORKS.
A company agrees to purchase goods and services using a PO with established prices and terms. When the goods are received (or the service is performed), the customer makes payment without the need for the supplier furnishing an invoice. The payment to the supplier provides the remittance information, including the supplier’s shipping document number (e.g., packing slip number, bill of lading number), which replaces the invoice number for cash application purposes.
It is imperative that both the purchasing and receiving staff understand the importance of their functions should a company move to ERS. Packing slips must be verified and forwarded to accounts payable for matching against purchase orders, which must be completely and accurately filled out. Any discrepancies or returns must be clearly identified on the packing slips. Without these two important components, any ERS initiative will make more, rather than less, work for the accounts payable staff. Most companies that implement ERS have to make some changes to their workflow. As readers may have already guessed, ERS results in a two-way, instead of a three-way, match. This is a big timesaver that ultimately reduces the number of errors introduced into the process. The lack of an invoice number can present a problem, however, though innovative managers have found workable ways to solve it. Many accounts payable departments that insist on an invoice number to pay have had success in using the packing slip number as the invoice number. Conversely, (b) CHANGES TO THE PROCESS.
2.3 Evaluated Receipt Settlement
27
other sellers that must have an invoice number have been successful in using the invoice number as the packing slip number. Pricing can be a key issue as well. “ERS requires the establishment of firm delivered pricing on POs,” says Becker. “This means that miscellaneous charges such as pallets, setup, and tooling must either be eliminated or factored into the item’s unit price by the supplier.” This is a big advantage to accounts payable. “Firm-delivered pricing eliminates all of the work associated with tracking and payment on miscellaneous charges,” explains Becker. With the emphasis on completed POs and accurate data, many accounts payable managers using ERS report a reduction in the number of problems with suppliers. ERS tends to be used more in certain industries than others. The automotive industry and all those industries supplying it are some of the former. The implementation process is usually not as hectic or as complex as certain other process improvements. “Soltec clients are successfully launching ERS pilot programs in three to four months, with as much as a 40 percent reduction in their invoice-transaction volume,” says Becker. “Full launch for all suppliers is occurring two to three months after the pilot launch.” Compare this with an SAP installation, which can take years and disrupt virtually the entire company. One of the first steps in launching an ERS program is to evaluate supplier relationships. This is typically done by the purchasing department, with little input from accounts payable. However, when it comes to setting up guidelines for the operation of the ERS, accounts payable managers should do everything in their power to be included in the discussions. Why? Because they are the ones who are going to have to live with decisions are madeand work with them every day. One barrier to success of ERS is that, in their zeal to get ERS up and running, upper management may cave in to unreasonable requests made by suppliers. In fact, they may not even realize that the demands are unrealistic. If the operating procedures are not written with input from someone who has in-depth knowledge of the way accounts payable functions, you may find yourself saddled with procedures that are difficult, if not impossible, to use. When ERS is implemented properly, it can be a real boon to accounts payable. You will soon have fewer suppliers, and so will be able to develop a closer working relationship with the chosen few. This will be a real benefit when it comes to reconciling payment discrepancies. (c) SUPPLIER RELATIONSHIPS.
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Ch. 2 Alternatives to the Three-Way Match
Once the program is operational, the ongoing requirements often fall on the shoulders of the accounts payable staff. Preparation of the remittance advice changes, as the information that is normally included, such as an invoice number, is no longer available. Most companies faced with the dilemma of which identifier to put on the remittance advice go with the supplier’s packing slip number. This allows the supplier that receives the payment to correctly identify and apply the money. Some suppliers, especially those that rely heavily on invoice numbers, will make the packing slip number and the invoice number the same. Other information that may be present on the remittance advice includes: the shipping date, the discount dollar amount as per the packing slip, the gross dollar amount as per the packing slip, the net dollar amount as per the packing slip, and the type. Additionally, the remittance advice may include the following optional data: quantity received, unit of measure, unit price, item number, purchase order/release number, extended price for each item received, receiving location reference, and sales tax. This identifier should be selected when the program is being established, and should be comprised of information easily accessible to the accounts payable department. This is the type of detail that is often overlooked when accounts payable is not involved in setting up the program. (d) OPERATIONS ACCOUNTING.
When using ERS, correct and complete information on the purchase order is imperative. Unfortunately for accounts payable professionals, although they must rely on this document, they have virtually no control over it. It is therefore crucial to impress upon the top brass in purchasing the importance of filling out the purchase order completely and correctly. Accounts payable professionals will need to complete a thorough review of the purchase orders to make sure they contain all necessary information, including freight charges and one-time, lump-sum payments. They must also contain firm prices and timely price updates. Volume-sensitive pricing, prices quoted at market, and retroactive increases or decreases all must be indicated on the purchase order. Working consistently with purchasing on this matter will put the accounts payable professionals in the best position to make ERS work in their company.
(e) CORPORATE AND LOCAL PURCHASING.
In many organizations, receiving documents receive scant attention. The checking of the contents of a shipment
(f) SUPPLY AND MATERIAL CONTROL.
2.3 Evaluated Receipt Settlement
29
against the packing slips is not as thorough as one would hope for. When discrepancies arise because of this, it is the accounts payable professional who is stuck reconciling the differences. Once again, dependent on information over which they have no control, accounts payable managers find themselves in the delicate situation of trying to get another department to do a better job so that their own job may be a little less hectic. Again, it is necessary to impress upon the receiving department the absolute necessity of doing a thorough match of the goods received against the receiving documents. Otherwise, it is possible to pay for goods never received. If at all possible, insist on having the receiving practices reviewed during the planning phase for ERS. At that point, adequate controls can be installed if needed. Use Electronic Data Interchange (EDI) technology to record shipments whenever possible. Whenever a new process is introduced, you can count on hearing from both your internal and external auditors. Thus, it is not a bad idea to invite them in at the planning stage so they can voice their concerns and you can answer them. It is much easier to design a system taking these matters into account than it is to go back and jerry-rig the system to handle them. Moreover, they can alert you to possible Internal Revenue Service issues at the get-go. So, not only does including the auditors early make them happier, they are less likely to try to find holes in the system down the road. Many who use ERS audit by exception and utilize sampling techniques, claiming that doing so substantially reduces auditing. This is a blessing to the accounts payable staff, who traditionally spend untold hours pulling documentation for auditors. It is in the planning stages that parameters need to be established to detect major errors. The likelihood of duplicate payments is reduced with ERS as there is no invoice, and possible duplicate invoice, to pay.
(g) AUDIT CONTROLS AND PROCESSING.
Without a doubt, instituting ERS will force changes to your information systems—simply, it will not be possible to implement ERS without making these changes. Review your current procedures to determine which changes will need to be made in order to operate efficiently. This is another reason it is so important to have someone familiar with the intimate details of accounts payable involved with ERS implementation. Accounts payable managers who want other modifications made might take this opportunity to try to add them to the list. This, of course, will work only if the additions are minor. (h) INFORMATION SYSTEMS.
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Ch. 2 Alternatives to the Three-Way Match
As noted earlier, the decision to go with ERS is rarely made in the accounts payable department, but virtually every step of the implementation process affects it. If it is to work well, then, the implementation team must include a representative from accounts payable, someone who has in-depth knowledge of the way the department works when it comes to paying bills. Thus, accounts payable managers need to push themselves to the forefront, if they are not initially included, at those organizations planning to use ERS. Otherwise, instead of having a say in designing a workable system, they will be presented with a fait accompli that may not work at all. The requirements of a successful ERS program include: •
An integration among the purchasing, receiving, and accounts payable systems. Accuracy in each of these areas is imperative, otherwise ERS can cause chaos to the organization. This means that departments that, in the past, might not have gotten along will have to put their differences behind them to make this program work. For ERS to work, purchase orders must be correct and contain accurate termssomething that rarely happens in some organizations. It also means that receiving will have to check incoming goods closely against packing slipsanother area that is sometimes lax. To successfully implement ERS, both these departments may need to clean up their acts.
•
Vendor-supplier trust and cooperation are prerequisites. ERS will not work between two companies that cannot rely on each other. If the employees at two companies always seem to be at odds, it is a good idea to try to smooth over these relationships before ERS is implemented. Of course, this may be easier said than done, as frequently the mandate to use ERS comes from the very top levels. However, the accounts payable manager in this situation does not have to sit back and do nothing. He or she can take the first step by extending a hand in friendship (perhaps in the form of an invitation to lunch) to try to establish smoother working relationships with the adversary. An in-person meeting can often do a lot to alleviate bad feelings.
•
Establish and agree on certain information with trading partners. This should, at a minimum, include identifying: the trading partners who will use ERS, part descriptions and numbers, prices and rates (which must be accurate and allow for updates), payment terms, and shipping termsif they are standard.
2.3 Evaluated Receipt Settlement
31
•
Dynamic charges should be handled outside of the ERS program. An ERS program can work even if the shipping terms are typically taken from the invoice. Most experts recommend taking the shipping terms out of the program and billing for them separately on a monthly basis. This would still allow a company to accrue most of the benefits of an ERS program. Other charges, such as fees for returnable containers and so on, can be handled much the same way.
•
Discipline in ordering and receiving must be rigorous. Because there is no invoice, the accounts payable manager must rely heavily on the information provided by purchasing and receiving. This matter must be discussed with these departments, a conversation that should be handled gingerly. In fact, because the directive to use ERS usually comes from senior management, it might not be a bad idea to try to get them to raise this issue with the departments. The accounts payable manager might try pointing out that in order for ERS to work, more information will be needed from purchasing and receiving. This should get the ball rolling on this very delicate issue.
•
Participating vendors must ship high-quality goods with minimal material rejects. With ERS, resolving discrepancies can be a nightmare. The program works well only when there are very few disputes to settle, which means that a vendor that ships inferior merchandise will make a poor candidate for this program. To be successful, the seller must impose the same strict discipline as that required of the purchasing and receiving departments.
The consequences of implementing ERS without strict discipline in pricing, ordering, and receiving are seen in significant incidences of exceptions that will negate the benefits gained by eliminating the invoice. The implementation of a successful ERS program depends on the development and maintenance of rate databases, as well as discipline in the ordering and receiving process. As with any new procedure, ERS will not be initiated without difficulties. By reviewing some common problems, accounts payable managers planning to launch ERS can anticipate obstacles and prepare for them. In-house resistance to change is the first roadblock most encounter. It is inevitable that people are comfortable with what they know and view change as disruptive and threatening. Some oppose it out of a misguided need to “protect their turf.” (i) BARRIERS TO IMPLEMENTATION.
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Ch. 2 Alternatives to the Three-Way Match
Without invoices, the onus falls on others to ensure that the company gets all the money it is due. To make ERS work smoothly, purchase orders and receiving must have as few errors as possible. In many companies, these departments are not usually held to this level of responsibility. But if the concerns of these departments are addressed in the planning stages, ERS has a much better chance of succeeding. Enhanced bar-coding capabilities will help answer some concerns of the receiving department, as will hard work to overcome sloppy practices there.
CHAPTER
3
CHECK PREPARATION PRINTING AND FILING
3.1 INTRODUCTION Most people who don’t work in accounts payable do not realize how much time it actually takes to get a check out the door. Some companies have their checks printed, signed, and put in an envelope for mailing entirely by machine, with little or no human intervention. These companies are a distinct minority. Even those that do use this technique still require some human handling on certain checks. For starters, certain payments, such as utility bills, require that the payor include a remittance advice with the payment. Others will sometimes include a copy of the invoice being paid. At this time, no computer exists that will take whatever attachments are necessary and include them with the check. 3.2 A MORE COMMON APPROACH Typically, corporate America prints its checks in one of three ways: Checks are outsourced and printed by a third party. • Checks are printed on a laser printer. • Checks are printed on a line printer in continuous form and have to be “burst.” •
In both the second and third approaches, checks either can be signed by the computer or hand-signed. 3.3 MANUAL SIGNATURES Where checks are hand-signed, massive human intervention is required, not only to sign the checks but to get them to the appropriate parties for 33
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Ch. 3 Check Preparation Printing and Filing
signature. Typically what happens is that the checks are burst apart and reattached to all the backup documentation and then taken in batch mode to an authorized signer who reviews the backup and signs the check. This is where the problems multiply. Finding an available authorized signer can sometimes be a problem. It is not uncommon for checks to sit for days unsigned until someone has the time to review and sign them. Then the clerk who is responsible for the checks is called to retrieve them. In some organizations, two signatures are required. The process of finding a second authorized signer involves the same issues as with the first signer. The longer it takes to get signatures on the checks, the more likely it is that vendors will call looking for their payments. When one of these vendors gets irate or threatens not to make future shipments, a search must be made to find its check. If a company has more than one check run a week, it is possible that there will be several batches making the rounds for signature. Which batch is the check in? In a two-signature environment, the clerk must then identify which signer has the checks. It is not unknown for a manual check to be drawn in these circumstances, leading to the likelihood of a duplicate payment. This discussion is not meant to discourage companies from using manual signatures. They have their place, especially for high-dollar payments and in those environments where the controls over payments before reaching accounts payable are weak or nonexistent. Once the checks are signed and returned to accounts payable, someone in the department must: 1. 2. 3. 4.
Separate the checks from all the backup. Prepare an envelope and stuff the check in it. File the backup. Mail the checks and/or call internal personnel, who need to pick up certain checks (a really bad practice).
Paying electronically eliminates a lot of these hassles. 3.4 AUTHORIZED SIGNERS The approval process is filled with problems. For starters, one has to know who can approve what. Then there is the issue of verifying the signatures on the invoices, purchase orders, and check requests to make sure that the signature on the document is accurate. One of the easiest ways for an employee to perpetrate internal fraud is to simply fill out a check request
3.5 Proper Check-Signing Procedures and Control
35
and sign the boss’s name to the request. Ironically, if the company has good internal controls in place (which include never returning the check to the original requester, but simply mailing it to the payee), the process actually helps the employee perpetrate the fraud. (a) LIST OF APPROVERS. To address these issues, companies should develop a list of authorized approvers, along with a detailed listing of the levels of approval. This listing should be available to those who need the information—specifically the people in accounts payable preparing the payments and the internal audit staff—but it should not be made generally accessible. Similarly, whereas approvers or signers need to know their own limits, they do not need to know the limits of everyone else in the company. The listings of approvers and their limits should be kept in a secure place, and given only to those who need this information; they should never be left lying around. Some companies have put this information on their intranet sites and have instituted password limits on who can access it.
To make sure that the right person is signing or approving the documentation, companies should keep copies of the signatures on file. Traditionally, these were kept on signature cards similar to those used by banks to verify signatures. Many an accounts payable professional can recount instances of senior executives, whose handwriting is exceedingly sloppy under normal circumstances, but who take the utmost care in filling out the signature card for the official company records. The result is that the signature on the card bears no resemblance to the scrawl they normally use on documents to approve payments. Thus, when these cards are given to the approvers, they should be instructed to sign them as they would any other document—in their usual illegible scrawl, if that is the case. Otherwise, the documents they approve for payment may be bounced.
(b) SIGNATURE CARDS.
3.5 PROPER CHECK-SIGNING PROCEDURES AND CONTROL “Trust is not an internal control,” reports Margolin, Winer & Evens, a Garden City, New York, accounting firm, in its semimonthly publication, Fraud Alert. Many companies with excellent controls become lax when it comes to their check-signing procedures, often because of the involvement of upper management. Many sign whatever is “put under their nose,” making them perfect targets for employees intent on committing internal check fraud.
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Ch. 3 Check Preparation Printing and Filing
When checks are given for signature, they should be accompanied by enough paperwork so that the signer can verify that the check has been made out properly, and for the correct amount. At a minimum, this should include the purchase order (PO) completely filled out, the receiving report, and the original invoice. The invoice should indicate that someone has checked the price and quantity extensions on the invoice. And the signer should randomly double-check the math on the invoice. This may seem like a lot of work, but remember, it is not necessary for all checks. It is only for those that are to be manually signed, which are those over a set dollar amount and that represent the largest exposure for the company. It is also recommended that any discrepancies on the threeway match be noted. The Fraud Alert also suggests that: (a) CHECK-SIGNING BEST PRACTICE.
Particular care be taken with vendors with unusual names and addresses. • The check payee should match the invoice information. • No abbreviations should be used on checks. It is relatively simple for ABC to be altered to read A. B. Callahan, for example. •
Many companies put manual signatures only on checks over a certain dollar amount. Others require two signatures on checks over an even higher dollar amount. Given the amount of money involved and the damage that a fraudulent loss can do to the underpinnings of a company, having two manual signatures on very large checks is not a bad idea. Proper check-signing procedures do not end once the ink dries on the check. The checks must be returned to someone other than the requestor and kept separate from the record-keeping function. An independent party should mail the checks. A few companies require that all travel and entertainment (T&E) reports be manually signed. The reason is that many believe that employees, knowing a high-level executive will be looking at their expense reports, tend to put the brakes on their spending when traveling on company business. These procedures may make it seem like overkill. However, given the high incidence of fraudulent disbursements, a little extra care is well worth the effort. While good up-front controls comprise one of the first lines of defense against disbursement fraud, good check-signing procedures can catch those last-minute frauds that manage to slip through the first go-round.
(b) LIMITS.
3.6 Limiting Time Spent Getting Checks Signed
37
3.6 LIMITING TIME SPENT GETTING CHECKS SIGNED Finding the signer is only half the battle. Getting that person to focus and actually lift a pen to sign the check is the other half. Accounts payable departments often find their schedules ruined by the bottleneck caused by harried executives who are required to sign the company’s checks. It’s often a low-priority task as far as these individuals are concerned—low priority, that is, until a major supplier refuses to make further shipments. Most accounts payable departments would be more productive if the time spent stalking authorized signers could be eliminated or at least reduced. Many professionals simply throw up their hands in disgust, believing this is a situation that can’t be changed. But that is not necessarily so. Accounts payable managers at a variety of organizations report success in diminishing this problem through the following techniques: raising limits for dual signatures; raising limits for electronic check signers; using electronic check signers for recurring payments; appointing backup signers; using electronic check signers for approved POs; and scheduling check-signing meetings. Simply by raising the level at which two signatures are required on a check, the number of checks requiring two “chases” will be reducedin most cases, drastically. This is due to the fact that, as most accounts payable professionals are well aware, small checks represent a high proportion of all checks written. Simply raising the limit from $5,000 to $10,000, for example, can make a huge difference. Companies requiring two signatures on all checks might consider moving to requiring one for small checks. Once a level of comfort is reached with one signature, the issue of raising the limit can be broached. And don’t forget: The banks on which the check is drawn should be contacted to make sure that the instructions they have on file regarding signatures on your checks are up to date. With a smaller number of checks requiring two signatures, the accounts payable associate responsible for obtaining those precious John Hancocks will have an easier time. Persuading that second signer to stop what he or she is doing when there are only five checks to sign is much easier than when there are 25, or even more. (a) RAISING LIMITS FOR DUAL SIGNATURES.
Use of an electronic check signer completely eliminates the problemwell, almost completely. Most companies using these machines have controls in place that require
(b) RAISING LIMITS FOR ELECTRONIC CHECK SIGNERS.
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Ch. 3 Check Preparation Printing and Filing
two people to be involved in the signing operation. Generally, the people involved in running these machines are part of the staff, so a regular schedule can be developed, and will be adhered to in most cases. This is generally a much easier situation than having checks signed manually. Some computers will sign the checks as part of the print cycle. The use of such computers will resolve the check-signing issues in much the same way as the separate machines currently available do. Rent, mortgage payments, lease payments, interest payments on fixed-rate loans, and a variety of other payments are made on a regular basis by many companies. For these payments that are recurring, never change, and are always for the same amount, there is really no reason why they have to go through the manual check-signing process. These items are ideal candidates for the electronic signer. Should you be successful in convincing management to take this route, it is possible to take it one step further. After some ease is achieved with the process, search for other payments that the company has a contractual obligation to pay. The examples that come to mind most quickly are utility bills and interest on floating-rate loans. Once the invoice has been approved, it could go through the electronic signer with no further management review. (c) ELECTRONIC SIGNERS FOR RECURRING PAYMENTS.
Along the same lines, invoices that are matched with approved POs do not really require a manual signature. Once the three-way match has been made, signifying that the goods were ordered and received, a manual signature adds nothing to the process. What this does is force the controls back to the first line of defense: the approval of the invoice. If that is done correctly, why involve highly compensated management in signing the check? A word of warning is in order here: This will be a hard sell at many companies especially where large invoices are involved.
(d) ELECTRONIC SIGNERS FOR APPROVED POs.
One of the problems often encountered in trying to get checks signed is that the authorized signer simply can’t be found. The signer may be out to lunch, traveling, or in a meeting. Eventually, the checks are left in the office of the signer, and subsequently require a few reminders to get the checks signed. This situation can be remedied simply by designating “pinch-hitter” signers to be used whenever the first level cannot be found. If several such individuals are appointed, the problem may rectify itselfthe reason being that some of the authorized signers, despite vocal complaints to the contrary, love to sign checks. Whether it is
(e) BACKUP SIGNERS.
3.7 Mailing versus Picking Up Checks
39
because of the perceived power, the need to be wanted, or the attention is not clear. What is apparent is that when alternatives are found, the formerly recalcitrant signers often reform their check-signing behavior. Several accounts payable managers report that this solution works wonders with signers who like to play hard to get. Some truly busy signers don’t realize the inconvenience they are causing the accounts payable staff. A few managers have reported success simply by scheduling a meeting with the offending individual and explaining how this behavior affects accounts payable. This has to be done tactfully, however; finger-pointing rarely helps any situation. The problem can sometimes be rectified by scheduling regular meetings with the check signer several times a week, to get the checks signed. By sitting with the individual as the checks are signed, the accounts payable manager guarantees the checks will be processed. These meetings generally last no more than 15 minutes. At first glance, it may appear that time is being wasted, but this is not true. For starters, the morale of the staff improves when the associates see that the manager is willing to take on the disagreeable task of getting the signatures. Often, the signers are a little short on people skills, and few accounts payable clerks enjoy being tasked with getting them to stop what they are doing and focus on the checks. The time spent with the signers has a side benefit: It can also be used to improve the visibility of the accounts payable department. These meetings provide the opportunity to point out the department’s accomplishments. This can gradually increase the signers’ appreciation for the work the accounts payable department does, which can pay off at year-end when it comes time to get raises for the staff approved. Needless to say, not all of these techniques will work at all companies, but at least one or two should. The resourceful accounts payable manager will review the techniques discussed and find ways to reduce the large amount of time wasted by frustrated staff associates trying to get signatures. (f) CHECK-SIGNING MEETINGS.
3.7 MAILING VERSUS PICKING UP CHECKS Having checks picked up is an annoyance for the accounts payable personnel. They either have to call or e-mail the appropriate parties, who tend to drift down to accounts payable whenever it is convenient for themusually when it is most inconvenient for the accounts payable personnel. Some companies have circumvented this issue by establishing a preset time each day when checks are available for pickup. However, this only half solves the
40
Ch. 3 Check Preparation Printing and Filing
problem because, just as there will always be emergency checks, there will always be someone who can’t make it at the scheduled time and insists on coming at a time convenient for him or her. That said, there is a more basic issue involved here. Allowing checks to be picked up by hand makes it easier for an internal employee planning to commit fraud to do so. How? Simple: They can get their hands on the check and divert it. In a more devious scheme, a few employees have been known to submit phony invoices and then pick up the checks and deposit them into their own bank accounts. (This topic will be discussed in detail in Chapters 38 and 39, “Check Fraud” and “Employee Fraud,” respectively. Most experts recommend that all checks be mailedeven employee travel and expense report reimbursements. The value of the time saved far outweighs the small postage savings accrued by not mailing the checks. It should be noted that all the functions surrounding the check printing and signing are sometimes handled in the treasury or accounting departments. This typically happens in organizations that have a smallish accounts payable department. The reason is the segregation-of-duties concern. Many try and segregate these responsibilities as much as possible. Thus, if there are only one or two people in accounts payable, the responsibility may be moved elsewhere. Some larger organizations concerned about segregation of duties move these functions to other departments, as well. However, typically, the checks go back to accounts payable for mailing and doe filing of backup documentation. 3.8 CHECK FILING The filing of the backup documentation can take a monumental amount of time. Traditionally, this paperwork was filed alphabetically by vendor. This took an incredible amount of time and did not necessarily add anything to the process. However, whenever anyone needed to check if an invoice had been paid, it was easy enough to go to the file and pull the copy of the invoice. This assumes that the company had set up only one file for each vendor; but, as anyone who has ever worked in accounts payable will tell you, multiple vendor files have been known to creep into existence. Thus, a company that buys from IBM might have a file called IBM and another called International Business Machines. Now, when the accounts payable staffer goes to check the file to determine if a particular invoice has been paid, he or she will get the right information only if they happen to hit the file that has that particular paid invoice in it. Additionally, many companies have discovered that the time spent filing alphabetically bore little benefit to the company. As technology wends its
3.9 Time-Saving Techniques in the Check Production Cycle
41
way into the accounts payable department, more companies are finding solutions to this filing problem, solutions that ultimately save them much time and boring, miserable work. The ultimate solution is imaging but this is not practical for companies of all sizes. Companies that image all their paperwork have no need for paper files and typically send all paper to cold storage or even destroy it immediately. However, at present these systems are often rather expensive, hence are not a realistic solution for midsize and smaller firms. Nevertheless, many of these companies have come up with a workable solution. If the company’s computer system is sophisticated enough to allow someone to peek through the files and determine when a check was issued and which batch it was included in, most of the problems disappear. Why? Because all the backup can be filed by batch, with little time spent on filing. The documentation within each batch can be alphabetized or filed by vendor or check number. Thus, for each check run, one big file can be created, instead of having someone go through the huge paper files and put each little chit in the right place. 3.9 TIME-SAVING TECHNIQUES IN THE CHECK PRODUCTION CYCLE One of the facts of life for accounts payable managers is that the handling of checks can take a large amount of time. Anything that can be done to reduce the time required for this task is money in the bank. Five areas that can be reengineered to save time are: • • • • •
Multipart checks Filing systems Check runs Travel and expense checks Purchasing cards
(a) MULTIPART CHECKS. At many companies, standard procedures require a carbon copy of a check be attached to all invoices and check request forms. This simple task can take many hours each week, without adding much value to the process. Many accounts payable systems provide complete information on checks issued; attaching the copy does nothing for the company. So eliminate this laborious task. When the company’s check stock runs out, it may be able to save a few dollars by ordering checks without that carbon copy.
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Ch. 3 Check Preparation Printing and Filing
Some companies have saved time and money simply by changing the way they handle filing invoices and related materials. This can be done in several ways. Many companies match invoices with checks and then file the two documents together. This is time-consuming. Simply file the invoices separately from checks. By implementing this simple change, companies save many hours each week. Others have had success by moving from filing by voucher number to a two-part check/ alpha filing system. (b) FILING SYSTEMS.
The other topic of frequent debate in accounts payable departments is check runs, which are time-consuming. However, if they are not done often enough, the demand for exception or rush checks increases and can really eat into the department’s time. The right number of check runs depends on many factors. Most companies able to increase productivity by focusing on their check runs reduce them. Reducing check runs from nightly to once a week can save time and money. However, reducing the number of check runs raises a major concern: that discounts will be lost. This does not necessarily have to be the case. When employees know when the check run is, they are timelier about getting their expense reports and any other special check requests in before the weekly run. (c) CHECK RUNS.
(d) TRAVEL AND EXPENSES CHECKS. Another time stealer for the accounts payable department are travel and expenses (T&E) checks—not only printing, but distributing them as well. Here’s how some companies avoid from this problem completely: The accounts payable system sends a file to the payroll system and employees are reimbursed in their paycheck. This has significantly reduced the processing time, and employees know exactly when to expect their reimbursements. If the time spent distributing T&E checks is excessive, some companies have had success simply mailing these checks to the homes of their employees. Those contemplating either of these suggestions should, however, be aware of another problem that is sometimes encountered. Occasionally, an employee will hide T&E reimbursements from a spouse. Beginning such a plan will bring an outburst of complaints from such employees, although it is unlikely that they will reveal the real reason for their objections.
One of the most notable time-savers for accounts payable departments worldwide was the introduction of purchasing cards (Pcards), also referred to as corporate procurement cards. These credit cards (e) PURCHASING CARDS.
3.10 Canceled Checks and Irate Vendors
43
effectively eliminate many small-dollar invoices from the check production cycle, thereby saving time and money for the company using them. As their popularity grows, and the services offered by the card issuers improve, the cards are expected to have a major impact on the accounts payable world. Some companies have given such cards to their accounts payable managers with instructions to use them to pay any invoice where the card can be used, if the invoice is under a certain, previously agreed limit. Subscriptions, seminars, and conferences are perfect applications for this time-saver. (For more information see Chapter 24, “Purchasing Cards.”) By this time, it should be apparent that although the check-signing and filing process can be time-consuming, there are techniques that innovative companies can use to decrease the amount of time spent on the process. 3.10 CANCELED CHECKS AND IRATE VENDORS Most accounts payable professionals can list their worst vendors from memory. One frustrated accounts payable manager recently vented on this issue on the accounts payable discussion group, as follows: We deal with around 25,000 vendors and send out approximately 3,000 checks per week. We get a tremendous number of vendors that post our checks wrong. Even when we have more than one invoice on the same check (especially phone companies), they will show one invoice paid, but not all. They insist the only way to clear the error is to receive a copy of the canceled check. This is most aggravating because I feel as if I am doing their job as well as my own. We list all the information they need on the check stub. Every time they tell us we owe an invoice, we show that invoice paid. They think we should pay what they say, or figure it out for them. I get so mad. Unbelievable . . . and I thought we were the customer!
This posting touched a nerve in the accounts payable community. Here are some of the suggestions offered by other accounts payable professionals who have experienced similar problems: •
Get everyone together. “We have encountered a similar situation with a vendor that is our main source of office supplies,” says one accounts payable manager. “After numerous attempts to work with the vendor’s accounts receivable department without success, I arranged a meeting with our purchasing manager to request we find another supplier. Before taking that step, we set up a joint meeting with the vendor. (The purchasing manager was in agreement with my position, and agreed to pull the account if the vendor was unwilling to take the necessary steps to correct the situation.) The meeting included the sales rep, the accounts receivable rep, and the ordering rep.
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Ch. 3 Check Preparation Printing and Filing
“Once the sales rep realized that we were on the verge of pulling the account, he made arrangements to have one person handle our account. The company also agreed to preaudit all invoices prior to delivery to accounts payable. We send our checks to the contact person, who ensures that payments are credited correctly. This has eliminated hours of re-creating information that has already been provided to the vendor, along with eliminating 95 percent of the billing errors we were spending time researching and correcting.”
This person was extremely lucky in that the purchasing professional agreed to support accounts payable. This factor, along with support from senior management, can be crucial in getting a key vendor to change its wayward ways. •
Charge them for the service. “I agree with what the other post has to say about this subject,” says still another accounts payable professional, who has spent more than a few hours doing another company’s work. “In our case, we’ve had this happen a few times, and tried to deal with the credit clerk to clear up the problem. When it became clear that we were doing their work, we decided to play hardball. First, we charged them $10 for every check copy they requested from our own files, or those ordered from the bank. We imposed this on vendors that had a track record of requesting copies of checks. Believe it or not, this seemed to really clear up the problem with most problem vendors.” This is an excellent suggestion, as it is unlikely that the clerks on the other side are going to want to explain the bill for such services to their management.
•
Go right to the top. A third manager stepped up to the plate to recount another tale of rogue vendors. “Unfortunately, there were tougher vendors who really just didn’t get it,” says this pro. “They constantly rebilled us under various names, didn’t record our payments properly, and so on. I finally made the decision to call the president of the company and deal with this. “Of course, most of the time, you can only get through to an assistant, but they seem to almost always get results. Don’t be too sweet either . . . always be professional, but firm. Demonstrate, through your tone and words, that you are frustrated and expect results. Tell them everything that has happened. (You should be keeping notes on problem vendors.) Tell them whom you talked to, what was said, and how long you’ve been dealing with the problem. If the head of the organization can’t fix it, maybe it’s time to switch vendors.”
3.10 Canceled Checks and Irate Vendors
45
Before following this first-rate advice, make sure your management is in accordance with this approach. Some will not be. True, often it is difficult to get through to a high-level executive, as most have secretaries screening their calls. If you encounter such resistance, try calling before 8:30 in the morning, when most senior executives are at their desks and their secretaries have not arrived. You might be surprised to discover whom you can get on the phone at that hour. • Take them off the approved vendor list. The last resort is to disapprove a vendor. To do this, you will need the concurrence of your procurement department. “Simply tell the vendor (call the president for this, too!) that you want to close your account,” says the accounts payable professional recommending this technique. “Tell them they are not permitted to accept any further orders from you. If they think they will lose your business, they will act quickly to resolve the issues. If all else fails, maybe it is time to really remove them from your approved vendor database,” she concludes. • Write one check per invoice. If your accounting system supports this feature, one solution is to instruct the system at the vendor level to not combine several invoices on one payment, advises another manager. “We routinely use this feature whenever we have problem vendors or vendors whose invoices do not have invoice numbers. Many banks also support online printing of canceled checks (front and back), which can be a big time-saver,” she adds. • Take a multipronged approach. “I think the time has come to play hardball,” says the final advisor. She recommends the following multistep process: 1. Escalate the issue to the most senior finance person who will have the clout to do something; if need be, take it to the chief financial officer/ chief executive officer. (If you have a sales rep, you can obtain names and titles from him or her; also let the sales rep know how serious you are so he or she can notify management.) 2. If feasible, tell the vendor you are not issuing any more payments until the account is cleared. This should stop them from taking new orders. Obviously, notify the district offices of this action and the reasons behind it. If any employees want to use the vendor, tell them to put it on a corporate procurement card (P-card) or pay it themselves and expensereport it; but no direct billing. 3. Obtain a report from your system of all payments issued to the vendor, containing invoice and check numbers, and send it to the person with clout (step 1). Also, forward this to the vendor’s finance department with instructions to reconcile the account.
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Ch. 3 Check Preparation Printing and Filing
Those accounts payable managers who have encountered problems of this nature may find some relief in the recommendations from their peers in the trenches. The strategies suggested here have worked for them and may very well work for you.
CHAPTER
4
AUTOMATED CLEARINGHOUSE AND DIRECT DEPOSIT
4.1 INTRODUCTION As the business community moves to improve all processes and cut costs, inexpensive methodologies to make payments are growing in popularity. Electronic payments remove many of the inefficiencies associated with paper checksthe proverbial “the check is in the mail” excuse disappears. Companies have long used direct deposit to pay their employees. Now, some are expanding that approach and employing the same process to pay their suppliers. 4.2 DIRECT DEPOSIT Direct deposit is actually an application of automated clearinghouse (ACH). However, because it is a process most people are familiar with, it is discussed first. Technically, direct deposit is an ACH credit made by the employer to the employee. The employer’s bank account is debited and the funds deposited in the employee’s bank account. As companies became comfortable with this approach, they expanded it to include reimbursements of their employees’ T&E expenses. 4.3 OTHER COMMON EXAMPLES The federal government was one early adopter of this payment approach. It uses ACH credits to pay Social Security recipients who sign up for the program. Banks and other financial institutions also recognized the benefit of this payment approach. Many consumers authorize their banks to debit their 47
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Ch. 4 Automated Clearinghouse and Direct Deposit
accounts for their monthly mortgage payments or insurance payments. These transactions are ACH debits. Using ACH processing directly via the Internet, instead of paying by paper check, will facilitate payments between businesses in much the way electronic catalogs have made ordering goods easy. 4.4 COMBINING ELECTRONIC BILLING AND PAYMENTS The allure of combining the billing and payment process electronically is easy to see. Electronic invoice presentment and payment (EIPP) is the process by which companies present invoices and make payments to one another via the Internet. The benefits of this combination include: • • • • • •
Shortened transaction cycles Improved cashflow management Increased marketing opportunities Improved productivity Reduced direct costs (e.g., postage and printing) Improved supplier relations
4.5 TERMINOLOGY There is a whole slew of terms that accounts payable professionals will have to learn in order to operate in the electronic payment arena. In addition to automated clearinghouse (ACH) already mentioned, some of those include: Electronic Data Interchange (EDI) Internet-initiated ACH debit (WEB) Magnetic ink character recognition (MICR) Nonsufficient funds (NSF) Originating depository financial institution (ODFI) Prearranged payment and deposit (PPD) Point of purchase (POP) Point of sale (POS) Represented check (RCK) Receiving depository financial institution (RDFI)
4.8 Case Study: How One Company Gets Suppliers to Accept ACH Payments
49
Telephone-initiated ACH debit (TEL) Uncollected funds (UCF) 4.6 CHECK TRUNCATION AND CHECK CONVERSION In a move to speed up the check clearance process, the Fed has instituted two processes: check truncation and check conversion. It is imperative that professionals understand these two processes and how they impact the clearing of checks. A check begins as a paper item and is negotiated, but processing the paper item is stopped at some point and the payment is processed electronically. However, the payment remains under check law. This process is referred to as check truncation. Note Readers should be aware that “truncation” is also used to mean a service whereby the financial institution does not return canceled checks to its customers with their statements. Nowadays, this process is usually called safekeeping.
Conversely, when a check begins as a paper item but processing the paper item is stopped at some pointnearly always before the paper item is negotiatedthe payment is processed electronically from then on. In this case, the payment is no longer under check law but under electronic banking regulations. The check is no longer a “check” but a “source document.” This process is referred to as check conversion. 4.7 WHAT COMPANIES ARE DOING TODAY At some companies, accounts payable professionals are taking the lead in encouraging their suppliers to accept electronic payments via the ACH. They have systemized programs to enroll suppliers in these programs. 4.8 CASE STUDY: HOW ONE COMPANY GETS SUPPLIERS TO ACCEPT ACH PAYMENTS Getting started with an electronic payment program is not as difficult as it might appear at first glance. Accounts payable manager Cathy Hoying is well aware of the advantages of paying suppliers electronically. Her
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Ch. 4 Automated Clearinghouse and Direct Deposit
company, Copeland Corporation, pays over 50 percent of its trade payables using the ACH. She explained how her company achieved this noteworthy goal and shared the documentation she uses to make it work. The company began its push to make electronic payments by targeting its direct material suppliers, the area in which the bulk of its trade payables dollars were spent. “We continue to recruit interested suppliers on a daily basis,” says Hoying. Like other successful electronic payers, she tries to make all emergency payments via the ACH. This presents a real opportunity to convert suppliers to the electronic payment program. Usually after a supplier has been paid once electronically, it becomes a convert. To convince suppliers to accept payments electronically, the company created a mailing to explain the program. The information used by Copeland follows: Electronic Payments: ACH Payment Option Is Here! What is ACH? ACH is an acronym for automated clearinghouse. Essentially, rather than send a check, Copeland would authorize its bank to send money to your bank account, similar to direct deposits. How does it work? Copeland would advise its bank on Monday—for example, December 2—to send money to your bank account. The money would be available in your account the next day— in this case, December 3. This is dependent on your bank’s location relative to the clearinghouses—typically, it is a one-day turnaround. You should receive notification from your bank that a deposit was made to your account—check with your bank regarding that information process. How will you know what is paid? Copeland will send a remittance advice to you via e-mail on Monday morning. This remittance advice will be a .csv file that can be opened in Excel. You will be able to manipulate and sort the data electronically. If you are interested in this payment option, please fill out and return the attached form. The first ACH payment will begin with the next remittance.
You can adapt this information to contain that which is pertinent to your company. The company also created a form for its suppliers to use to authorize Copeland to make the electronic payments. Those accounts payable professionals who want to get started with an ACH payment program can use the tools Hoying graciously shared.
4.9 THE FUTURE This is the accounts-payable-related function that is likely to change the most in the next few years. As consumers begin paying their own bills online, and become comfortable with the routine, many are likely to
4.9 The Future
51
replicate that process at work. Also, executives at ease with the process are more likely to push for this process. Look for big expansion in the number of payments made through the ACH by businesses paying other businesses.
CHAPTER
5
MAKING INTERNATIONAL PAYMENTS
5.1 INTRODUCTION Making international payments is very different from making domestic payments. For starters, it may be necessary to make those payments in another currency. This introduces another element into the payment function, one that is alien to most who deal only with domestic transactions. The best source of information for those getting started is their local bank. Ask the banker for information about making such payments long before any live transaction is available. This will allow the accounts payable professional the time to make the necessary preparations and to discover the best method for the company given the nature of its business. Unfortunately, this is not always possible, as these matters seem to rear their heads at the last moment. Lack of time to prepare is just the beginning of the problems. The cost of making an international payment can be staggering if attention is not paid to all the details involved. Yet, often, especially at organizations that do not have many international payments each day, some of these details are overlooked. Some strategies to use to reduce international payment costs are: •
Foreign exchange
•
Bank account issues
•
Payment mechanisms
•
International payment service
•
Benefits of international payment services 52
5.4 Payment Mechanisms
53
5.2 FOREIGN EXCHANGE Companies purchasing small amounts of foreign exchange at any time get slaughtered on the exchange rate. If you do not believe this, check the foreign exchange rates quoted in the Wall Street Journal the next time foreign exchange is purchased at your company. The reason is the small size of the purchase. To get around this problem, some companies use online bank systems to purchase foreign exchange. While this is not always possible, it is worth the effort. When purchasing the foreign exchange, deal directly with the traders. Do not go to correspondents. Why? Because they will have to be paid. They will tack on a spread to the price quoted by the trader, and this spread will often be hefty. Ask for quotes for the amount neededand ask for quotes from several banks. Let them all know that you are getting several quotes and that you intend to come back shortly for a live quote. Occasionally, you will be given a great quote when you ask for an indicative quote and, conversely, a lousy one when the trade goes live. Do not let this happen. The bank should give a quote that it can commit to for a few minutes. If it seems out of whack, call one of the other banks and ask there for a live quote. If the first institution was playing games, let them know in no uncertain terms that this is not acceptable and that future deals will be in jeopardy if it ever happens again (and if it does, drop them forever).
5.3 BANK ACCOUNT ISSUES If it is feasible, open an in-country account where balances in local currencies can be maintained. This works well if there are some receivables in the local currency. It also saves the spreads on round-trip foreign exchange transactions. While this suggestion will work for only a few companies, it is worth considering if the foreign sales from the company happen to fall into this category.
5.4 PAYMENT MECHANISMS If payments are made to the same institutions on a regular basis, not necessarily in the same amounts, try and make those payments repetitive transfers. Why? It is much less expensive this way, and less prone to error, misrouting, and fraud.
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Ch. 5 Making International Payments
Consider also reverse wires using the Society for Worldwide Interbank Financial Telecommunication (SWIFT). This is similar to Fedwire, and the debiting party’s banker will confirm before sending the funds. If this is done, use the SWIFT MT-100 format. 5.5 INTERNATIONAL PAYMENT SERVICE Technology has changed payment processing for international payments. Real-time foreign exchange trading is now available, thanks to inexpensive automation. These real-time systems take advantage of personal computers and networks and have made discount international payment services possible. Most are available through money center banks. Ask a local bank if these services are offered. If they are, realize that an intermediary bank may be involved, so check. If the services are not offered locally, try one of the money center banks. 5.6 BENEFITS OF INTERNATIONAL PAYMENT SERVICES There are some very real benefits to be realized by using one of these services. These advantages come from both reduced costs and improved controls. For starters, the fees associated with these services tend to be fixed rather than variable. Soft costs and uncertainty are eliminated. Use of such a service also transforms the relationship from what may have been adversarial to cooperative. If there was constant dickering over the foreign exchange levels, it is unlikely that the relationship was smooth. By eliminating the source of frictionthat is, the foreign exchange tradingthe relationship has a much better chance of progressing on an even keel. The automated support and reporting capabilities of these systems minimize errors, improve controls, and allow 24-hour access. It no longer matters which part of the country the company is located in, nor where the banker may be. The systems also offer security features that, as fraud becomes a bigger issue, are becoming more and more important. These features include a dual password and data encryption, which will make the auditors happy. These services are ideal for those making a few international payments a week, although some of the banks will be happy to sign you up as a client with even fewer payments. Should you have that number of payments or more, investigating these new services may solve more than one or two of your international payment issues.
5.7 Payments to NAFTA Partners
55
5.7 PAYMENTS TO NAFTA PARTNERS Canada and Mexico are not only the United States’ North American Free Trade Agreement (NAFTA) partners, but they are the largest and third-largest U.S. trading partners, respectively. Given these facts, it is likely that accounts payable professionals making international payments will do so to a company in one of these locales at some point in their career. Thus, it is important to understand how banking and payment systems in these two countries differ from those in the United States. Canada’s system is the easier of the two to understand, as it is similar in many ways to that in the United States. With the exception of Quebec, where French is spoken, the language and culture are the same as in the United States. Payments are typically made in either Canadian or U.S. dollars and are primarily paper-based, although the country has a high usage of electronic funds transfer/electronic data interchange (EFT/EDI). Canadians are most accustomed to checks, although on a percentage basis there are more EDI payments than in the United States. Lockboxes are not as common in Canada as in the United States, and the mail system is poor. This has an impact on cross-border transactions. Mail is generally delivered to company offices, not post office boxes. But the big difference in Canada involves what many American companies view as their God-given right: float. In Canada, there is no bank float. Thus, the games that U.S. companies play when paying their vendors do not work in Canada if the payment is made from a Canadian bank. Drawing a check on a bank located in Montreal to pay a vendor in Vancouver will gain the company nothing. Thus, there are no advantages of using remote locations for bank accounts. Controlled disbursement accounts do not exist, as there is immediate availability on Canadian dollar checks. Generally speaking, there is a one- to two-day availability on checks denominated in U.S. dollars. Again, partially because of the lack of float, wire transfers are used less frequently than in the United States. There is also one major similarity that accounts payable managers should be aware of: Positive pay is offered by Canadian banks. Any company with bank accounts in Canada is advised to use it there, as well as in the United States. (a) CANADA.
(b) MEXICO. Unlike Canada, it is safe to say that banking and making payments are handled very differently in Mexico than in the United States. To begin with, the different language and business culture present obstacles to
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Ch. 5 Making International Payments
those not familiar with the norms in that part of the world. While this may seem obvious, it is important to not underestimate the importance of cultural differences. Payments are generally made in pesos or U.S. dollars. The big difference, however, occurs with the choice of payment mechanism. A full 92 percent of all transactions are made in cash, 6 percent by check, and only 2 percent by EFT. Mexican banks push EFT because check fraud is such a problem. According to many experts, check fraud in Mexico is several times worse than in the United States, which should give some indication of the magnitude of the problem. And the mail system in Mexico can best be described as inadequate—and this is probably a charitable characterization. Lockboxes are not used. For those not familiar with accounts payable in Mexico, the explanation may seem amusing. Typically, companies make payments once a week, with the most frequent time being 2:00 P.M. on Friday. These are usually picked up by cobradores, messengers who travel the city on bicycles, picking up payments. Several experts believe that the 2:00 P.M. Friday time slot is used because it makes it difficult for the messengers to get the checks to the bank before closing time. If the messenger misses picking up a payment, the company must wait until the following week at the prescribed time. As in Canada, there is no controlled disbursement in Mexico. Additionally, banks do not offer account reconciliation services. A statement is sent to the owner of a checking account, but the checks are not returned. However, it is possible to get positive pay on bank accounts at certain Mexican banks, including Banamex and Bancomer. It is also notable that between 80 and 85 percent of the population do not have bank accounts. Although most companies do have accounts, most experts strongly advise verifying this information before sending a check. The availability of checks drawn on U.S. banks is generally between two and four weeks.
PART TWO
CONTROLS When companies do not set standards for some of what would appear to be mundane functions, duplicate payments increase and the opportunity for fraud grows. Until the minute details are probed, it might appear that requiring such standards is overkill. However, as you will see as you go through the next few chapters, poor practices in areas such as rush checks, setting up master vendor files and paying from copies radically increase the risks. In the next few chapters sound practices in these areas will be thoroughly investigated to help you limit your company’s risk.
57
CHAPTER
6
EXCEPTION AND RUSH PROCESSING
6.1 INTRODUCTION A rush check is any request that does not go through normal channels and disrupts the normal workflow of the payables department. Those who do not work in the department often think that the accounts payable manager is making a mountain out of a molehill when he or she reacts negatively to a request for an exception or rush check request. What these individuals do not realize is that it takes anywhere from 15 to 30 minutes to handle such a request, time that must be taken away from the normal work process. And these requests can happen to the accounts payable manager many times in a given day, if it is permitted. Of course, there are actual emergencies, when such a request is legitimate. But a close look at those companies where a large number of rush check requests are made would probably reveal they occur due to inefficiencies outside the accounts payable department. Worse, from the accounts payable department’s staff’s point of view, these requests are often caused by carelessness and mistakes made by others. Another danger associated with rush checksone that even those who are not interested in whether they are creating additional work for the accounts payable staff should be concerned aboutis the possible negative impact rush checks may have on the company’s financial position. Rush checks tend to be manual checks; that is, they are rarely produced by the computer system. Thus, the information has to be entered at a later time to ensure that the company’s books are correct. And because there is often a lag in completing this step, at times it does not get done at all. This opens the door to duplicate payments and, in some cases, fraud. Issuing a large number of manual checks will be a matter that most outside auditors will bring up in the management letter. In a well-run company, it simply should 59
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Ch. 6 Exception and Rush Processing
not happen. Not only does permitting rush checks on a regular basis add work to the accounts payable department, it can put the company at financial risk, something that should concern all executives. The reality, though, is that it is unlikely the occurrence of these checks will ever be eliminated entirely. 6.2 DEALING WITH THE ISSUE Given the seriousness of the matter, most accounts payable managers look for ways to alleviate the problem and decrease the number of these interruptions. A few techniques that work and can be implemented rather easily include: Ask a few questions. • Educate. • Just say no. • Change procedures. •
Begin by closely questioning the person making the rush request. Often it can be determined that the check can be handled through normal channels and still meet deadlines. If after questioning, it appears that a rush check is necessary, take one other simple step: Look over the request and the documentation. Often, the person requesting the check hasn’t looked closely at the bill, or has provided, unintentionally, wrong information. The bill may not be due when he or she thinks it is. Or the person may have added a few days to the time frame “just to be on the safe side.” Most accounts payable professionals will be able to convince these individuals to put the request through normal channels.
(a) ASK A FEW QUESTIONS.
The next strategy is a long-range approach. It involves educating everyone in the company as to how the payables department works and the time it takes to process checks. Some companies can turn around checks in a few hours, while others, especially those requiring multiple approvals or signatures, can take several days or longer. The longer the cycle, the more likely you are to have rush requests. Start the education process by writing a memo detailing the workflow, including realistic time frames. If checks need two manual signatures (yes, there are companies that still do that) and one of the signers is apt to take two days, factor that into your timing. If the process is complicated, try (b) EDUCATE.
6.2 Dealing with the Issue
61
flowcharting it. From this, draw up a simple memo to all who request checks. In this document give them guidelines regarding the appropriate time frame for submitting check requests. Be realistic. Including very optimistic times is just buying trouble down the road when accounts payable can’t deliver. Of course, it is prudent to check with the supervisor before releasing this memo. Keep copies of the memo handy, and when someone requests a rush check that could have been handled under normal circumstances, give them another copy along with the check. Try to do this without being annoyingeasier said than done in many cases. Over the long haul, education is probably the best way to reduce this problem. (c) JUST SAY NO. In truth, as noted, many of these so-called emergency check requests are the result of someone else’s carelessness. If it happens only once in a while, that’s one thing. But in many instances, it is the same few people making most of the unnecessary requests. These people have to be hit on the head with the proverbial two-by-four before they get the message. In these cases, the two-by-four is to refuse their request. Before doing this, however, be sure you have the full support of the department head. One thing is certain with this approach: There will be a ruckus over this. But sometimes, you just have to take a stand. Be forewarned that not everyone will be willing to do this; and there’s a good chance there will be an argument with the department head about this as well. In all probability, there will be some financial impact to the company caused by the rush check request, either a late charge or a higher cost. So when taking a stand, don’t do it on the occasion of a huge invoice. And be prepared for a struggle, which ultimately you may lose. But, take heart, word will get around, and others will begin to get their requests in on time. Those companies that don’t have check runs every day typically see a higher number of rush check requests. If this is your situation, and if your volume has increased or there seems to be a large number of checks that must be rushed through, consider adding a check run. Finally, accept that, in most organizations, this problem will probably never disappear. No one in his or her right mind will tell the president or some other high-level officer that they can’t have their rush check because it could have gone through normal channels if it had been handled correctly.
Sometimes, despite good intentions, it’s the accounts payable department that needs changing. This is most likely to be
(d) CHANGE PROCEDURES.
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Ch. 6 Exception and Rush Processing
true in a growing dynamic company where procedures have not been adjusted to keep up with the expanded requirement. 6.3 HARD-LINE APPROACH When all else fails, and the requests for exception processing continue, it’s time to take off the kid gloves. When that happens, it’s no more Mr. Nice Guy. Some ways to reduce the number of such requests in those circumstances are: Prepare a form for special checks. The form should include the name of the person requesting the check, an approval signature, and the date the check is needed. Next, require that the controller or CFO or other high-level executive approve all these requests. • Make it difficult. Ask a lot of questions. Those encountering this process once typically realize they don’t want to repeat the experience, and the number of requests will drop precipitously. • Document the costs associated with preparing a rush check. When upper management is presented with the results of such a study, usually they will give full support to AP’s initiatives in reducing these occurrences. • Require multiple signatures. Add one line to the check request form, and require three instead of two signatures in order to get it. On that line the requestor has to explain why the check is needed on a rush basis.
•
6.4 IDENTIFY RUSH-CHECK TROUBLEMAKERS To identify rush-check troublemakers, begin by keeping a log of all the rush checks issued. On it, make sure to identify not only the culprit, but the reason that the check is needed. After a month or two a pattern may emerge. If it can be identified, then the chance of eliminating it increases. Once you have identified the pattern, see what you can do to eradicate the cause of the problem, and you will reduce the number of rush checks handled in the department. As part of your campaign to help management see the value of enforcing compliance with a nomanual-check policy, track the amount of time spent on handling manual checks. Begin by having the staff keep a log of all such requests, along
(a) A PICTURE IS WORTH A THOUSAND WORDS.
6.5 Modify Systems and Procedures to Reduce the Need for Rush Checks
63
with time to fill them. Each time a staffer has to stop working to handle such an item, he or she should monitor the time it takes to handle the item, then enter it in the log. The log should also contain information regarding who made the request and the reason it couldn’t wait until the scheduled check run. At the end of the month, calculate how much time was spent on normal check runs and how many checks were produced. From this information calculate how much time was spent handling a check that came through normal channels. From the log data, calculate the time spent per check on the rush items. Take the average salary of the staff and calculate a per-check handling charge. Present all this information in a report, complete with bar graphs. These graphs will bring home the point that manual checks are much more costly than checks handled through the normal process. (b) IDENTIFY THE REPEAT OFFENDERS. From the log information, identify the repeat offenders and the reasons for their requests. In most organizations, a few names will show up on the report with much greater frequency. Present this information to management, along with a request that a new hard line be taken on special requests. This will help get the top-level support you need when instituting a hard-line approach to rush checks.
6.5 MODIFY SYSTEMS AND PROCEDURES TO REDUCE THE NEED FOR RUSH CHECKS Accounts payable professionals are using a wide variety of approaches to reduce the number of rush checks in their organizations, some of the best, which are as follows: A growing number of companies have formalized accounts payable procedures and have documented them in a companywide procedures manual. • Benchmarking is becoming more commonplace, not only to measure departmental productivity, but also to identify business problems. • Accounts payable professionals are not tolerating the additional work it takes to rush checks when it is caused repeatedly by the careless actions of others outside the department. • Accounts payable professionals are learning how to use common software programs (e.g., Excel, Lotus, Word) and are using this •
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knowledge to develop procedures that greatly improve departmental efficiency. • Accounts payable departments are insisting that the purchasing department correctly and completely fill out purchase orders (POs). A large number are refusing to do the cleanup work for the purchasing department. 6.6 PUBLISH A NEWSLETTER Sometimes it seems as if everyone in the company makes the same mistakes repeatedly when submitting invoices for payment or check requests. This often leaves accounts payable managers frustrated by their inability to communicate simple information to a large audience. But a growing number of innovative professionals have found a unique way to deal with this issue. They communicate on a regular basis with the entire company by means of a companywide two- to four-page accounts payable newsletter issued on a quarterly or even monthly basis. While this might not be needed in all cases, nor will all AP managers have the time to produce and distribute such a newsletter, the following guidelines will help those looking to begin such a publishing venture. First, remember, the goal is to update and educate the rest of the company and to get them to handle everything relating to accounts payable in such a way to make it easier for the accounts payable staff to do their jobs. That said, this goal should not be made obvious in the newsletter. Rather, show readers what “is in it for them” by following accounts payable guidelines. Let’s face it: Self-interest motivates most people, so showing them how they will benefit will increase the odds of getting their help. And to do that your newsletter will have to be interesting to read. Some guidelines that will help you produce a newsletter that gets read are: •
Give it a snappy title. The Leland James Service Corporation calls theirs the “Accounts Pay-Zette.” The company also has a smaller publication used primarily within the accounts payable department that they call “Practically Paid.” Others, such as Talisman Energy Co., devise titles that creatively take advantage of the company’s namein this case, “Tali Ho.” A very large computer company calls its newsletter “The Armadillo Express.” Guess which state the accounts payable department is located in? Other titles that are being used include “Accounts Payable Newz” and “Accounts Payable Focus.”
6.6 Publish a Newsletter
65
•
Make it recognizable. Devise a masthead and use it with every issue. This will give your periodical “brand recognition.” It doesn’t have to be anything fancy. With the graphics and variety of fonts available in today’s word-processing programs, it is not difficult to come up with an attractive design. And use the same color paper to print the newsletter each time. This will also help with recognition.
•
Keep it short. The best in-house productions are either two or four pages. Remember, the goal is to get the audience to read what is written, and if it’s too long, it will simply get tossed in the circular file.
•
Make it entertaining as well as educational. One organization includes a quiz. Another gives all the articles titles from movies. Anyone who can find all the movie titles in the newsletter is invited to send in their name to be included in a drawing for a special prize. The real purpose, of course, is to entice the reader to go through the entire issue. Theme issues also worksometimes. Be careful though: if it is too cute, readers may become engrossed in the fun and miss the educational points.
•
Get everyone involved if possible, but have a good writer or editor review the final version. This person should be given the freedom to be ruthless. If the newsletter is not short, concise, and entertaining, it won’t get read and the whole purpose will be negated.
•
Keep it upbeat and maintain the focus. The focus is to answer the reader’s question: “What’s in it for me?” Find a way to convey your messages without preaching or lecturing.
•
Produce it on a regular basis. By maintaining a schedule, readers will come to expect the next words of wisdom. The most successful newsletters are published either monthly or quarterly.
•
Use the newsletter to introduce new employees and announce promotions. A newsletter is the ideal venue to inform everyone of an employee’s responsibilities in a very clear and concise manner. It’s not at all inappropriate to end an announcement with something like, “Call John with all your questions about ABC.”
Reiterate procedures. If it becomes apparent that many people are doing the same thing incorrectly, it’s probably time to remind people of the correct procedure. • Review staff responsibilities. Use the newsletter to periodically review who is responsible for what in AP. •
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•
Supply contact information. Include as many phone numbers and email addresses as possible. If the manager does not want to receive any calls, however, don’t include his or her contact info.
•
Toot your own horn. Include short pieces on accounts payable department successes.
Before starting such a publication, most accounts payable managers will need approval from their superiors. Some organizations come to the conclusion that a separate newsletter isn’t necessary if a company newsletter already. In these instances, many have had success adding an AP column to that publication. Some who publish AP newsletters report positive feedback from a question-and-answer column, to which readers are invited to submit questions. Another good idea is to consider accepting submissions from other, related departments, such as travel, payroll, or purchasing, whose own activities are relevant to those of the accounts payable department.
CHAPTER
7
ERRORS AND DUPLICATE PAYMENTS
7.1 INTRODUCTION Despite their best efforts, accounts payable managers continue to be plagued by erroneous payments. The ever-increasing number of accounts payable audit firms is testimony to the fact that this remains a serious and financially troubling issue. Fortunately, as the number of firms offering duplicate payment recovery services mushroomed the price for these services came down. Nevertheless, companies fed up with paying others to recover their money began incorporating changes to ensure minimal erroneous payments. While bringing in an audit firm is still considered a best practice, it should be done only after a company has gone through its own routines, as described in this chapter. 7.2 STATISTICS Figures taken from the 2003 Managing Accounts Payable benchmarking survey prepared by IOMA help put the seriousness of this matter in perspective. It is fair to assume that these figures understate the problem for two reasons: Like weight and age, few people are willing to admit the full extent of their payment errors. • The numbers reflect only the errors managers know about. Obviously, they cannot report the overpayments and duplicate payments they are not aware of.
•
Although participants of this survey were asked for the percentage of errors made on vendor payments, a full 20 percent wrote in less than 1 percent. 67
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This tends to give credence to the theory that some companies do not know the true extent of the problem. The remaining 80 percent reported an average error rate of 1.91 percent. Of those, 70 percent of the payments were reissued. The same question was asked regarding T&Es. In this case, 25 percent indicated less than 1 percent, and the other 75 percent averaged 1.32 percent. In this case, half the payments were reissued. These are serious numbers. 7.3 TYPES OF ERRONEOUS PAYMENTS One of the first steps to take to eliminate payment errors is to identify the types that can occur. The most common include: • • • • •
Duplicate payments Invoices paid for an incorrect amountfor example, $1,000 instead of $100 Paying for items, such as freight or insurance, that should not be paid Discounts not taken Fraudulent payments
Aside from the obvious reason, fraud is included in this discussion of erroneous payments because the same lack of controls that permit erroneous and/or duplicate payments also allow fraudulent ones to slip by. 7.4 LOW-TECH SOLUTIONS It is probably next to impossible to completely eliminate erroneous payments, but there are many actions to take that will at least reduce the number of these mistakes. Accounts payable professionals have reported some success in this area by: Cleaning up master vendor files (for a detailed look at this issue, see Chapter 9, “Master Vendor Files”). • Instituting controls on adding and deleting information from the vendor files. • Paying only from original invoices. • Setting up strict rules for handling invoices with invoice numbers. •
7.6 Employees: Your Most Important Resource
69
Insisting that POs be completely filled out before being sent. • Canceling all invoices once they are paid. • As part of the annual review, having an external auditor review controls.
•
It may not be possible to enforce all of these rules. Insisting that you will pay only from an original invoice sounds nice, but there are times when the bill is legitimately lost in the mail. Nevertheless, setting strict controls when an invoice is not an original will reduce the number of such payments. For a detailed look at this issue, see Chapter 8, “Paying When the Original Invoice Is Not Available.” Similarly, many employees are successful in convincing their auditors to exclude certain recommendations from the management report. (No one likes to be criticized to upper management; it is generally not seen as a good career move.) However, if you persuade the auditors to remove something from the management letter, do not immediately forget about it. Consider whether the criticism is legitimate and what you can do to correct the condition. 7.5 HIGH-TECH SOLUTIONS The items just discussed are of the simpler variety. Other actions that can be taken generally require management backing. They include: • • •
• • •
Receiving as many invoices as possible electronically. Actively recruit participation in e-invoicing initiatives. Doing the three-way match electronically. Hiring a third-party firm that specializes in reviewing bills and contracts to recover funds (see Chapter 25, “Post-Audit Firms,” for more details). Developing a simple program that checks invoice numbers against dollar amount. Asking the audit firm to point out weaknesses in your procedures. Tightening controls as recommended.
7.6 EMPLOYEES: YOUR MOST IMPORTANT RESOURCE Most companies overlook their most valuable asset when it comes to plugging the leaks: their own employees. The people involved in the day-to-day activities of the business usually know where and how the problems may
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occur. Unfortunately, they are rarely consulted and even less frequently listened to. So start by asking the people involved in the daily processing of payments where they perceive the holes to be. You might be surprised to hear what they have to say. 7.7 TOLERANCE LEVELS One of the most popular recommendations made to accounts payable professionals is to set tolerance levels for which discrepancies will be ignored and vendor invoices can be paid. Some companies set these as a discrete dollar level, say $5, and others as a percentage of the face value of the invoice up to a certain amount, say $50. This approach is not without critics. It is all too easy to overpay an invoice when the extra amounts involved are small. However, if a company receives many small invoices from the same vendor, the amounts can quickly add up. Another way these amounts accumulate is when the vendor passes along charges that it is supposed to pay. This often happens with freight and insurance charges. But, the same financial impact can be achieved with 100 charges of $3 as with one $300 charge. Skeptics may wonder whether this was an honest mistake on the part of the vendor.
(a) SMALL AMOUNTS ADD UP.
(b) CHECK THE INVOICE. When it comes to checking invoices, here is what a few innovative billers do. The invoice indicates the correct terms. It may also indicate, in tiny print, that a 1.5 percent late payment service charge may be assessed. A statement on the invoice reflects the amount due if paid before the discount date. It is correct. Now, here comes the kicker: In the “pay this amount” box, the figure shown reflects a late fee for one month. If the accounts payable clerk paying the bill does not stop to foot the amounts on the invoice, the amount paid will include the late payment service charge. Nowhere on the invoice does the correct figure appear, not even in tiny print.
7.8 HANDLING DISCREPANCIES For the reasons discussed earlier, many experts recommend resolving all variances, no matter how small. A few unscrupulous vendors will use information about your tolerance levels to their advantage. Accounts payable professionals who know exactly which charges their companies are responsible for paying and which they are not are in a position to save their
7.9 Accuracy and Timeliness
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companies huge amounts of money, even if it is 35 cents at a time. Those who refoot all invoices will discover the few dollars spent to buy calculators is money well spent. Not everyone will agree with this point of view; it may be less relevant in some industries than others. But if it is not a “real” issue, why are accounts payable audit firms doing so well? And why do accounts receivable managers want to run for the hills when they hear such a firm is auditing one of their client’s books? Those wishing to take a middle-of-the-road approach might try investigating all discrepancies, regardless of size, for a month or two. The results of that investigation should provide the necessary guidance to determine what is appropriate at each company. 7.9 ACCURACY AND TIMELINESS Many duplicate payments occur because the original invoice was not paid on time or because the accuracy of the payment is in question. When a payment is made for an incorrect amount, the likelihood of the receiving party being able to apply the cash diminishes greatly. If the cash is not applied, the recipient will think the payment has not been received and will call looking for its money. More than occasionally a second payment is made. By focusing on these two key areas, the number of duplicate and erroneous payments will be greatly reduced. The greatest success tends to come when focus is placed on three different areas: Procedures • Purchase orders • Invoices
•
The most obvious place to start, when concerned about accuracy and timeliness, is with the procedures being used. And that is just what many successful AP professionals do. Savvy professionals continue to search for solutions by modifying their procedures. The AP manager at a midsize insurance company says his dilemma is that, “As the disbursement unit of a group of insurance companies, we are often in a situation where we must answer to other departments as to ‘Where did that check get sent?’ and ‘So and so didn’t get their check!’ When dealing with one of our companies specifically, we found it very difficult because the majority of the time, their feedback occurred after the fact, when it was out of our control to resolve the situation.” Many reading this would tell him that this predicament is not peculiar to insurance companies; in fact, the majority of
(a) PROCEDURES.
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accounts payable managers have to deal with it. Here is how several companies have addressed this issue: •
Review existing procedures and clarify those that are not crystal clear. These might include actions as simple as writing the receiving party’s name on source documents during the backup/source matching process.
•
Never assume anything, and clarify via phone call all questionable items.
•
Rotate duties within the department to prevent boredom. A side benefit to this is that the staff is cross-trained, which enables the company to have more than adequate backup in case of absences.
•
Requests for payment often come into accounts payable with too few details and no audit trail documentation. Take requests for payment with insufficient information (which can include missing account numbers or documentation) and send them back to the originating department until the proper information is collected. This commonsense solution will work in most organizations, when it has management backing, so make sure you have it before implementing such a hard-line approach.
•
Try the KISS (keep it simple, stupid) solution for those who code incorrectly. Develop a one-page reference chart of accounts for each office. Include only those account numbers used in that office. This should eliminate most, if not all, coding errors.
In most companies, the primary piece of documentation regarding a purchase is the purchase order (PO). For many it is their bible. Whereas the PO is usually under the purveyance of the purchasing department in manufacturing companies, that is not the case at those institutions where no such department exists. In those cases, the modus operandi will be slightly different. Here are two of the problems encountered by accounts payable professionals and how they were solved:
(b) PURCHASE ORDERS.
•
The AP supervisor of a Wisconsin college says, “Our biggest problem is that we do not have a purchasing agent, so this falls to the accounts payable area to control. We have redefined our purchase order system and have a closer working relationship with departments and use e-mail and computer systems a lot more.”
7.9 Accuracy and Timeliness
•
73
The AP manager at a retirement community has the opposite problem. “With eight departments, each doing its own purchasing, sometimes using the same vendor,” grumbles this professional, “I would receive an invoice and have to search the company to see which department had ordered the product.” But this innovative manager came up with an easy-to-implement solution to this messy problem. “Now we use the department number as part of our PO number,” she explains. “It has really helped identify the purchaser.”
Invoices also play an important part in the life of an accounts payable professional. While many consider the PO the bible for a transaction, most are willing to forget it should a better price or terms appear on an invoice. In many organizations, invoices must be approved for payment before a check can be cut. Getting approved invoices back is the bane of existence for many accounts payable professionals. When this problem is not controlled, duplicate payments multiply.
(c) INVOICES.
One AP professional explains how his department addresses the issue of getting invoices approved in a timely manner: “We make copies of invoices sent to departments for approval, and if not returned within a couple of days, we call them.” Like others in the same situation, he spends more time than he would like on the phone trying to track down approvals. Others choose to keep on top of the matter on a regular basis. The accounting supervisor of a freight transfer company reports having implemented a recurring e-mail message she sends to all department heads stating the importance that all invoices and expense reports be received in accounting prior to the month’s end. That is just the beginning of the process for this persistent supervisor. “Failure to comply with our e-mail,” she says, “will result in accounts payable copying late arrivals of invoices and discussion with department heads in our monthly review.” This hard-line approach usually works but often makes an adversary out of the offending employee. (i) Timeliness.
The other problem with invoices that drives accounts payable managers crazy is the large number of small invoices. These are difficult to track, hence often get paid more than once. And because the individual amounts involved usually are not huge, no one gets upset when they are overpaid. But small amounts add up. This not uncommon situation is dealt with in several ways, including: (ii) Large Numbers of Small Invoices.
•
Consolidating many items on each invoice.
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Ch. 7 Errors and Duplicate Payments
Using corporate procurement cards for low-dollar purchases. • Paying once a month from a statement rather than individual invoices.
•
7.10 TIMING ISSUES Many companies look for ways to stretch their payments to vendors, especially for large invoices. Unfortunately, those that do are increasing the chances of a duplicate payment, though few realize this. When a payment is delayed, most vendors will send a second invoice, and not all mark it as a copy or duplicate invoice. So when the invoice shows up, it looks like a new invoice and is often processed for payment. Processing a second invoice for payment does not present a problem for those companies that have good controls for duplicate payments, but many do not. Thus, when this second invoice is processed through the system, it gets paid. After all, it does not look like a copy, and if it is not so marked, the accounts payable staff has no way of knowing that it has already been paid. This issue is compounded by the fact that many vendors do not tell their customers about duplicate payments, and even the most scrupulous will take some time in reporting the overpayment. After all, the receiving company must identify the second payment; applying unidentified cash is not a top priority in most organizations. 7.11 ELIMINATING DUPLICATE PAYMENTS WITHOUT AN AUDITOR Duplicate payments are a serious issue for most companies. In fact, in a recent benchmarking survey, 90 percent of the respondents admitted making one or more duplicate payments in the last year. At a recent conference, Beverly Brando, of Business Strategies Inc., showed accounts payable pros how to find these errors. She also revealed how to convince management to change the procedures that allowed for duplicate payments. Most accounts payable professionals know which problem customers are likely to receive duplicate payments. Brando suggests that you prepare a list of such vendors and then ask your information technology department to run three reports by vendor, to show payments made to each vendor according to:
(a) DUPLICATE PAYMENTS: PHASE ONE.
Invoice number • Dollar amount • Invoice date
•
7.12 Duplicate Pay Audits: The Future of Accounts Payable and AP Audits
75
Group this information by vendor and review again to further identify duplicates. This step alone may provide the accounts payable manager with the data needed to finally get the master vendor file cleaned up. A manual review of these reports will identify those payments that must be further investigated. While this research is being done, collect all backup information as to why the duplicate payment was made. The recovery work should not begin without approval from the accounts payable manager’s supervisor. It is crucial that this issue be handled appropriately, as when done so accounts payable professionals have an excellent chance to improve their stock with upper management and, subsequently, to tighten procedures. Brando advises turning this potential bomb into a great opportunity. Once the first cut has been thoroughly analyzed, it is time for the next step. Although many accounts payable managers believe they know to which vendors the duplicate payments are going, they may not be correct. Therefore, it is recommended that the process be conducted for all large, and possibly even midsize, vendors. There may be additional revenues to be had from these sources. (b) PHASE TWO.
(c) PHASE THREE. Many companies do a very poor job of maintaining their master vendor files. The same company could be included several times under slightly different names. This is one of the leading causes of duplicate payments. First, request a list of all the vendors in the master vendor file. Then, review the list carefully to determine which, if any, vendors are duplicates. By quantifying the losses due to duplicate payments, you will be armed with the information needed to change those procedures that cause problems. Best of all, the company will be able to recover 100 percent of the duplicate payments for itself. With a little effort, it is possible to uncover duplicate payments yourself without having to pay a third party to find them for you.
7.12 DUPLICATE PAY AUDITS: THE FUTURE OF ACCOUNTS PAYABLE AND AP AUDITS A revolution is underway in accounts payable. Even organizations that were considered leading-edge a few short years ago would today be viewed as backward. The changes are occurring rapidly and have only just begun. A
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panel discussion of seven experts at a recent accounts payable conference and expo explored the issues and provided a glimpse into what is to come. The group, led by Process Management Improvement’s Tom Nichols, surveyed the profession, its use of audit firms, and where audit firms will fit in the grand scheme in a few years. From these discussions, coupled with the insightful questions from the audience, came a surprising but energizing picture of the accounts payable world in the next decade. The conference began with each panelist briefly stating his or her views on where the accounts payable profession was going, the future of the audit industry, and how he or she fit in. A few notable trends emerged from the comments. They are:
(a) TRENDS.
•
Contract management and compliance is the next hot area for audits. Expect to hear a lot about the losses due, not to duplicate pays, but to lack of contract compliance. To put the issue into some perspective, one of the speakers indicated that, on average, a company using an audit saves:
1 percent of spend on accounts payable audits 3 to 8 percent of spend on contract compliance errors
Accounts payable and purchasing departments will continue to merge. • Accounts payable organizations will become less transaction-oriented and more analytical. This trend will be magnified as companies move toward electronic invoicing. • Technology will play a big part in both accounts payable operations and the way firms audit for all sorts of erroneous payments. • In even greater numbers, companies will recover the low-hanging erroneous payment fruit themselves. They will do this by implementing technology, using some of the features of their enterprise resource planning (ERP) systems, plugging the holes that caused the problems in the first place, and by doing their own internal audits. •
There is a relatively easy way to determine whether the firm you hired did a good job: Hire a second firm to do a second pass and see how much its auditors collect. Many charge a higher fee for this type of work because the first firm will have made all the easy recoveries. This is common, and the audit firms not only (b) MEASURING THE SUCCESS OF THE AUDIT FIRM.
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expect it, they encourage it. If you are taking this approach, bid out the work. Many in the business know each other and the others’ work so well, so they will often bid lower if they know which firm did the primary audit. The bidding process can work both ways. One firm confided that it never bid to go in after a certain competitor because it never found anything. This led the auditor to conclude that the two firms must use similar audit techniques. Don’t be shy about asking for a reaudit—it’s done all the time. Also common are the audits of outsourced work, especially companies handling telecommunication, utility, and freight payments. The speakers at the conference felt that audits of payments made by third-party vendors were critical. The best audits are those that cover the entire procure-to-pay cycle. This requires cooperation between the two departments, which is often difficult to achieve if the two groups don’t have the same manager. Several attendees indicated that they had a hard time getting purchasing to agree to audits. The speakers had these suggestions on how to get cooperation:
(c) WORKING WITH PURCHASING.
Allocate the recoveries back to purchasing through an accounting entry. • Find a “smoking gun” to convince them of the value of an audit. The smoking gun could be a returned check from a vendor or a credit on a statement. Whenever you find a credit on a statement, investigate the root cause of the credit. It may uncover one of those communication gaps that permit other flawed payments. • Provide purchasing with reports showing spend analysis, price spikes, and case studies where a contract was in a drawer and invoicing was done against a blanket PO that was missing key terms. •
Once purchasing is shown several cases where the supplier has overbilled, and payment was made at the higher price because the necessary information was not put on the PO, they will be more likely to cooperate. Also, as companies continue to look for new ways to save money, contract compliance audits will become more common. One of the attendees at the conference asked what an accounts payable professional should look for if purchasing was not cooperating with even the idea of an audit. The speakers suggested: (d) WORKING ON YOUR OWN.
•
Discounted vendors
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Ch. 7 Errors and Duplicate Payments
Missed rebate opportunities • Complex pricing arrangements—a definite red flag that the pricing might be prone to errors
•
The accounts payable professional working without purchasing should also focus on the vendor file setup, from the beginning of the relationship. By setting firm rules on how the vendor invoices, the format of these invoices, and the frequency of the invoices, some of the problems may be eliminated. The move to Web invoicing will also have a positive impact on the problem of incorrect payments.
CHAPTER
8
PAYING WHEN THE ORIGINAL INVOICE IS NOT AVAILABLE
8.1 INTRODUCTION Those not intimately involved with accounts payable are probably wondering why devote a chapter to paying when an original invoice is not available. The reason is simple: Payments made against copies of invoices account for a significant portion of all duplicate and fraudulent payments. Virtually all accounts payable professionals would like to institute a policy of never paying from anything but an original invoice. Yet, realistically speaking, this is not possible. Invoices do get lost or mutilated. In a recent Managing Accounts Payable Benchmarking Survey, respondents were asked whether payments at their company were made without the original invoice or receipt. The responses were divided almost right down the middle, with a slight majority (51.5 percent) indicating they made payments from copies.
8.2 WHO PAYS FROM COPIES With some variations, the larger the company, the more likely it was to allow payments from copies. Those in education take the booby prize in this area, with fully 68 percent of them making payments from copies. Companies in the health-care and utilities/transportation industries have the strictest policies in this regard, with slightly more than 40 percent making payments from copies. For a complete breakdown of figures by company size and industry, see Exhibit 8.1. 79
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Ch. 8 Paying When the Original Invoice Is Not Available
Yes
By Size of Company Up to 99 100–249 250–499 500–999 1,000–4,999 More than 5,000 By Industry Manufacturing Finance Utilities/transportation Private practice Nonprofit/government Wholesale/retail/distribution Health care Education Communications Construction Entertainment/hospitality Other E XHIBIT 8.1
W HO P AYS
FROM
53.2% Yes (%) 53.6 51.6 48.2 47.6 53.0 62.7 55.7 57.4 42.9 57.7 46.2 51.9 40.6 68.0 46.9 54.5 55.6 58.8
No 46.8% No (%) 46.4 48.4 51.8 52.4 47.0 37.3 44.3 42.6 57.1 42.3 53.8 48.1 59.4 32.0 53.1 45.5 44.4 41.2
C OPIES
Source: IOMA.
8.3 CONTROLS WHEN USING COPIES There is good reason for the controversy surrounding the making of payments without an original invoice or receipt. If payments were only made against originals, there would be no duplicate payments (or very few). Thus, companies that do make payments from copies should have strong controls in place to ensure that the payment has not already been made. These firms also need to ensure that if the original does surface, a payment will not be made against it when one has already been made against a copy. To that end, many stamp the copy either “Duplicate” or “Copy,” and then file it away. That would seem sufficient, but in practice, when the original finally finds its way down to accounts payable, it often gets paid—after all, it is an original invoice. Unless the files are checked for each and every payment, or good controls are in place, or someone remembers making the first payment, a duplicate payment will be made.
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81
There is also the concern that the payment has already been made, which is why the original invoice cannot be found. If the vendor applied the cash incorrectly on its own books, it will look to them as though a payment had not been made, even though one has. Additionally, if the payment was mailed to a lockbox, the vendor may have received it but not updated its records. And there are a few unscrupulous vendors that claim they have not been paid when they actually have. Thus, whenever a payment is being made from a copy, there are concerns that the payment will be made a second time, that it has already been made, or perhaps, that the request is fraudulent. It is easy to see why this topic generates so much concern. 8.4 COMMON TECHNIQUES TO ENSURE A SECOND PAYMENT WILL NOT BE MADE Many companies used similar processes to eliminate duplicate payments. The following list provides a number of solutions that work at various companies. Not all will work in all companies; what is applicable in each organization will depend in large part on the other controls and processes in place. The solutions most commonly used include variations on the following: A search routine by vendor for the dollar amount and/or the invoice number. • The approval from one or more senior-level managers for payments made without an original. • Payment of only those invoices that are long overdue. Each company has its own definition of what long overdue is.
•
8.5 CONTROLS WHEN PAYING FROM COPIES There is a wide variety of procedures companies can use to ensure the payment being made from the copy is legitimate and that another will not be made at some future date. As you review the following list, you will note that many of them seem to make life a little more difficult for the person trying to get a payment made from a copy. That impression is correct, and there is a very good reason for this. Payments made from copies are timeconsuming and put the company at risk, as discussed. Such payments should be made only when all other avenues have been exhausted.
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Ch. 8 Paying When the Original Invoice Is Not Available
It is easy for the requestor to simply have the vendor fax another copy of the invoice and then have the accounts payable department pay it. Unfortunately in many instances, the original invoice is lying on this very person’s desk, and when it does eventually surface, it is forwarded for payment because the person has long forgotten it has been paid. By making it difficult, the requestors may decide that it is easier to submit invoices for payment when received or search their desk for the missing document. In either event, you are changing bad behavior patterns for the future. Listed here are procedures that have worked in a number of organizations: • • • • • • • • • • • • •
• •
Require a signature approval from one or more high-level executive before issuing a check. Research the company’s records thoroughly to detect a prior payment. Print out a payment history for the supplier in question and check on the invoice number and the dollar amount. If purchasing makes the request for the payment, insist that a valid PO and an unmatched receivable transaction exist. If non-PO, search the payment history for possible duplicates. Review the purpose and reason for the request. Get a sign-off from purchasing for all requests without original invoices. Run the information through a search routine based on the invoice number and dollar amount involved. Stamp the copy “Copy of Original” and pay only after the system is checked for duplication. Require an explanation for the lack of an original invoice with the payment request. Only pay on a copy if the invoice is severely past due and a thorough review of the files has been completed. Review requests for payment without the original invoice on a caseby-case basis to determine if it is advisable to pay. Mark copies used for payment purposes “Certified Copy” so that the staffer processing the item can double-check the system to detect duplicate payments. Get a copy of the purchase order and receiving document. Require a memo requesting the payment from a copy and have it signed by two senior-level managers.
8.5 Controls When Paying from Copies
• • • • • •
• • •
83
Have a form signed by both the requestor and the chief financial officer. Pay only those invoices that are more than 90 days past due. Require that the check-request form be cosigned by an officer of the company. Place all requests for payments from copies in a tickler file for later follow-up and research. Have the request for payment signed by the individual who has the primary relationship with the vendor. Use evaluated receipt settlement (ERS, or invoiceless processing), thus eliminating the need to receive an invoice. For more information about ERS see Chapter 2, “Alternatives to the Three-Way Match.” Issue payments only on those items that are more than 45 days past due. Research the possibility of a duplicate payment manually, going through the files to check the paperwork. Pay from copies only if the invoice number is completely legible on the copy so that it can be checked for possible previous payment.
Those who have been paying from copies should reevaluate that process and decide whether they are comfortable with the policy. If they decide to go forward with such a policy, then they must have the appropriate controls and procedures in place to make sure that they are not paying twice or paying something they should not.
CHAPTER
9
MASTER VENDOR FILES
9.1 INTRODUCTION Proper maintenance and control over a company’s master vendor file will greatly decrease the chances for duplicate and erroneous payments and fraud. Yet many companies do not give adequate thought or attention to this issue. Not only are their controls often weak, but their files are not purged nearly as often as they should be. In fact, some companies never purge them. A recent benchmarking survey asked some pointed questions about master vendor files. 9.2 THE DATA The first factor investigated in the survey was the number of entries in the master vendor file. As might be expected, the larger the company, the higher the number of vendors in its file. On average, companies had just under 11,000 vendors in their files. Even smaller companies were found to have an incredible number of vendors in their master file. Those with fewer than 100 employees had an average of 2,338 entries in their master vendor files. Note Eighteen companies with more 100,000 vendors were not included in this calculation because it was felt they would bias the numbers for most organizations.
Exhibit 9.1 shows a breakdown of the data by number of vendors. The greatest number of organizations, over 41 percent, had between 1,000 and 5,000 invoices, while another 31 percent had between 5,001 and 20,000. 84
9.4 When to Set Up a New File
Number of Vendors
Percentage of Companies
Fewer than 1,000
12.5
1,000–5,000
41.6
5,001–20,000
29.1
20,001–100,000
4.3
More than 100,000
2.0
E XHIBIT 9.1
N UMBER
85
OF
V ENDORS
IN
V ENDOR F ILE
Source: IOMA.
The exhibit also shows the breakdown of number of invoices by size of company. By comparing the number in your master vendor file with that of companies of like size, you will see how you compare. 9.3 CLEANUP POLICIES One of the big surprises of this study was the purging policies that exist at many companiesrather, the nonexistence of such policies. Almost onequarter of all companies reported they never purge their master vendor file. (No wonder 18 companies have more than 100,000 entries in this file!) Another 12 percent of firms reported reviewing their file only every three years. Looking at the number of vendors in the master vendor files, one has to question the cleanup policies at those firms with more than 50,000 vendors. Even 20,000 seems excessive, except perhaps at really huge companies. While it is true that most companies set up employees who travel and request reimbursement as vendors, this issue will explain away only a small part of the distortion at the very largest firms. In all likelihood, those companies with inordinately large numbers of entities in their master vendor files have weak policies regarding cleanup. 9.4 WHEN TO SET UP A NEW FILE Accounts payable managers must find a balance between setting up new vendor files and keeping the miscellaneous vendor file from becoming unmanageable. The point at which a vendor qualifies for its own file can generate considerable controversy. What is clear is that a new file should not be set up for one-time vendors. Most companies set up a master vendor file if they expect to pay a vendor at least three to six times a year.
86
Ch. 9 Master Vendor Files
9.5 MAINTENANCE POLICIES It is astounding that over one-quarter of the respondents reported they never purge their master vendor files. This means that a vendor that was paid once, 10, 20, or more years ago, remains in the file. It also means that a company whose name was entered incorrectly remains in the file, as do duplicate entries for the same company. Thus, AT&T and American Telephone and Telegraph Company could reside in the same file. Unfortunately, most computers would not recognize that these two entities were the same company. Although 17 percent of the companies surveyed reported purging their file once every three years, and while this is better than never, it is nothing to brag about. Exhibit 9.2 shows a breakdown of master vendor file cleanup policies by size of company. 9.6 GOOD MASTER VENDOR POLICIES Many professionals know their files should be purged more frequently, but say they just do not have the time. This is unfortunate, because lax policies ultimately cost companies money. When your company pays both IBM and International Business Machines for the same invoice, it loses outeven if it eventually recovers the funds. Even more troublesome is the fact that a clever, but dishonest, employee could present an invoice from a long inactive vendor and possibly get it paid and pocket that money. It is probably adequate to purge vendor files on an annual basis, but less than half the respondents meet that goal. Not only are these companies wasting computer-storage spacethough that is not an issue at every firmthey are exponentially increasing their chances of making a duplicate payment, or
Monthly
Quarterly
Yearly
Every Two Years
Every Three Years
Never
Up to 99
5.3
1.8
35.1
10.5
14.0
33.3
100–249
1.6
7.1
32.3
17.3
13.4
28.3
250–499
4.2
2.5
31.4
14.4
16.1
31.4
500–999
3.9
1.6
27.9
19.4
22.5
24.8
1,000–4,999
4.2
2.1
31.2
18.0
16.4
28.0
More than 5,000
8.8
2.7
27.7
15.0
15.0
25.7
E XHIBIT 9.2
OF
Source: IOMA.
T IMING
M ASTER V ENDOR F ILE C LEANUP
BY
S IZE
OF
C OMPANY
9.7 Establishing Vendor Naming Conventions
87
worse, processing a fraudulent invoice. While tighter control on the master vendor file will not eliminate these issues, it will decrease the likelihood of their not occurring. 9.7 ESTABLISHING VENDOR NAMING CONVENTIONS The important issue when considering a vendor naming policy is that it be consistent. A sample naming policy from RECAP, Inc. recommends answering the following seven questions: 1. How many characters does your system allow for a vendor name? 2. Does your system allow more than one line for a vendor name? 3. Does your system allow for a different name to appear on the check than on a 1099? 4. Can you look up a vendor based on a short name, full name, or a “sounds like” name? 5. When you look up a vendor and a list of vendors is displayed, how much of the vendor’s name and address are displayed to help you select the correct vendor? 6. Are there limits as to how many characters/lines of a name can be printed on checks, fed to other systems, appear on reports or screens, or appear in window envelopes or on labels used for mailings? 7. Can you link vendors under a common identifier with an address qualifier to allow multiple addresses for the same vendor? With the answers to these questions and the policy suggested in the following subsection, you will be able to devise a naming policy for your company that will eliminate duplicate files for the same vendor. Like the preceding list of questions, RECAP, Inc. provided this sample naming policy:
(a) SAMPLE NAMING POLICY.
If the name is a corporation that includes Corp., Inc., or LLC, include that in the name when you set up the vendor. • If the name of the vendor begins with an article (The, A, etc.), do not include it in the name when you set up the vendor. • If the name is an individual, consistently include or exclude prefixes such as Mr., Ms., or Dr. • Avoid using periods (.) within vendor names, and use one space after each initial. •
88
Ch. 9 Master Vendor Files
• • •
•
•
•
•
8.
Avoid using apostrophes in vendor names or in abbreviations of words in vendor names. Avoid abbreviations, or be consistent in their use. Enter vendor names beginning with a number as specified. However, names that begin with a year, such as the 1999 U.S. Open, and are likely to be used again for a different year, should be set up without the year prefix. If abbreviations are used, prepare a short table of allowable abbreviations and provide it to people who are authorized to add vendors, as well as to people who have to find vendors based on a name. For example, American can be abbreviated either Am or Amer. Decide which you will use and include it in the list. If the vendor is “doing business as,” “trading as,” or is “known as,” use the vendor’s actual name and DBA, TA, or KA, followed by that name on the second line of “name” or first line of the “address.” If the vendor asks that you pay a factor (a company that buys receivables), set up the name for the vendor and put the name of the factor as the second line of the name or the first line of the address. If the vendor is a taxing authority, set up the name of the taxing authority as the name. Put any qualifiers, such as department, division, and the like, on the second line of the name or on the first line of the address. Despite instruction on many property tax bills that specify that you make a check out to the name of an individual as tax collector, the check will be cashed if you make it out to the name of the taxing authority as the first part of the vendor’s name. If your system does not support two-line names, consider using the first line of the address for the continuation of the vendor’s name. If the vendor’s name fits completely in the name field, and the first line of the address is required, put a period in the first line of the address.
This policy is good, but so is any system that is used consistently. Develop one that works for your own organization and then insist that everyone use it religiously. 9.8 TIPS ON SETTING UP THE MASTER VENDOR FILE Setting up vendor files so they reflect all pertinent information and are tamperproof as well is not easy. In spite of this fact, it is a task that is given little thought or attention at most companies, leading to reduced worker productivity, duplicate payments, and, in the worst case, fraud.
9.9 New Vendor Setup
89
The master vendor file must be easy to use, while incorporating as much information as possible in order to increase the productivity of those using the file (they do not have to search elsewhere for information), while reducing the potential of making duplicate payments. Much of the following advice is common sense: • •
•
• • • •
• • • • •
•
Use codes that incorporate the vendor’s name. Use the vendor’s billing address (the “pay to” address). Putting the headquarters’ address in the master file is not of much use as it is unlikely that there will be a need for that information. Enter the vendor’s 800 phone number not its toll number. If you are not sure what it is, find out. Not every company has an 800 number, but if it does, use it; why should you pay for the calls. Enter the vendor’s discount terms. Enter due dates to default on the invoice screen. Enter minimum or maximum purchase and credit limits. Enter the general ledger expense account number most frequently associated with the vendor. Let this be the default code if no information is entered in this category. Where applicable, include a material or job cost number. Designate independent contractors with their federal ID number. Enter the sales tax distribution account. Use the comment field for special coding or concerns. Set up separate files for the same vendor where there are: Significant differences in the types of purchases Discounts on some purchases and not on others Sales tax on only some of the purchases Assign different vendor numbers if payments made to this entity are sometimes 1099 and sometimes for material. But if you do this, be on the lookout for duplicate payments.
9.9 NEW VENDOR SETUP One of the best ways to minimize the occurrence of duplicate payments and fraud is to institute effective controls on the master vendor file; and the time to start is when the vendor file is first set up. Unfortunately, this is the point for which some companies have the fewest guidelines. When the vendor is set up, the requestor, most frequently someone from purchasing,
90
Ch. 9 Master Vendor Files
scrawls some basic information on a piece of paper and leaves it for the accounts payable person in charge of setting up new vendors. Needless to say, organizations that have loose guidelines for establishing a new vendor are just as likely to be lax when changing a remit-to address—one of the easiest ways for an employee to perpetrate check fraud. To help avoid these problems and to set up new vendors in a uniform manner, leading-edge companies use a new vendor setup form. Phillips International’s Gary Bass has graciously shared his firm’s form. It is shown in Exhibit 9.3. Because this form was set up in Word, and can be easily replicated, readers can make copies for use in their own organizations. Whether a company takes advantage of this form or uses one of its own creation, a vendor setup form will reduce the chances of both duplicate payments and fraud. Who can argue against that?
Company Number:
New Vendor:
New Remit: Vendor ID: Vendor Name (check-payable name): Vendor Address: City:
State:
Zip Code:
Terms: One Check Per Invoice:
Yes:
No:
Phone Number: Vendor Group (from Vendor Group List below): Vendor Type (Check one): Corporation:
Federal ID Number:
Employee:
(Optional)
1099 Vendor:
Social Security Number:
Submitted by: Approved by: Vendor Group List ACQ
Acquisitions
ADV
Advertising
CON
Consultant
GEN
General
CTB
Contribution
P/M
Printing/Mailing
TEL TMP
Telephone Temporary Help
PST ROY
Postage Royalties
E XHIBIT 9.3
N EW V ENDOR S ETUP F ORM
Source: Gary Bass, Phillips International.
RNT
Rent
9.11 Maintaining the Master Vendor File
91
9.10 ADJUSTMENTS, CORRECTIONS, AND ADDITIONS A properly controlled accounting system will limit access to the master vendor files; likewise, the ability to make changes to this file will be limited. Ideally, a report will be generated automatically by the system on a regular basis detailing all the changes and corrections made. This report will be reviewed in detail by a senior-level executive. One of the most common types of employee fraud relates to an employee who has access to the master file. The employee goes into the system and changes the “pay to” address of one or more vendors to which large checks have been issued. Subsequently, these checks are automatically mailed to the new address. Once the checks have been received by the employee at this phony address, he or she updates the system again, to change the address back to the original. Thus, it is vital to limit the number of people who have permission to update and change the master file. And this is only one example of how the vendor file can be manipulated for fraudulent purposes, to give you an idea of the damage that can be done when proper controls are not put in place; there are others. 9.11 MAINTAINING THE MASTER VENDOR FILE Once access to the master vendor file has been limited, the procedures for updating it also must be modified. The following steps will help: 1. Instruct your data entry personnel to maintain a list for noting any adjustments that need to be made. 2. Note the changes made to the file and include them in the vendor’s permanent paper file. 3. Never allow data entry personnel to make changes to the master file. 4. Designate personnel responsible for making semipermanent changes to the master vendor file. 5. Review master vendor lists on a regular basis. 6. Create more than one vendor file for the same vendor if there are consistent and differing types of purchases made by the same vendor. 7. Make sure to keep all vendor price adjustments current. 8. Make all necessary corrections and adjustments to the master file at the same time. This should be done only by the individual authorized to do so.
PART THREE
CASH MANAGEMENT As the role of accounts payable increases in the corporate world, cash management issues are increasingly becoming something to be considered. The obvious areas of whether or not to take early payment discounts and payment timing have been around for a while. However, in growing numbers, accounts payable departments are focusing on these matters. They are working to ensure that they qualify for every possible discount possible— these discounts are simply too attractive to pass on. Similarly, effective departments are paying bills on time, and not a minute earlier. With the increased focus on outside accountants, accounts payable has to be concerned about getting into the Management Letter—a place that no one wants to be. Petty cash boxes, while no longer considered a good practice, still abound. However, since they are still used, we’ll look at the best ways to handle the process.
93
CHAPTER
10
TERMS AND TAKING DISCOUNTS
10.1 INTRODUCTION The taking of a discount when the payment is “past terms” is a sensitive topic on both sides of the fence. When some 700 professionals were asked about this touchy subject, almost 30 percent admitted taking all discounts offered, even if a payment was past the terms offered by the supplier. And keep in mind that the figure may actually be higher, as not all companies following such a policy are willing to admit doing so. Roughly one-half revealed that they take all discounts within the terms offered, while a mere 7 percent refuse all discounts. Half said they always took it when paying within the discount period, while the remainder did so sometimes, depending on their cost of funds. This could simply be because it has been so long since interest rates were high enough for most firms to justify not taking the discount. However, if and when rates shoot into the double-digit stratosphere again, this analysis will become more prevalent. 10.2 SHOULD THE DISCOUNT BE TAKEN? “The only firing offense at our company,” says one accounts payable manager, “is missing a discount.” This may seem extreme, but those in the know realize the effect discounts can have on the bottom line. That said, it is important to analyze the whole financial picture before taking all discounts offered by all vendors. A recent survey of a large number of companies shows that just under half of them (49 percent) offer discounts to induce their customers to pay early. Of those, half offered a 2 percent discount, and another 40 percent 95
96
Ch. 10 Terms and Taking Discounts
offered a 1 percent discount. At first glance, 1 percent or 2 percent may not seem like much. But missing a discount can be a big deal at many companies. Let us start with a hypothetical bill of $100 with terms of 2/10 net 30, the most common discount terms extended. The bill can be paid in full in 30 days, but if it is paid in 10 days, a 2 percent discount can be taken; that is, only $98 must be paid. Thus, the paying company will give up the use of its money 20 days earlier than absolutely required. To determine whether this is financially advisable, take a look at these calculations:
(a) BASIC CALCULATIONS.
Amount of discount?
Number of days in the year
Discounted price
Number of days paid early
The math in the example looks as follows: $2 ÷ $98 × 365 ÷ 20 = 37.24 percent
A company in a net borrowing position would take the discounts only if its cost of funds were less than 37 percent. With a result like this, the correct action is pretty clear. But the results are not always this apparent. The second most frequently offered discount in the cited survey was 1 percent. The reader who “does the math” will find the rate of return, or breakeven rate, for that calculation to be 18.62 percent, if the discount period is 10 days and the full payment is due after 30 days. In today’s interest-rate environment, most companies would still pay early to get the discount in either of these examples. But there is another possible scenario. Even when terms require full payment in 30 days, very few companies meet that deadline. If, in reality, full payments are not made in 30 days as requested, but in 45 days, the effective rate of the discount diminishes. In the case where payments are typically made in 45 days, the company is losing the use of its money 35 days earlier than otherwise required. In those instances the calculation should be:
(b) FACTORING IN REAL LIFE.
$2 ÷ $98 × 365 ÷ 35 = 21 percent
This number is still awe-inspiring, but it is not as mind-boggling as the prior example. And if compensation is typically given after 60 days, the return drops to 15 percent—still impressive, but approaching the kind of
10.2 Should the Discount Be Taken?
97
returns financial executives are accustomed to seeing. If only a 1 percent discount were being offered, these returns would all be halved. (c) TO TAKE THE DEDUCTION OR NOT. Each company has unique circumstances to consider when deciding whether to take the deduction. The accounts payable professional making this decision usually needs to do a three-part analysis, as follows:
1. Carry out the basic calculations as described, using the figures and the terms as offered. 2. Factor in reality as it exists at the company. If the company does not pay its bills until 15 days after the due date, include this in your second calculation. Some companies have different policies for different customers. A large vendor might insist on being paid on the thirtieth day, while smaller customers may tolerate payments on the forty-fifth or sixtieth day. In these situations, two or more sets of calculations will be needed. 3. Compare the reality number, or numbers, with the company’s borrowing or investment rates. Be sure to note that the cost-of-funds rate for this comparison is the company’s rate on its short-term facilities, not its all-in rate. In this case, the analysis is a short-term one, hence it would be incorrect to incorporate longer-term rates into the analysis. It is this final comparison that will determine whether to take the discount. The results might surprise you. There are a few instances where a company is better off financially when it does not take the discount. For example, a company that normally pays at 60 days would look carefully at a discount of 1 percent, as this turns into a return of 7.5 percent. However, in today’s conditions, if that company were in a borrowing position, it might be better off not taking the discount. While this is unlikely in the current lower-rate environment, it does not take much to change the balance in the equation—especially if longer terms are negotiated. The emphasis in the analysis is not only on the breakeven calculations, but on the company’s financial position as well. (d) NONFINANCIAL CONSIDERATIONS. There are three other factors that will influence a company’s calculations regarding whether or not to take a discount. They include: •
Cashflow. A company that is stretched tight for cash may forgo all discounts, as it simply does not have the cash to take advantage of
98
Ch. 10 Terms and Taking Discounts
discounts offered. This may be a sign that the company is having financial difficulty, or it may simply be a function of the industry. •
Company policy. As mentioned, some companies take all discounts, regardless of when the payment is made. The professionals at those companies will not have to worry about doing the necessary calculations to determine whether it is financially advisable to take the discount. Such a policy should, however, be approved by senior management; this is not something that should be undertaken by the accounts payable clerk. The reason is that certain suppliers are apt to become annoyed at such a practice, which could have other repercussions that far outweigh the financial benefit gained from the practice. Others will not seem to care.
•
Turnaround time. It is difficult in most companies to turn around a check in a short period of time, due to all the approvals required. There are a number companies where this would be impossible, especially if the company has only one or two check runs each week. Those who can do it in 10 days should be commended.
10.3 AN ONGOING PROCESS The analysis of discounts should not be a one-shot deal; it needs to be repeated periodically—at least once a year. Interest rates change, the terms offered to the company change, and the company may take on new suppliers or lose some of its existing ones. All of these events can trigger a change in the feasibility analysis. The decision made today, with today’s numbers, may not be valid a year from now. Many accounts payable managers do themselves a disservice in the area of discounts. They analyze the data, make intelligent decisions, and then forget about the matter, thereby underplaying their importance to their companies. As a result, management does not appreciate the talent working in the trenches. Professionals who want to make sure their departments get the recognition they deserve should take these calculations and present them in memo form to their superiors. Additionally, they should calculate the amount of money that the company saves each year when these discounts are taken properly. Conversely, those who determine that the company should not be taking the discount need to document their reasons, and make sure management is aware of them and concurs. This is particularly important if the
10.4 Possible Problems When Paying Late
99
company practice had been to take all discounts at all times, a not uncommon procedure, as most people automatically assume that all discounts must be taken.
10.4 POSSIBLE PROBLEMS WHEN PAYING LATE Many accounts payable professionals find themselves paying their company’s bills later and later. Whether they do this under a management directive or of their own initiative, the result is the same. Every day that a company delays making a payment results in an improvement in the bottom line. This is because the money will remain in the bank earning interest; or, if the firm is in a net borrowing position, it will not borrow the money, and thus pay interest, until the check clears the bank. Given this obvious fact, there is ever increasing pressure to hold off paying a bill until the last possible moment. What financial zealots often do not realize is that their aggressive payment policies may actually cost their companies money—and in a few cases, cost them dearly. Because few vendors complain when payments are a few days late, there is little pressure to pay on time. Herein lies the problem. Many vendors will not pressure the customer for the payment; they simply send a second invoice. Some, but not all, mark it “Copy” or “Duplicate.” A conscientious accounts payable professional related the following incident. His firm had paid twice an invoice from a generally well-respected Fortune 500 company. The amount was in excess of $150,000. The second invoice was not marked “Copy” and was printed in a slightly different format. Needless to say, both invoices had been approved for payment. This company was lucky: A staffer discovered the duplicate payment. A phone call to the vendor revealed that it had already realized the payment was a duplicate and was planning to return the money—in about three weeks, the estimated time it took to turn a check request around. All in all, the paying company would be out of pocket for a month, assuming there were no further complications. The cost of this little mishap was $1,000, and it was “invisible.” This figure was derived by calculating the interest expense the paying company had to incur to borrow the extra $150,000 for one month: (a) CASE STUDY.
$150,000 × .08 ÷ 12
100
Ch. 10 Terms and Taking Discounts
This story had a happy ending: The purchaser realized it had made a duplicate payment and was able to ask for its money back; and, fortunately, it was dealing with a reasonable vendor. It could have been much worse. The real problem in this instance was the two invoices, neither of which was marked “Duplicate.” While it is easy to blame the vendor, in all probability the paying company needs to take a closer look at itself. We can learn a great deal from Miguel de Cervantes, who wrote in Don Quixote, “Our greatest foes, and whom we must chiefly combat, are within.” In this regard, there are several issues to evaluate: (b) THE CULPRIT.
Why was the payment approved twice? • Why were there two invoices? • What kind of checking did the company do to ensure a duplicate payment was not being made?
•
The obvious answer in this situation is that the up-front controls were weak and that the company just might have been guilty of paying late, giving the vendor the opportunity to send that second invoice, which caused the trouble. Any company regularly making payments after the due date needs to establish top-notch routines for detecting duplicate payments. Without such processes, the company will ultimately give away much more than it will save. Many accounts payable professionals are convinced that their companies do not have a serious problem with duplicate payments. However, any time a vendor returns a payment and indicates that an invoice has been paid, it is a warning signal that you may have duplicate payment issues (it is highly unlikely that only one duplicate got through). Also, be aware that not all vendors will return duplicate payments. In many cases, these funds sit in an unapplied account, never to be reconciled, and are eventually dumped into miscellaneous income. After all, how many vendors are going to spend the time to uncover the problems of others, especially when it means they will have to return money? Unfortunately, as the increase in accounts payable audit firms indicates, this is not always the case.
(c) SOLUTIONS.
10.5 ARE ALL POSSIBLE DISCOUNTS BEING TAKEN? The answer to this question in most organizations is usually a resounding no. Many reading this are probably thinking that is not the case in their
10.6 Should You?
101
organizations. But there is a good chance that they are wrong. Finding ways to increase the number of discounts a company can take is something that the accounts payable professional can do that adds value to their firm. A few simple techniques that can be used are: •
Improve check turnaround procedures so it is possible to legitimately earn discounts.
•
Make all involved in the process, especially tardy invoice approvers, aware of the financial benefits of earning such discounts.
•
Insist on completely filled out purchase orders so accounts payable is aware of all discounts it is entitled to take.
•
Use an accounts payable audit firm to determine if any discounts are being missed. If they are, change procedures to ensure all discounts will be taken in the future.
•
Establish a good rapport with purchasing to make sure that accounts payable is kept in the loop when special deals are arranged. Occasionally, the purchasing department will negotiate an extremely attractive discount and then fail to tell accounts payable about it. This is especially true if it is a one-time transaction. If the discount is not taken, do not expect the vendor to give the excess money back.
•
Take all discounts offered by vendors even if the purchase order does not indicate one is available. Let the vendor come back and ask for the extra funds; few will.
10.6 SHOULD YOU? A few professionals believe it is wrong to take discounts after the discount period has ended. Yet all evidence indicates th at a good portion of corporate America takes these discounts regardless of when the invoice is paid. A few things that are being done by those who want to be fair without completely penalizing the company for close misses include: Take a common-sense approach. • Take a 15/15 formalized approach. • Take a five-day approach. •
Take into account how close the company is to actually earning the discount. If it is missing the discount period by only a day or two, and the discount is not real deep, there is no
(a) TAKE A COMMON-SENSE APPROACH.
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Ch. 10 Terms and Taking Discounts
harm. Also, determine whether the vendor agrees with how the time period is calculated; that is, from invoice date versus invoice receipt date and check date versus payment receipt date. Evaluate the relationship with the vendor. If the vendor is doing its job, it will know you are taking unearned discounts and adjust the next purchase price accordingly. If that is the case, both the accounts payable manager and the sales rep for the vendor are playing with the same money. On the accounts payable side, the accounts payable professional can tell everyone about the great discount savings being taken; at the same time, the sales rep can tell management about protecting the company’s margin with a recent increase in the sales price. With competition the way it is, many sales reps are much more aware of margins (including the effects of proper cash management), not just sales price. Consider whether there is the time to test the waters with certain vendors by taking an unearned discount and monitoring its effect on purchase price, delivery time, service provided, and so on. Most accounts payable professionals do not. There is also the argument that even in business, sometimes a company just has to do the right thing. Remember those business ethics classes! Blatantly taking discounts after the due date has expired can lead to trouble. One accounts payable manager described a high-level finance guy at his firm who suggested to upper management that all discounts be taken regardless of timing. Long after the finance guy had moved on to another company, accounts payable and purchasing managers were still trying to mend fences with vendors. Once the decision to take the discounts under certain circumstances has been made, set ground rules. One company approaches the task using a 15/15 rule. If it has not exceeded the discount date by 15 days, and the discount amount is no more than $15.00, the accounts payable staff may take the discount. If either the day or dollar limit has been exceeded, the accounts payable manager must approve the invoice and discount issue.
(b) TAKE A 15/15 FORMALIZED APPROACH.
The frequency of check runs can add a new dimension to this discussion. Those who have weekly check runs have additional problems. One approach is to institute a policy that tries to pay within five days on either side, so it washes out. However, if an invoice did not process due to vendor errors, the company takes the discount based on dating from good receipt of the invoice. If a vendor fails to invoice with a
(c) TAKE A FIVE-DAY APPROACH.
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discount, and the company pays within the terms, it will charge it back. The company that does this does so on an annual review basis, and reports that in more than five years it has had virtually no complaints.
CHAPTER
11
CASH MANAGEMENT
11.1 INTRODUCTION Traditionally thought to fall under treasury’s umbrella, cash management is the efficient administration of a company’s inflow and outflow of cash. Using the best techniques available, it is possible to add to the bottom line. Conversely, if poor strategies are executed, the profitability of the company is adversely affected.
11.2 WHY DISCUSS CASH MANAGEMENT IN ACCOUNTS PAYABLE? Just about everything done in accounts payable affects the cashflow equation. That is why it is important not to overlook cash management implications when evaluating accounts payable functions. Likewise, it is important not to forget this when evaluating new policies, procedures, technologies, and controls. Companies play all sorts of games in their attempts to hold onto money longer than they might under normal circumstances. Occasionally, in their zeal to hold onto cash, they lose sight of the big picture and execute strategies that could hurt the firm in the long run. These approaches become more innovative in high-interest-rate environments or when companies are strapped for cash. In all but the very highest interest-rate environments, taking the early payment discount makes financial sense. The traditional 2/10 net 30 means that a customer has the choice of paying the full amount
(a) DISCOUNTS.
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of an invoice 30 days after the invoice date or paying it after 10 days and taking a 2 percent discount. Thus, a $100 invoice dated June 1 would be due on July 1. If paid on June 10, then $98 would be the amount due. This translates into an effective rate of 36 percent, which is why companies will go to great lengths to earn their early payment discounts. Even if the terms are 1/10 net 30, translating to an 18 percent rate, companies will push to take the discount. Unfortunately, firms that have cashflow problems often must forgo the discounts. While 10 days may seem like plenty of time to process the paperwork and make the payment, often it is not. Mail time, approval delays, and inhouse processing time all eat away at the 10-day window. Some companies just cannot get their paperwork processed that quickly. Most companies that miss the early discount date will still take the discount if they miss it by only a few days. Some companies have a corporate policy stating when they will take the discount and when they will not. All companies should institute such a policy to provide guidance to the professionals who work in their accounts payable departments. This is a management issue, not one that should be decided by the associates—the ramifications for handling this could be severe. For example, some suppliers will try to collect what they deem unearned discounts. A few take action to end their customers taking these discounts. They keep count, and when the amount of unearned discounts taken exceeds a certain level and are not repaid, they put the customer on credit hold. No accounts payable associate wants to be responsible for taking that action without a written policy approved by management. Another “cash management” approach is to take the early payment discount regardless of the payment date. This does not make for good relationships with vendors even if it is tolerated, as it often is. 11.3 PAYMENT TIMING The most obvious accounts-payable-related cash management function is the timing of payments. The timing can relate not only to taking the discount a few days after the discount period has ended but also to stretching terms. It also is sometimes used for the normal payment. Going back to the hypothetical 2/10 net 30 example, the payment is due on the thirtieth day. Some companies, to hold on to their cash a little longer, will pay on the thirty-first day. If suppliers don’t complain, they then move out to the thirty-second day, and so on.
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Another payment approach is to decide that the company won’t pay at 30 days but will pay at 45 or 60 days. Companies that do this across the board tend to be the so-called 800-pound gorillas in their industries. They announce that their payment terms are such and such, leaving their suppliers little choice. If companies are going to pay invoices on anything other than the due date, a written policy, approved by management, should be in place. As with the unearned discount example given, no accounts payable associate wants to be responsible for having an important supplier put the company on credit hold. There is no right or wrong payment timing/early discount policy. Each company must decide for itself what approach it wants to use, and then the accounts payable department can execute that strategy. Of course, accounts payable can and should make recommendations.
11.4 MAXIMIZE FLOAT Most companies use controlled disbursement accounts, so float can be a key issue. Checks clearing against controlled disbursement accounts do not have to be covered until they are presented for payment. Typical types of float include mail, bank, and processing: •
Mail float is the amount of time it takes for a check to get to the bank lockbox or customer’s location. Banks try to locate their lockbox operations to minimize this factor.
•
Bank float reflects the amount of time it takes the check to clear once it has been deposited. Banks will often have disbursement points that maximize this factor. Companies often choose bank accounts where they can use controlled disbursement accounts. This allows them to fund only those checks that are presented for clearing each day. Some companies will disburse large checks from accounts where they know certain customers don’t have accounts.
•
Processing float refers to the amount of time it takes for the depositing operation to get the check to the clearing. Bank lockbox operations have perfected this task and process checks quickly and efficiently. Companies can be either efficient or somewhat inept at getting their checks to the bank. This is one area over which accounts payable has
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little control. In higher-interest-rate environments, companies will choose which bank to disburse funds on based on where they know their larger customers are likely to deposit their checks.
11.5 PURCHASING CARDS In addition to eliminating numerous small-dollar invoices, purchasing cards (p-cards) are a great cash management tool. When used on regular invoices, the early payment discount can be taken and the funds not disbursed for another 15 days, on average. And this is not the only way to use p-cards to extend terms. Many suppliers are happy to accept payment on a p-card at the thirtieth or thirty-first day. Those companies that pay in such manner can extend their terms, possibly to 60 days, without risk of being delinquent. Use of p-cards not only prolongs float, it can also result in rebates for volume discounts. Companies with large p-card programs should investigate rebates with their card issuer. Some companies, in search of bigger rebates, have combined their T&E card with their p-card program, and a few others have also combined fuel cards.
11.6 BANK FEES With rates so low, float has much less value than it did in the days of doubledigit interest. Thus, keeping bank fees low is a way to add to the bottom line. For some, use of the automated clearinghouse (ACH) instead of checks or wire transfers is the way to keep these charges under control. Companies everywhere are starting to investigate the feasibility of the ACH for ordinary payments, instead of just for payroll. (Note: ACH credits are the payment mechanism for direct deposit of payroll.)
11.7 ACH BACKGROUND With the explosion in the use of e-invoicing, accounts payable professionals can expect to hear a lot more about ACH payments, payments made through the automated clearinghouse. As many are aware, there has been a decline in the number of checks issued for the last few years, a move expected to expand significantly over the next few years. The majority of those payments will move to the ACH arena. Business-to-business (B2B)
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ACH payments, sometimes referred to as corporate ACH payments, can be made using several options. An ACH payment can be a credit or a debit. If the purchaser chooses to initiate the payment itself, the transaction is known as an ACH credit. Many accounts payable professionals are familiar with this type of payment because that is how they are paid. Anyone who is on direct deposit for payroll (and sometimes T&E reimbursement) is paid this way. However, if the seller initiates the payment, going in and debiting the purchaser’s checking account, the transaction is an ACH debit. For example, this type of arrangement is used by some gas companies for payment from individually owned gas stations for fuel deliveries. Several states are starting to use ACH debits to extract tax payments, especially sales and use tax payments, from companies. Many who use such a procedure set up a separate account for ACH debits. All their other accounts have ACH blocks on them. Expect more states to move in this direction. Although the ACH is set up to handle both credit and debit transactions, most B2B payments are still credits. 11.8 ACH: TYPES OF CORPORATE PAYMENTS A few years ago, before the advent of the Internet and the introduction of sophisticated yet inexpensive Web-invoicing products, the amount of data transmitted along with a payment was extremely important to both the buyer and seller. This data allowed the purchaser to give the buyer information about which invoices were being paid—data that was often crucial for cash-application purposes. This is less important today, as there are more flexible ways of sharing information. In any event, the ACH options are delineated by the amount of information transmitted along with the payment. They are: CCD. The cash concentration or disbursement model can be either a debit or credit transaction. The money is moved and no information is transmitted with it. There is no remittance detail, and it is typically used to pay a single invoice. CCD+. The cash concentration or disbursement model-plus is a CCD with an addendum of up to 80 characters. It contains information formatted in an ANSI ASC X12 format. The addendum can reference information that is sent outside the ACH. It can be used to pay multiple invoices.
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CTX. The corporate trade exchange application can also be a credit or debit. It allows for the movement of money, and the addendum can have up to 9,999 records, each up to 80 characters. It uses the aforementioned ANSI format and can be used for multiple invoices. The move to electronic payments is being made largely because it is cost-effective. It is important to realize that ACH transactions are not wire transfers. While wire transfers can achieve much the same efficiencies, they are so expensive that few use them for anything but the largest-dollar transactions. Most of this terminology was developed around electronic data interchange (EDI). While we do not expect EDI to fade into the woodwork, it is not anticipated that it will grow, either. However, use of the ACH is expected to surge in the next few years. To that end, accounts payable professionals will need to learn as much as they can about it. One of the best resources for information about the ACH comes from the National Automated Clearing House Association (NACHA). A visit to its Web site, www.nacha.org will reveal information about conferences and books devoted to electronic payments (and receipts) made through the ACH. 11.9 CLEAN-DESK SYNDROME There are those bosses who insist that employees leave their desks clean and uncluttered at the end of the day, but the implications of a clean desk sometimes can be negative for accounts payable. For some, a clean desk means that all the work that has been received in the department has been entered into the system and scheduled for payment at the appropriate date according to the company’s written approved payment policy. This is an acceptable and preferred approach. Unfortunately, this is not always what a clean desk means in accounts payable. Some diligent accounts payable associates process for payment every invoice they receive the day they receive it. Then they pay the invoice at the same time, not taking advantage of the terms offered by the supplier. This is a bad accounts payable cash management practice. Why? Because it causes a company to disburse funds before the due date, funds that could be invested earning some return for the company in the interim. This is when a clean desk is a bad accounts payable practice. If the company’s systems cannot schedule payments, it is better to have invoices in files, perhaps even on desks, in order to preserve the company’s cash for as long as is feasible.
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11.10 GAMES COMPANIES PLAY While some of the “games” described here do not demonstrate best practices when it comes to vendor relations, occasionally companies have no choice. When they are strapped for cash, they play games. It’s that simple. It’s the only way they can survive.
CHAPTER
12
PETTY CASH
12.1 INTRODUCTION Petty cash is one of those pain-in-the-neck functions that the accounts payable department gets saddled with in many companies. This often happens despite the fact that any auditor worth his or her salt will tell you it does not belong there. In this day and age, there is really no good reason for a petty cash box. Nevertheless, they still abound, and the responsibility for managing them is often given to the accounts payable department. Given that fact, it is important to take a look at the right way and the wrong way to handle the petty cash function.
12.2 PETTY CASH NO-NOS Too many companies handle their petty cash boxes in a cavalier manner— so many, in fact, that virtually everyone associated with the function has a horror story or two to tell. Embezzlements that began as short-term loans, funds used to pay for activities that most would consider questionable at best, and personal IOUs form just the tip of the iceberg. Though most accounts payable professionals given responsibility for the petty cash box are not in a position to set company policy regarding the funds, they usually have the freedom to make recommendations. Having those recommendations taken seriously is, however, another matter— particularly if they might inconvenience a senior-level manager. Nowhere is it more difficult to enact change than at privately held companies where some owners sometimes treat the firm’s cash as though it were their own—which, technically, it is. 111
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A well-run petty cash system prohibits: Borrowing by any individual. • Check-cashing privileges for employees. • Access by anyone other than the individuals responsible for the box. • Unapproved cash disbursements. •
12.3 RECOMMENDED PROCEDURES In an ideal world, there would be no petty cash boxes. But as noted in the introduction, many companies think they need them and so it is necessary to establish sound operating procedures. The petty cash fund should be kept in a secure place with limited access. Some security-conscious companies keep the money in a locked box, which is then placed in the company safe. As a basic precaution, personnel with access to the locked box should not have the combination to the safe. Thus, at least two employees are necessary to take any money out of the box. At a minimum, the money should be kept in an envelope in a locked drawer. Other important security measures include: •
• • • •
Attaching a reconciliation form to the envelope or keeping it in the box. Every time a withdrawal is made, an entry is made on the form and initialed by the person disbursing the funds. The person extracting the funds should have a request signed by someone empowered to authorize such disbursements. The reconciliation forms should have sequential control numbers and be used in numerical order. The fund should be reimbursed and audited on a regular basis. Surprise audits should be performed.
Disbursing funds from petty cash is one function where separation of duties is imperative. Only a limited number of individuals should have the ability to access the box. The only reason more than one person should be authorized is to provide adequate coverage during the primary person’s absences and vacations. This is not a function to which every officer should have access. Given the fact that petty cash funds are, in some cases, a necessary evil, astute accounts payable managers will establish procedures to ensure the safety of the funds while still meeting the company’s needs for ready cash.
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12.4 OTHER RECOMMENDED PROCEDURES Handling petty cash for a company can eat up a good chunk of time unless procedures are set up and enforced. Use of petty cash should be held to a minimum, recognizing of course that there will be emergency situations during which it will be impossible to enforce the time frames. However, an emergency must be just that, and does not include someone forgetting to go to the bank or being too rushed to do so. If a company must keep petty cash, the following procedures will help minimize the disruptions it causes: • •
• •
•
Set a time when cash will be disbursed. Ask for several days’ notice if a large amount of cash is to be given to one or more individuals or if a large number will be making withdrawals at the same time. This might happen if the company is sending a large number of people to a conference or is holding an off-site meeting for executives. In these instances, the coordinator of the event should notify the person responsible for the petty cash. Actively discourage the use of petty cash. If the company gives travel advances, try and have those advances handled via check. Look for alternative procedures such as purchasing cards (p-cards) and, perhaps, as many companies have done, move to a policy of giving no travel advances. Do not accept IOU notes in the box when staff members run a bit short of cash and do not have time to go to the bank. True story: At one company that did allow such a practice, the manager handling the box found himself in an awkward position when the executive who had given the IOU had a heart attack and died suddenly. Fortunately, one of the deceased’s friends came forward and paid the IOU.
CHAPTER
13
PAYMENT TIMING
13.1 INTRODUCTION Once companies realize that payment timing can have a financial impact— either positive or negative—management begins to look at accounts payable with a different mind-set. No longer is the department viewed as merely a clerical function, but rather as a group handling a process that deserves focus, attention, and financial analysis. The harsh reality in corporate America in the early twenty-first century is that any function that can be reengineered to make it more efficient will be. And vendor payment timing, which has been completely ignored in many companies for so long, is now ripe for review. Payment timing is an easy and obvious target of those who understand anything about cashflow. Although, as discussed in the previous chapter, a few have ethical problems regarding the extension of payment dates, doing so is becoming a financial reality at many companies as they search for ways to improve profitability any way they can. 13.2 CAN ANOTHER DAY BE SQUEEZED OUT OF PAYABLES? The first step in such a process is to determine whether payments are being made too fast. It would be foolish to delay a payment to a valid vendor that was already being paid late as compared to the rest of the industry. 13.3 TIMING PAYMENTS IN DIFFICULT TIMES Nothing disturbs the smooth operation of the accounts payable department more than a directive from senior management to “stop paying the bills.” 114
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Such a directive may be issued during a period of tight cashflow or because owners want to cash out or look for banks or a prospective investor. Whatever the reason, there are some strategies that will help a manager get through this rough period without damaging a company’s credit rating or reputationand, hopefully, without the manager going crazy. Note Accounts payable managers are cautioned against undertaking any of these strategies without the expressed approval of their management.
13.4 STRETCHING VENDOR PAYMENTS The most frequently used, and potentially most damaging, strategy employed by companies attempting to preserve cash is simply to delay vendor payments. If the postponement is not too long, the strategy may work. However, companies that use this tactic run the serious risk of damaging their credit rating and their reputation with their suppliers, a risk not to be taken lightly. Many vendors belong to industry credit groups whose members get together for the express purpose of discussing the payment patterns of their customers. If it is discovered at one of these meetings that a given company is delaying payments all over town, these important suppliers may pull credit, seriously affecting the long-term viability of the firm in question. A company may be able to stretch payments by a few days occasionally, but it is not advised over the long haul. 13.5 PLACE SMALLER ORDERS A better tactic for conserving cash is, whenever possible, to simply place more modest orders. This may entail giving up certain volume discounts, but that is usually preferable to alienating a valued supplier. Obviously, the accounts payable manager cannot mandate such action, but can suggest it during discussions about conserving cash and stretching payments. 13.6 TALK TO VENDORS Many executives do not realize that honesty is the best policy when it comes to stretching terms. A number of companies have found, to their surprise, that this practice often works with preferred vendors. Those in
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seasonal businesses experience periods of cash tightness when products are being manufactured and then shipped to customers on open account. Inevitably, the situation is remedied as customers begin to pay for the goods ordered. By discussing the matter honestly with valued vendors, many companies find their suppliers sympathetic to their plight and willing to show some leniency with regard to payment timing. If the company is a valued customer, the vendor will most likely try to be accommodating. Again, this is probably a matter that will be decided at the very top management level. The important issue to understand is that many companies experience temporary cashflow challenges. There are ways to deal with them so as not to damage relationships with valued suppliers. By analyzing the issues and devising workable solutions, a good working relationship with the vendors most important to the company can be preserved. 13.7 A FORMALIZED APPROACH Rather than randomly holding on to checks for a few more days, companies are beginning to analyze their payment flows to determine where terms can be stretched, or optimized, as those in the field like to say. The reason they say “optimized” is that, in some cases, a shortening of terms may be called for. Now those reading this may be doing a double take: Yes, a shortening of terms may have a stronger financial impact. Why? The answer is simple. Sometimes, by paying faster, a company will qualify for a discount for the early payment. Thus, when undertaking a review of payment timing, look at discounts that could be lost if terms are stretched. Also, talking to the vendors might uncover hidden opportunities for discounts that are often overlooked or have not been offered to the company. The payment timing model is based on an Excel (or other) spreadsheet program specially designed to analyze the current payment patterns of the company. Following this analysis, members of the accounts payables staff are interviewed on an itemby-item basis so as to determine new patterns to recommend. It begins with contractual terms on the invoice or those agreed to with the vendor. As most payables professionals will point out, however, these terms often have very little to do with the actual ones—especially if no discount is involved.
(a) HOW THE PAYMENT TIMING MODEL WORKS.
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Begin the review by selecting between 45 and 90 of a company’s largest vendors for examination. Typically, these will represent between 50 percent and 70 percent of the company’s payables on a dollars-spent basis. Look at each payment and determine the likely amount of time by which it can be extended. Also search for missed discount opportunities, analyze check approval time, and record the terms of the most recent invoice. The payables staff has a wealth of information at their fingertips, which most organizations find invaluable. Some recommend that this information be presented to management for final approval. Once the program is in place, monitor it. Certain vendor payments may have to be adjusted if these valued suppliers complain. If no objections are raised by other vendors, it might be appropriate to stretch their payments out farther. The second component to this analysis is to search for lost discount opportunities. In some cases, greater savings can be made for a company in identifying missed discounts than by extending their payments. Most companies will profess that they are taking all allowable discounts, but according to experts, this is rarely the case. Terms on bills will often change without the company realizing it. The newly improved terms do not get put into the payables system; or whoever is running the computer system does not fully understand it and loses some discounts. And let us not forget everyone’s favorite excuse: office politics. Whatever the cause, part of this analysis involves identifying missed discount opportunities. (b) DISCOUNTS.
Obviously, payroll and taxes cannot be extended. Others that are not included in the analysis are: factors and contractors, equipment lease payments, utility bills, and, sometimes, rent.
(c) EXCEPTION ITEMS.
Not all companies have the time or staff expertise to complete such an analysis themselves. By hiring a consultant with specialized knowledge, you guarantee that the task will be completed in a relatively short period of time regardless of what else is going on in the company. The consultant also brings knowledge of how other companies are being paidthough this information is not usually available. It never hurts to have an unbiased third pair of eyes looking over your operations. Often, insiders are too close to a situation to be completely
(d) ADVANTAGES OF HIRING AN OUTSIDER.
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objective. The outside consultant does not have this problem. For a relatively small amount of money, you get a professional to take an objective look at your operations and tell you how they can be improved. This is the type of service that your management team may not think to bring into your department. Those professionals who know there is money to be saved if they could stretch their payables might recommend to management that a payment timing analyst be employed in their company. (e) SAVINGS. Without going into extensive detail, the savings for the stretched portion of a payment timing program can be calculated as follows:
Interest rate × payments × number of days extended ÷ 365
To illustrate, here is an example of a company with these parameters: Borrowing rate: 9 percent Annual payments extended: $20 million Number of days extended: 10 Annual Savings: $49,315, that is: .09 × $20,000,000 × 10 ÷ 365
There are savings associated with finding missed discounts as well. For example, a 2/10 net 30 discount found will result in a $4,000 savings on a $200,000 invoice. Payment timing is a delicate issue that, if handled properly, can make an impact on a company’s bottom line. As corporate America continues to look for ways to squeeze more value out of its assets, expect an increased focus on this area.
CHAPTER
14
AUDITS AND THE OUTSIDE ACCOUNTANT’S MANAGEMENT LETTER 14.1 INTRODUCTION The one place accounts payable managers do not want to see their names is in the management letter prepared by the company’s outside auditors at the completion of the annual audit. In this document, the accountants communicate to upper management “reportable conditions and material weaknesses” in the company’s policies and procedures. One goal of all accounts payable professionals should be to make sure that nothing derogatory about their work or the work of their department is included in this document. Fortunately, most auditors give their clients the opportunity to respond to any chargesin which case, the letter will contain both the charges and the responses. Most auditors will not remove a charge from the management letter unless the issue has been resolved. Just promising to fix something will not get the accounts payable department off the hook; the matter has to be completely corrected. 14.2 MOST NOTABLE PAYABLES ISSUES The most likely situations to earn accounts payable a mention in the management letter are discussed in the following subsections. This discussion is by no means exhaustive, but it does touch on the most common issues, followed by offered suggestions for avoiding them. This is a big no-noand before you skip to the next item because you say your company always pays at the last minute, realize that this is not the issue. Often, as noted in an earlier (a) WRITING CHECKS TOO SOON.
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chapter, overzealous accounts payable clerks clean their desks every night—often under instruction by management. They do this by processing all vouchers the minute they hit their desks, although they do not mail the checks until the appropriate time. This results in a large number of checks floating in limbo. This poor control practice pushes the responsibility for these checks up the ladder, resulting in wasted time spent answering calls from clients looking for payments. Additionally, this looks terrible to the person “on the other side” when the check is received a month or more after it is dated. Finally, it appears as though the company is experiencing cashflow difficulties. This is not the impression that most companies want their suppliers to have. (b) LACK OF PROPER CONTROLS ON CHECK STOCK AND SIGNATURE PLATES.
Given the increased rise in fraud, coupled with recent regulatory changes that make corporations more liable for check losses, lack of proper controls is guaranteed to result in a write-up in the management letter. While working late one night at a client’s office, one experienced auditor found a check machine with the signature plate in it. Check stock was similarly poorly controlled, as he was able to print (and sign) a check for $1 million. Being an honest man, he left it for the controller. This was definitely a situation where a picture was worth a thousand words, and the controller got the message. Improper segregation of duties will warrant mention of the accounts payable department in the management letter faster than almost anything else. In fact, that is what led to the downfall of the British firm Barings. Although Nick Leesam was not the accounts payable manager, he was responsible for making the payments on his trading activity. At a minimum, the person approving a payment should be different from the one responsible for writing the check. Bank reconciliations should also be done outside the accounts payable department.
(c) INADEQUATE DUTY SEGREGATION.
People should be required to take vacations. In fact, many banks require their employees to be away from the office for two consecutive weeks, in the belief that in this time frame any internal fraud can and will be uncovered. While an employee is away, someone else should handle his or her daily work. This way, if any member of the staff has been able to perpetrate fraud, it will be uncovered during the person’s absence. But for this policy to work, someone else must be assigned to do the vacationing employee’s work; otherwise, the purpose of (d) VACATION REQUIREMENTS.
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this requirement will be defeated. Those managers who give their staffers a hard time when they want to take vacation time should seriously reconsider that stance. An added benefit of this policy is that staff must be crosstrained, which gives a company automatic coverage in case of emergencies. All invoices should have the appropriate approvals. People sometimes get sloppy about this requirement, especially in fast-growing organizations. Without clear approval levels, and when multiple approvers for the same item exist, the potential for duplicate payments rises rapidly.
(e) APPROPRIATE APPROVALS.
(f) APPROPRIATE BACKUP. The backup attached to any check request should be adequate and approved. Again, this is an area where fast-growing companies often fail. The flip side is that, in certain organizations, everything under the sun is attached, making it difficult to find the needed information. So while it is important to attach the needed backup, do not overdo it.
All check signers should compare the data on the backup to the check. Otherwise, the check preparer may just as well sign the check. As silly as this may sound to the control-conscious person reading this, many will sign whatever is placed in front of them, trusting the person who prepared the check. Such an attitude increases the chance of check fraud. If the signer signs whatever is placed in front of him or her, the whole purpose of requiring manual signatures is defeated. (g) CAREFUL CHECK SIGNERS.
The numerical sequence on checks (and check-signing machines) should be accounted for by someone other than the person preparing the check (or running the machine). Check stock should be stored in a secure, locked location. Access should be prohibited to those with responsibility for preparing the checks.
(h) CONTROLS ON THE CHECK STOCK AND MACHINES.
Invoices must be controlled. All invoices should be sent from mail opener to person responsible for making the payment. Why? To make it less likely that the invoice will sit on someone’s desk for days or weeks before it is submitted to accounts payable. It also helps reduce the chance of check fraud.
(i) INVOICE CONTROLS.
In an ideal world, no payments would be made from copies or duplicate invoices. However, as everyone knows, corporate America is far from an ideal world. All duplicate invoices should be marked as such, to minimize duplicate payments. For more information on how to
(j) PAYING FROM COPIES.
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minimize the risk when paying from copies, refer to Chapter 8, “Paying When the Original Invoice is Not Available,” which covers this topic in depth. All supporting documents should be canceled to avoid duplicate payment or fraud. This can be done by marking the material “Paid” or by stamping it so. When this is not done, the document may be used as backup for another check request. This is a favorite technique of those individuals intent on defrauding the companies for which they work. All supporting documentation should be canceled in this fashion—no matter how small the dollar amount. (k) CANCELATION OF SUPPORTING DOCUMENTATION.
(l) CHECK MAILING PROCEDURES. Checks should be mailed by a manager, not the person who prepared the check. Many auditors will insist that checks never be returned to the person requesting them, but rather mailed directly to the intended recipient.
14.3 USING THIS INFORMATION Many accounts payable managers have been successful in getting a sneak preview of the management letter before it is sent to the controller. Whether the draft is offered or obtained through less up-front means, after reviewing it, many take the opportunity to try to persuade the auditors to remove those points from the report that the managers see as unreasonable. More than a few payables professionals have been successful in persuading their accountants that a change in the report “is not an issue.” This is important for two reasons. To begin with, getting an item off the list means you do not have to address it to the auditors’ satisfaction, only your own. But there is another, subtler, reason to avoid a debate with the auditors, with top management acting as the referee. In many instances, controllers and other members of upper management were hired from the very accounting firm that is now performing the audit. Should you get into a serious disagreement with the audit team, top management is apt to have a decided bias in favor of the auditors’ point of view. Not only are they the experts, but in many cases a close relationship between them also exists, rendering you the outsider. The savvy accounts payable manager will handle these issues before the auditors arrive, thereby sidestepping many discussions with them about what does and does not belong in the management letter.
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14.4 SARBANES-OXLEY EFFECT The recent corporate accounting scandals have raised the bar when it comes to the outside accountants’ letter, and resulted in the passage of the Sarbanes-Oxley Act. The widespread negative publicity surrounding these major cases of accounting fraud means that, going forward, accounts payable professionals will have a more difficult time dissuading their accountants from including any negative items in their reports—which also means that adequate controls will be more important than ever. (The issue of ethics and the impact of Sarbanes-Oxley Act on the profession are discussed in detail in Chapter 30.)
PART FOUR
TRAVEL AND ENTERTAINMENT Reimbursing employees for expenses incurred while traveling and/or entertaining on company business is not as simple as it might appear at first glance. However, many innovations are taking place in this arena. Companies are evaluating their travel and entertainment processes and many are coming to what others consider startling conclusions. Some are not checking receipts and others no longer require pretravel authorizations. Given the cumbersome nature of the entire process, there has been a big move to handle the process electronically. Once again, technology comes to the rescue. Depending on the corporate commitment and the technological sophistication, this move can span a wide variety of applications and techniques. These chapters take a look at some of the best practices leading edge companies are using to make this process more efficient. Finally, the more sophisticated companies whose employees travel overseas on company business are reclaiming their VAT (value added tax) and GST payments. Services to handle this unique function are discussed in this Part.
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15
HANDLING TRAVEL AND ENTERTAINMENT REPORTS
15.1 INTRODUCTION One of the biggest time stealers and ulcer inducers for accounts payable managers is the handling of employee travel and expense reports and reimbursements. Most would gladly give the function away if they could. Traditionally, employees who traveled would: 1. Obtain written authorization from their supervisor. 2. Get a cash advance. 3. Complete a detailed report, including all receipts, upon completion of the trip. 4. Give that report to the immediate supervisor for approval. 5. Perhaps get a second authorization. 6. Send the approved report down to accounts payable for reimbursement.
15.2 THE PROBLEM When the report arrived in accounts payable, a clerk would check the report to make sure the math was correct, the necessary approvals had been obtained, and the entire report conformed to company policy. If anything was amiss, the report would be sent back to the originating party for correction. If the report got held up at any one of the junctures mentioned— and reports inevitably do get held up when so many different parties are involvedthe reimbursement would be delayed. In more cases than not, 127
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employees would receive the bill from their charge account provider before they had been reimbursed by their employer. And because these bills tended to be large, especially if airfare and hotel charges were included, many employees would then call accounts payable demanding their money, often before the report had wended its way through the system to accounts payable. The issue was compounded by the fact that many companies used preprinted forms that employees filled in by hand, often making mathematical mistakes and more than occasionally using poor penmanship. The conversations in these cases often got ugly, with the accounts payable staff taking the brunt of the unpleasantness, even though the staff had nothing to do with causing the problem. Due to the inherent flaws in such a system, many travel and entertainment reimbursements would end up being written as manual checks, not the most productive approach for accounts payable. Adding insult to injury, often the delay was caused by the employee demanding reimbursement. Completing a T&E expense report is no one’s idea of fun, and many employees put it off until the last possible moment, then expect everyone else to jump through hoops to issue their check. This is unfair to those who toil in accounts payable, but it is a sad fact of life. Given all these problems, it is only to be expected that the T&E function is one that comes under scrutiny, and has undergone some major improvements in many companies.
15.3 SOLUTIONS Companies typically approach their T&E problems from two fronts: (1) They review their policies and procedures and (2) they use technology to solve the problem. The next chapter takes an in-depth look at the second approach; this chapter examines the best practices used by today’s leadingedge companies. Note Not all the approaches described here will work at all companies. Certain corporate cultures will not permit some of the techniques. Others will not have the systems capabilities or will not be able to get the technical support they need from the company’s IT department. Whatever the case, some of the following best practices can be used in most companies, although some will require policy changes and approval from upper management.
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129
Most experts recommend eliminating formal upfront authorizations. Why? One reason is that most employees do not take it upon themselves to plan and book a trip without their boss’s approval. Thus, most experts feel this step is a waste of time and adds no value. Those who are concerned about unauthorized travel can use monthly management reports to ensure that no unauthorized trips are taken at company expense.
(a) AUTHORIZATIONS.
Nothing will get an employee to complete an expense report quicker than being out of pocket for company expenses. Many companies no longer offer cash advances to traveling employees. They feel that, combined with the use of credit cards, employees will be expected to lay out their own money for only a few low-dollar items. This minor inconvenience is more than offset by the productivity saving.
(b) CASH ADVANCES.
Use as much technology as possible to automate the process. As mentioned, this will be discussed in detail in the next chapter.
(c) TECHNOLOGY.
Never give them to the manager. The only thing that happens when all receipts are attached to an expense report is that the receipts get lost. They should be placed in an envelope and sent along to accounts payable. (d) RECEIPTS.
Most employees are honest. Detailed checking of expense reports adds little value to a company. If the reports have been automated, it is unlikely that there will be any mathematical errors. Additionally, the errors caught tend to be small-dollar items. A company would be better advised to pay an employee an extra $25 once in a while than to hire a fulltime employee to check every expense report. Spot-checking based on dollars spent in various categories is much better use of a company’s limited accounts payable resources. Of course, a company that goes the spot-checking route has to make it perfectly clear to all employees that anyone caught cheating on a T&E report will be fired immediately. This may sound a little harsh, but cheating on a T&E is fraud. To enforce such a policy, the company has to come down hard on anything that is amiss on T&Es. While a company may not wish to terminate someone who requests reimbursement for a questionable item, it can make a big deal about it. And, of course, employees who have any questions should be encouraged to ask them before submitting a report.
(e) CHECKING.
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Ch. 15 Handling Travel and Entertainment Reports
Employees should be required to use company T&E cards, though the liability should be with the employee. That way, if they are tempted to use the card for personal expenses, they will be responsible for them. Some companies will act as a backup guarantor for those employees who do not qualify for the card. This generally is the case with employees who are new graduates. Expect some resistance to this requirement. Why? Because for years employees have become accustomed to accumulating free points for travel and other bonuses based on their company travel. By requiring the use of a corporate card, many will feel they have had a benefit taken away from them. Insisting on the use of corporate card gives the company some cashflow advantages that can be readily understood when the reimbursing techniques are discussed. (f) CORPORATE T&E CARDS.
(g) PAYMENTS FOR EXPENSES MADE ON CORPORATE CARDS. These payments should be made directly to the credit card company. This will give the company use of the money until the payment date. Some companies have found that changes such as this pay for a new electronic T&E system.
These payments should be made electronically to the employee’s checking account, either with the normal paycheck or as a separate transaction. The employee can be notified by e-mail. For those employees who do not wish to use an electronic form of reimbursement, the payment should be included with the normal paycheck. Some companies insist on electronic reimbursement, but others are reluctant to take such a hard-line approach.
(h) PAYMENTS TO EMPLOYEES.
If an employee cannot take the reimbursement electronically, the check should be mailed to the employee’s home. No exceptions should be made to this policy, as it is extremely time-consuming and inefficient to have employees coming to the accounts payable department to pick up their checks. (i) REIMBURSEMENT BY CHECK.
(j) REPORTS. If electronic reporting is used, take advantage of the data capabilities and prepare some management reports to identify where the money is being spent. Some companies have used such reports to pinpoint where they are spending the largest amounts of money for hotels and airlines. By aggregating use, they have then been able to negotiate lower corporate rates. The experts who do this recommend focusing on hotel bills
15.4 How Much Checking Is Enough?
131
and airline charges, as these represent the largest amounts of money. However, many focus on car rentals, which tend not to be as much. Car rentals can be addressed after the bigger ones.
15.4 HOW MUCH CHECKING IS ENOUGH? Of all the practices recommended, the one that draws the most controversy is the suggestion to only spot-check. Many are aghast at the thought. In a recent benchmarking survey, respondents were asked about the policy at their companies regarding T&E report checking. Half the replies indicated that in-depth checking was the norm in their organizations, while one-third reported moderate checking. Only 16 percent said they spot-checked the reports. That said, the concept of spot-checking has been gaining acceptance in certain circles over the last few years. Nevertheless, the debate over which method is the most effective continues to rage and will probably do so for years to come. The prospect of not checking every dollar on an employee’s T&E report makes some managers cringe. They fear that if it becomes known that reports are not reviewed in detail, employees will take advantage. These individuals also believe that a certain percentage of employees are dishonest and will include expenses they should not. Stepping back and looking at the big picture often helps to put this issue in perspective. The following questions will help in planning a policy that will work effectively in any organization. How much time is spent checking T&Es, and what does this cost the company? • In any given year, what is the total dollar value of unauthorized items entered on expense reports? • What is the additional amount of unauthorized entries that will likely be entered on T&Es if employees learn that the company is not doing a thorough review? •
The truth of the matter is, there is a limit as to how much anyone can enter inappropriately on a T&E. A figure such as $1,200 worth of travel expenses could be increased by $100 or $200 without raising too much suspicion, but that amount could not be inflated to $12,000 without causing a stir. The exposure in this area is somewhat limited. Those concerned about theft or fraud could check every report over a given amount, say $2,500.
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There are ways to design a spot-check program to address whatever safety issues are raised. An additional deterrent is to make it widely known that anyone caught cheating on an expense report will be dealt with severely. There is a halfway position between in-depth checking and spot-checking. A moderate amount of checking will give the anxious some level of comfort. Firms that take this road often devise plans that will allay some of management’s concerns. Many companies take this approach as a first step when trying to move toward an eventual spot-check approach. After moderate checking has been in use for some period of time, often as long as a year or two, the amount of checking is gradually reduced. Another approach some companies use is to let employees know that the amount of checking will be minimal, but that repercussions for dishonesty will be severe. However, not all executives are willing to take such a harsh approach.
(a) THE COMPROMISE.
(b) THE NORM. The level of T&E checking a company does has a lot to do with its culture. Company size does not seem to have much of an impact on the amount of T&E review required, with one exception. A full 28 percent of large companies (those with more than 5,000 employees) permit spotchecking; this is a much higher rate than companies with fewer employees. While moderate checking for large companies seems to be in use with companies of all sizes, in-depth checking is significantly lower. To review the statistics by size of company, see Exhibit 15.1.
Total By Size of Company
Spot Check (%)
Moderate Check (%)
In-Depth Check (%)
18.6
27.6
53.8
Spot Check (%)
Moderate Check (%)
In-Depth Check (%)
Up to 99
25.0
25.0
50.0
100–249
17.8
28.8
53.4
250–499
13.5
30.6
55.9
500–999
15.7
26.0
58.3
1,000–4,999
17.6
26.9
55.5
More than 5,000
25.2
30.1
44.7
E XHIBIT 15.1 Source: IOMA.
L EVEL
OF
C HECKING U SED
FOR
T&E
15.4 How Much Checking Is Enough?
133
Looking at the statistics on an industrywide basis, there are no notable trends readily apparent. The education industry uses spot-checking sparsely; those in utilities and transportation use it more than any other industry. For full details of your industry’s usage, see Exhibit 15.2. (c) FACING MANAGEMENT RESISTANCE. If there is resistance to the proposal to spot-check, review the work for the last six months and calculate how many T&Es were bounced back. How many charges were not paid? Compare this with the cost of auditing all the reports. If these figures are not accessible, start a log and keep track of this information for the next few months. Then you will the figures to back such a recommendation, should the numbers warrant it.
Clearly, spot-checking is the easiest approach for those in the accounts payable department, but it is not necessarily appropriate at every company. Depending on the corporate culture, management may or may not view it favorably. Before suggesting it, gauge the opposition carefully. This issue may not be worth alienating management. However, if management asks for cost-cutting or productivityincreasing suggestions, this one is ideal. And do not forget that the amount of T&E checking can change over a period of time.
(d) RECOMMENDING SPOT-CHECKING.
Spot-Check (%)
By Industry
Moderate Check (%)
In-Depth Check (%)
Manufacturing
18.6
24.6
56.8
Finance
14.8
29.5
55.7
Utilities, transportation
26.5
34.7
38.8
Private practice
11.5
23.1
65.4
9.1
24.2
66.7
Wholesale/retail/distribution
24.4
34.1
41.5
Health care
19.4
31.9
48.6
Education
12.0
24.0
64.0
Media
31.4
17.1
51.4
Construction
20.0
25.0
55.0
5.3
15.8
78.9
15.9
27.0
57.1
Nonprofit
Entertainment/hospitality Other E XHIBIT 15.2 Source : IOMA.
L EVEL
OF
C HECKING
BY
I NDUSTRY
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15.5 T&E MANUAL Some companies do not have formal travel and entertainment policies, while others have policies that have not been updated in years and are largely ignored. The point is, companies need to have formal written policies that are widely communicated to every employee affected. This includes those who travel and those who enforce the travel policy—that is, the accounts payable staff. Adrienne Glasgow, the CFO for The American Red Cross in Greater New York, shared the following insights regarding the setup of a workable T&E manual. Basically the manual should: Be direct. Make no assumptions, as these only lead to problems down the road. These translate into “loopholes” that only lead to trouble. • Detail everything, even the obvious. • Have an index and examples. In this case, a picture is truly worth 1,000 words. • Keep the manual in a three-ring binder for easy replacement of pages.
•
•
Do not become attached to the book, resisting future changes to your masterpiece. Good policies change all the time to take advantage of the latest technology and to incorporate innovative practices that may not have been possible when the manual was first written.
The written policy should be well thought out and documented. To be most effective it should: (a) WRITTEN POLICY.
• • • • • •
•
Detail each type and kind of activity. Clearly set limits. Do not leave anything to employees’ imagination or discretion. Keep the corporate culture in mind when writing the policy. Do not be petty. Keep in mind the best practices utilized in the industry. These can generally be obtained from industry associations. Clearly state what is needed and/or expected. Keep it simple. Use short, simple sentences. This is not a work that is going to be submitted for a literary prize but rather one that will be used by employees at all levels. Make it easily understandable by all. Include all forms to be used and review those documents to make sure they conform to the policy as written.
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Everyone needs an editor, including those writing T&E manuals. In this case, it is not only to ensure grammatical accuracy, but also to ensure that the manual is correct from all sides. This can be done by:
(b) MAKING SURE THE MANUAL IS CORRECT.
Having others read the first draft. • Expecting changes and not being hurt by those corrections. • Confirming that all superiors are in agreement with the policies presented in the manual. • Having someone from accounting review the manual to ensure accuracy on that front. •
The most successful manuals are dynamic—that is, constantly changing. Those who understand this will not be offended when the manual is changed. And whenever a policy is changed, it is important that the change be reflected in the manual and that updates are sent to all affected parties. This is a good way to notify everyone of the new changes and to, hopefully, gain compliance with these new procedures.
15.6 POLICY AND PROCEDURES CHANGES As companies progress and reengineer their processes, travel and entertainment policies and procedures often come up for review and improvement. The following list provides some techniques that have worked at companies of differing sizes: •
Communicate the company travel and reimbursement policy to all affected employees. This includes not only those who travel, but their support staff as well. It is imperative that the secretary responsible for doing the boss’s T&E report knows your guidelines. When employees know what the policies are, they are more likely to abide by them, making accounts payables’ job easier.
•
Coordinate T&E reimbursement to coincide with the pay periods. This makes cashflow forecasting a tad easier.
•
Use the company e-mail system to communicate with other departments. It can be used to notify employees that checks are ready for pickup or that deposits have been made to their accounts, or to make a query.
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•
•
•
•
•
•
Limit the number of expense reports that can be submitted by one employee. A number of accounts payable professionals report success in suggesting that only one report be accepted per month per employee. Depending on the other T&E policies, this period can even be longer. Ask employees to submit reports that contain entire trips. This is preferable to accepting expense reports that are bound by arbitrary time frames, usually monthly. Doing so makes it easier to audit and helps with management reporting. Consider an electronic T&E reporting system. This can be as simple as designing templates in one of the spreadsheet applications and then e-mailing them for approvals and submission. Require receipts only on those expenses that exceed $75, the IRS limit. This will eliminate much of the paperwork associated with T&Es, even if none of the other recommendations are followed. Enter vouchers into the accounting system in batches, which are then used as control groups. Common groups can be approved and posted. This saves a number of accounts payable departments a good deal of time. Consolidate all decentralized travel systems. The side benefit of such a system is that it will allow management to negotiate new and lowercost travel agreements with the one or two selected travel agencies.
15.7 WHAT ABOUT ELECTRONIC RECEIPTS? The Internal Revenue Service recently indicated that it will accept electronic data as documentation for corporate T&E expenses charged to corporate cards that meet given security requirements. As this goes to press, the details are being worked out. (a) DOES THIS MEAN NO MORE SAVING RECEIPTS? Data from corporate card vendors that exercise reasonable controls to ensure integrity, accuracy, and reliability of the data, and to protect it from additions, alterations, or deletions will probably be considered acceptable alternatives to receipts. Whether companies will require their employees to provide receipts depends on two things: •
The company’s policy: Many will probably still insist that employees submit receipts.
15.8 Faster Employee Reimbursements
•
137
The capabilities of their credit card issuer, as it will have to meet the strict guidelines specified by the IRS in order for you to discard receipts.
The most immediate effect on accounts payable will be the possible elimination of paper and a possible reduction in clerical work. “Possible” because not every company will decide to use the new guidelines. Even those that decide not to save receipts may still insist that employees turn them in. The first task will be to determine company policy. Every company will have to address this issue almost immediately. Even if the decision is to not change anything, it will still be necessary to inform traveling employees. This topic will get a certain amount of attention, and if employees are not informed of their company’s policy, some will inevitably come to the wrong conclusion. Information should be disseminated to all employees in a timely fashion. The other big change likely to affect accounts payable is the increased usage of automated T&E systems. With the reduced paper requirements, certain companies will find automated systems more attractive. Expect to see automated T&E systems used in a growing number of companies, lightening the load ever so slightly for accounts payable professionals. Because so little press has been given to this issue, there is an opportunity to educate the more senior members in their departments who, in many cases, will be the ones ultimately deciding company policy. This is an opportunity to present them with the information and facts that will bolster the case. (b) EFFECT ON ACCOUNTS PAYABLE.
15.8 FASTER EMPLOYEE REIMBURSEMENTS Those in accounts payable are often plagued by requests from employees for faster reimbursement of travel and entertainment expenses. There are some ways to accomplish that goal: •
Pay employee travel expenses within 10 days of receipt of the report. To make such a policy work, however, it may be necessary to add a disclaimer that any incomplete or improperly prepared expense reports will result in payment delay.
•
If checks are used, they should be mailed to the employee’s home.
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Use automated clearinghouse (ACH) transfers. Send all a notification of their deposit, ideally by e-mail. • Include T&E reimbursement with payroll payments. •
In many companies, the whole area of travel and entertainment is ripe for reengineering. Changes can be made that not only make the accounts payable department more efficient, but save the company money as well. 15.9 E-TICKETS As business progresses into a paperless environment, one of the many applications is the electronic airline ticket, typically referred to as an eticket, used most commonly for domestic flights. (Paper tickets are still not used extensively for international travel.) The benefits of these tickets are so great for businesses that some airlines are starting to charge for paper tickets. There is one big disadvantage of e-tickets: There is no paper reminder when the ticket is not used. When travel is canceled, travelers with paper tickets have the paper reminder that they need to return their ticket for a refund or a credit. Accounts payable professionals whose companies use e-tickets need to devise a routine to cover this eventuality.
CHAPTER
16
HANDLING ELECTRONIC T&E REPORTS
16.1 INTRODUCTION Electronic T&E report filing is a technique recommended by most experts for companies looking to reengineer the process. Most companies that take this route either develop their own proprietary software or purchase a thirdparty system. The former tends to be less expensive but also tends to require more help from the IT department. Depending on the level of sophistication desired in the system, some have even had success developing a system from a simple spreadsheet program. But why go the electronic route? 16.2 ADVANTAGES There are many things that can be done electronically that simply cannot be done using a manual system. Some of the benefits include: •
•
• • •
Reports to management help enforce compliance with the company’s T&E policies. Once again, this removes the stigma of being the bad guy who will not pay for unauthorized expenses from the accounts payable staff. Corporate charge cards are paid exactly when they are due. While most accounts payable managers are adept at this, it is one less headache, especially when these bills are large. The T&E audit process is simpler and more efficient. The efficient settlement leads to greater employee satisfaction. Because of the timely reimbursements that are possible with such a system, some companies have eliminated advances for those who travel. 139
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Ch. 16 Handling Electronic T&E Reports
•
These systems allow a more efficient use of the accounts payable department’s resources, moving the staff away from clerical tasks and toward more productive work.
16.3 HOMEGROWN SYSTEMS Travel and expense reports can be a royal pain for payables managers at both large and small companies, as they are often messy and submitted at the last minute. Then there are the employees who harass AP for their reimbursement checks long before it is feasible to turn the report around. The handling and G/L coding of these items can eat up quite a bit of time as well. Thus, most payables professionals will grasp at anything that makes the T&E matters easier to handle. To this end, many companies, and not just large ones, are beginning to handle their T&Es electronically. The following two case studies show how both a large and a midsize company were able to develop workable T&E systems. The company in this case went from doing employee travel and expense reports manually on a photocopied form to a sophisticated electronic system. Although this company was relatively small, with only 150 employees, half submitted T&E reports on a regular basis. The company first went from using the manual form to a Lotus spreadsheet, before progressing to the electronic form on its mainframe. This is a good procedure for those just getting started, and, depending on the number of travelers, may work just fine for a smaller company. The spreadsheet worked well, but each time it was enhanced, the form would have to be emailed to all the end users. Inevitably, this led to questions and phone calls for help. (a) CASE STUDY 1.
Because the people using the system were comfortable with the Lotus system, it could have been difficult to get them to switch over to a new one. However, thanks to management support, the key ingredient to any new venture, it was not. Following its implementation, employees seeking reimbursement for their travel expenses had to submit their reports on the new forms. There may have been some behind-the-scenes grumbling, but the only complaint officially filed regarded the fact that traveling employees cannot do their expense reports while on a plane; they have to wait until they check into their hotel room and can get a phone hookup.
(i) Making the Change.
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141
With the new system, employees fill out their reports online and then print them out. Receipts are attached, as in the past, and a supervisor’s signature is obtained. This last step is important, as the supervisor at this company is held responsible for the report. It is then sent to AP, where it is audited. Should small changes be required, it is no longer necessary to involve the submitting employee. The professional reviewing the report simply pulls up the report on the computer and makes the change. If, however, numerous or large changes are required, the report is bounced back to the submitting employee. Once the report is verified, it is released for payment automatically. All reports received by noon on Friday are included in the following Wednesday’s weekly check run. There are no exceptions to this rule. And because employees pay their own credit card bills, and cash advances are kept to a minimum, this system encourages everyone involved to get their reports done on time. Employees are reimbursed either through the automated clearinghouse (ACH) with an electronic data interchange (EDI) payment, just like direct deposit, or with a check. The method of payment is determined in advance. The system is user-friendly and includes G/L codes so that it is not necessary for AP to code reports once submitted. This is a big time-saver.
(ii) How It Works.
The second case involves a Fortune 500 company where “the system sold itself.” The improved turnaround time of reports submitted electronically helped tremendously in getting users to accept the new system. Those submitting electronically were able to reduce their turnaround time from two weeks to 24 hours. Upper management buy-in was key at this company as well.
(b) CASE STUDY 2.
At this company, no special login is required from those completing their electronic T&Es. Users access the system from their local e-mail or system/platform. The company uses many different systems, but the electronic T&Es can be accessed on anything from a PC to a so-called dumb terminal. The system also contains online management expense guidelines, making usage easy even for computer novices. The company has found that due to the quick turnaround of the system, use of cash advances has been reduced as well. If a report is entered by 2:00 P.M., the employee can receive an ACH deposit the next day. If he or she requires a check, he or she is e-mailed when it is ready. (i) The Process.
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The employee enters an electronic request into the system. The form is signed with a personal identification number (PIN) and then forwarded to the appropriate manager for authorization. For tracking purposes, the system assigns this report a unique serial number. The manager is able to view the report online and authorize it with his or her PIN. At this point, the request is forwarded to AP, and an automatic notification is sent to the employee at the same time. Employees not notified can follow up with their supervisors. What about the receipts? Upon receiving notice that the report has been approved, the employee faxes copies of the receipts to AP, making sure to reference the unique serial number assigned earlier. The receipts are then fed into an imaging system by the AP staff. When AP has verified that clean copies have been received, reimbursement is authorized. In no case will the report be processed without the receipt of the faxed documents. The employee is required to hold onto the original copies of the receipts for 90 days. After that time they can be destroyed. (ii) How It Works.
Both conversions discussed here were successful because they had two key ingredients necessary for any change:
(iii) Success Factors.
Each was backed by a management, which agreed with the assessment that it was appropriate. • They were able to get the necessary MIS resources to develop the new system. •
Accounts payable professionals, in companies of any size, who are able to obtain similar commitments will be able to emulate these success stories. 16.4 THIRD-PARTY ELECTRONIC SOFTWARE Accounts payable professionals are always on the lookout for better ways to handle the cumbersome task of processing travel and entertainment expenditures. The best hope so far for taming the unwieldy T&E beast is automation, in the form of new software. A number of these products are available on the market today. 16.5 E-TICKETS If your company travelers are using e-tickets, chances are that some of the cost savings are going down the drain. Why? Because, as mentioned in the
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previous chapter, travelers who change their flights at the last minute can easily forget to cash in their unused tickets. True, unused airline tickets have always been a problem. However, with e-tickets, there is no physical piece of paper to remind travelers to get the refund. Therefore, the problemand your potential cash lossis worse than ever. American Express says that more than 4 percent of e-tickets issued by corporate travel departments go unused. Fortunately, new systems have emerged to track unused e-tickets, and even process refunds; however, many companies are unaware of these systems. A leading provider of e-ticket tracking software solutions is Ticket TRAX, by American Express (www.americanexpress.com). If your company is an American Express Business Travel client, you can use Ticket TRAX, which was unveiled in 2000. You pay for this service by giving American Express a cut of what they recover. In the first four months of in-market trials, Ticket TRAX identified and refunded more than $2.5 million in lost electronic tickets for 47 corporate clients, says American Express. A notable selling feature of this service is that no extra work is required from you or the traveler—Ticket TRAX takes care of the full refund process. The system logs a record of all electronic tickets booked by a corporation’s employees through American Express Travel. It then checks the computer reservations systems (CRSs) after a specified period of time to determine whether all segments of the ticket were used. Unlike most other electronic ticket refund services, Ticket TRAX can research tickets as far back as 13 to 22 months, depending on the data stored by the airline. For each unused, refundable ticket, Ticket TRAX automatically initiates a refund request to the airline. It can also notify travelers by fax or e-mail to expect the refund, so they can correct their expense accounts. Ticket TRAX provides the travel manager with a monthly report documenting the amount of money Ticket TRAX has saved. Internal audit groups can use the report to help check expense reports.
(a) A LEADING AUTOMATED SOLUTION: TICKET TRAX.
In addition to American Express, several other business travel agencies have e-ticket tracking solutions either currently in operation or in the works for their clients. Three are described here: Airline Ticket Manager, ResTRACK, and eTrak. Airline Ticket Manager (www.interproexpense.com) is software that contains the Airline Ticket Manager feature, designed to help Expense (b) OTHER TRACKING SOLUTIONS.
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Express users easily and properly report the disposition of airline tickets as they prepare their expense reports. Unlike Ticket TRAX, however, this system relies on user input to track unused e-tickets. Therefore, it is not completely foolproof. Even so, users report big savings using this system, which requires no additional effort on the part of the traveler or your processing staff. Expense Express prompts users to indicate whether a ticket was used, unused, or partially used, and to submit any unused or partially used tickets to the company, along with other required receipts tied to that expense report. Airline ticket information is screened through the system into Airline Ticket Manager and compiled into reports that can be used for reconciliation against charge card statements and to satisfy IRS audit requirements. The unused or partially used airline tickets are pulled from the expense report receipt packages and submitted for future travel credit. ResTRACK (www.travelsys.com) is different from either Ticket TRAX or Airline Ticket Manager, in that it can be used as a standalone system. Its provider, Automated Travel Systems, offers a full suite of automated solutions for corporate travel departments, including ResFAX, ResMAILrnet, ResMARKER, and ResQCX. A strong feature of ResTRACK is its reporting capabilities. It has a selfgenerating reporting feature, and ad hoc reporting may also be accomplished via flat files imported to Crystal Report or Excel. No additional keystrokes or formats are required to use ResTRACK. It analyzes all passenger name records (PNRs) containing an e-ticket indicator. Stored in its own database, ResTRACK will review e-ticket transactions at a specified interval after the last travel date in the itinerary. The user specifies two, five, or seven days after the last travel date. ResTRACK stops checking coupon status when a coupon is no longer “open.” Similar to ResTRACK, eTrak (www.trondent.com) and eTrak Pro (an enhanced version) is a standalone product. eTrak is run at the end of each day when it reads the daily ticketing report in the CRS to obtain information about each e-ticket issued that day. This information is then stored in the eTrak database so that it can check final status of the flight coupons after travel is complete. A notable feature of eTrak Pro is that it will update the traveler’s profile with details of unused e-tickets, creating an alert for when the individual’s next reservation is made. Similar to ResTRACK, eTrak comes with a strong report module that offers several “canned” reports. It also allows for the use of Crystal Reports,
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Access, Excel, and Paradox. Currently, eTrak offers five canned reports: All Tickets (both used and unused), Unused Segments Only, Unused Tickets Only (if one coupon is unused, entire ticket shows), Summary/Unused Segments, and Summary/Unused Tickets. More reports are to be added soon.
CHAPTER
17
AUTOMATING THE T&E REPORT PROCESS 17.1 INTRODUCTION Ask accounts payable managers what causes them the most grief and more than half will say the handling of travel and entertainment (T&E) reports. The “personal” nature of T&Es (especially in those organizations in which individuals pay the credit card balances themselves), combined with the highly intensive paper handling, account for the difficulty. Thus, anything that makes the process easier is welcome. Automation heads the list. This chapter looks at the automation processes currently being used to help facilitate this function. And because many companies still insist on indepth checking, which impedes the process, this chapter also introduces ways that leading-edge companies have successfully implemented automation solutions to address this problem area. 17.2 MAKING THE MOST OF DIRECT DEPOSIT Fair, Isaac, and Company Inc. has enjoyed a 95 percent or better participation in its direct deposit program. Thus, its employees are accustomed to not receiving a check. “Most of our workforce travels and incurs reimbursable expenses at least occasionally,” says David Warren, the company’s accounts payable manager. “It has long been a source of complaints that we were unable to also give employees direct deposit for expense reimbursement,” he explains. The company was receiving requests from vendors to be paid either by wire transfer or through the automated clearinghouse (ACH). Fair, Isaac began searching for a quick solution in the summer of 1997. “We wanted to get a ‘pretty good’ solution in place quickly,” says Warren, “rather than a more complete and expensive solution several years later.” 146
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He worked with a programmer and, where needed, several other employees. He talked to other companies in similar positions that had already implemented solutions. The company decided to use the standard Oracle payment processing, to generate an output file, and standard communication software and modem to send an ASCII file to the bank. An hour after the files is sent, he contacts the bank and downloads a results file. He says that, throughout the process, the company received good support from both BankAmerica and Oracle. To test the new approach before going live companywide, 20 volunteers were recruited from the finance department. The company ran test transactions for five weeks, which were for one cent plus any actual expense reimbursements. The company then added several dozen frequent traveler volunteers; and less than six months after the initial discussion, the system was introduced. Initially, the company continued to provide the standard paper remittance advice for T&E reimbursements. It routed these through interoffice mail. When employees—especially those who traveled a good deal—complained, the company developed an e-mail notification system. Application forms were also improved, and were made available on the Web. Warren hopes to eventually be able to send the file to the bank via the Internet, with the confirmation from the bank coming through e-mail. Is the program a success? “We currently have around 65 percent of our employee expense reimbursements using employee direct deposit,” explains Warren. “We have had occasional problems with direct deposit delivery. However, the requests for replacement checks vastly exceed the requests for direct-deposit replacements.” The numbers speak for themselves.
17.3 SPREADSHEET APPROACH Technology need not be costly or complicated. Many accounts payable professionals simply develop their own application using spreadsheets such as Excel or Lotus. “The best system I have seen belongs to Microsoft,” says one accounts payable professional. “There were some rumors the company might sell this,” she adds. A number of computer-proficient accounts payable managers have created their own spreadsheets to handle their company’s T&E processes. It is not difficult for those who have basic spreadsheet skills. If you or someone on your staff has the necessary computer skills, this might be an approach that would work in your company.
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17.4 ONE-CARD INTRANET-BASED SOLUTION With more than 100,000 employees in three countries using eight different credit cards for business purposes, General Motors’ T&E processing was ripe for an innovative change. The company consolidated all employee corporate charge cards into a single, multifunctional card supported by one expense summary and management system. General Motors expects to reduce its costs by a whopping 93 percent, primarily by eliminating the costs associated with the handling of paper expense reports. To handle this business, General Motors chose Citibank, which teamed with Captura Software of Bothell, Washington, to provide a global intranet-based system. “We’re calling this new and innovative expense management solution a win-win-win,” says Bill Wimsatt, General Motors’ manager of accounting services. “It simplifies business travel and procedures for employees, and offers them a faster turnaround in expense reimbursement.… It saves the company a few million dollars a year; and it provides us with important financial information we can use to strengthen our leverage with suppliers in our corporate travel business,” Wimsatt continued. The new card offers General Motors and its employees many benefits. It will be intranet-based, so only those with approved passwords will be able to view information. All expense summaries will be filed electronically in the language and currency of the employee’s local country. The new card will be used primarily in the United States, Mexico, and Canada, so, initially, the languages available will be English, Spanish, and French. The new card greatly simplifies the life of the traveling executive. When employees access the secure intranet site, all charges made to their corporate card will already be visible in the system. Employees need only validate the charge card transaction by pointing and clicking. The company benefits not only by the tremendous reduction in costs, but also by the new system’s capability to aggregate data. The use of technology and this intranet-based solution allows General Motors to identify similar processes going on in different parts of the company. With this information, it identifies opportunities for huge savings and increased efficiencies. 17.5 IN-HOUSE VERSUS THIRD PARTY Like many of their peers, the professionals in the first two scenarios are reluctant to use one of the commercial products on the market because of expense. The initial price of these products, along with maintenance costs,
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can be high. Therefore, the cost of developing an in-house system has to be weighed carefully against the price of a third-party application. But this is just the beginning of the analysis. Many companies believe they can develop a customized system that meets their T&E needs at a lower cost than one provided by a third party. However, allocating information systems (IS) resources to accounts payable is often low on a company’s priority list. Thus, even if it can theoretically be done at a lower cost in-house, it is important to determine if and when programmers will be made available to work on the application. Finally, it is necessary to determine how important improving T&E handling is at a company. If only a small number of employees actually travel, it will be difficult to make a case for either an expensive third-party solution or allocation of the company’s limited IS resources. Accounts payable professionals who fall into this category might find it worth their while to try and use their own skills to develop an acceptable module. By taking different pieces of the solutions discussed here, you may be able to develop a solution that will work in your company.
CHAPTER
18
VALUE-ADDED TAX REFUNDS
18.1 INTRODUCTION U.S. travelers to other countries, principally Europe and Canada, are eligible to reclaim certain taxes they paid while traveling abroad. These taxes are generally paid as part of various bills, such as hotel, conference charges, and so on. That said, reclaiming these amounts is not so simple, and when it comes to business travelers it generally falls upon the shoulders of the accounts payable manager who is responsible for T&E reimbursements to make sure the company gets its money back. Many companies are not even aware that they are entitled to get this money back, and others have no idea how to go about doing so. What is reclaimable varies by country, and the rules for doing so are not consistent. Needless to say, the instructions are not all that clear either. Anyone who has ever tried to collect value-added tax (VAT) payments made while traveling overseas knows that it can be a frustrating, paperintensive, and annoying process. Many get so discouraged, they give up and never claim the money they are entitled towhich might be what the VAT authorities had in mind when they made the process so difficult.
18.2 WHAT IS VAT? VAT is a consumer-oriented tax imposed on goods and services sold. Meridian, a company operating a VAT reclaim service, explains that a taxable entity incurring VAT for business purposes may be entitled to a VAT refund in many European countries and Canada. To obtain a refund, an original invoice, together with an application form and other supporting 150
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documentation, must be submitted to the VAT authorities in the country where the expenditure was incurred. In theory, this sounds simple enough, but it is not. Different countries have different rates; moreover, the VAT is recoverable on different items in different countries. For example, the VAT on hotel rooms is recoverable in the United Kingdom, but not in Belgium. 18.3 ASSISTANCE AVAILABLE The companies that know how to reclaim their VAT payments are few and far between. Most need help, and this help can come in one of two forms. There are companies, generally referred to as VAT reclaim companies that will handle the process for you. And for companies that prefer the do-ityourself approach, there is also a company that sells reasonably priced software for this purpose. Which approach is taken will depend on the resources available and the corporate culture.
18.4 VAT RECLAIM COMPANIES Because of the difficulties involved in obtaining VAT refunds, a number of companies have made a business of handling these claims for other firms. The fees these companies earn are typically a percentage of the amount recovered. It may be a flat 10 percent, as in the case of the VAT Clearing House, or a sliding scale depending on what has been collected, as with Meridian. Generally, there is no fee if the company does not recover the VAT, but it is important to discuss this before entering into a contract. There also may be a minimum fee.
18.5 TIME LIMITATIONS: DEADLINES The deadlines for filing VAT refunds can be confusing, as they are not all the same. Meridian VAT Reclaim (www.meridianvat.com) has prepared the following guidelines to assist readers in meeting VAT deadlines: Canada. Canada has a “rolling deadline.” Invoices must be submitted for refund within one year of the date that the invoice is issued. The European governments impose two filing deadlines: June 30 and December 31.
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United Kingdom. The United Kingdom has separate filing deadlines for European Union (EU) and non-EU-based companies. EU-based companies must file by June 30 for expenses incurred in the United Kingdom during the previous calendar year. Non-EU-based companies must submit refund applications by December 31 for invoices dated July 1 of the previous year through June 30 of the current year. Rest of Europe. June 30 is the deadline for all companies to file expenditures incurred between January 1 and December 31 of the previous calendar year. Note: Belgium, the Netherlands, and Ireland allow one to file retroactive claims for invoices dating back several years.
South Korea. Similar to most of Europe, the Korean government imposes a deadline of June 30, by which companies must file invoices for expenses incurred during the previous calendar year. Accounts payable professionals who are aware of these dates can share them with their international travelers to ensure that they get the original invoices needed in a timely fashion. This enables accounts payable professionals to either apply for the refund or forward it to their VAT refund outsourcer before the deadline. 18.6 FOCUS ON VAT-FRIENDLY COUNTRIES Companies that wish to handle some of the work themselves should focus on the so-called Big Four, the countries providing the biggest refunds with the fewest headaches: Germany, the Netherlands, Sweden, and the United Kingdom. Corporate VAT Management suggests either ignoring or allowing a third party to handle the difficult countries, such as France, which requires an in-country agent, or Italy, where it traditionally has taken as long as five years to see any money. 18.7 FOCUS ON VAT-VALUABLE EXPENSES The biggest return for most companies will be in the refunds garnered by hotel bill, car rental, conference attendance, and trade show participation. Focusing on these expenses in the four countries just mentioned will enable most accounts payable managers to generate the largest refunds. Corporate
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VAT Management estimates that 90 percent of all travel-related refunds come from these categories. Nontravel-related expenses, such as telecommunication charges and legal and other professional fees, are also often eligible for refunds.
PART FIVE
TECHNOLOGY Technology is changing the way just about every job is done today and the accounts payable functions are no exception. EDI (electronic data interchange) has long been a part of accounts payable but in the last few years, e-mail, the Internet, e-Marketplaces, XML (eXtensible Markup Language), e-invoicing, encryption, digital signatures and imaging are just a few of the technologies affecting accounts payable today. While initially accounts payable was one of the last areas in a company to get computers and new technology, this is changing. Because of the nature of the functions, technology is changing accounts payable perhaps more than many other areas. Accounts payable professionals who want to get ahead has no choice but to keep up with technology–otherwise, they will be left behind.
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ELECTRONIC DATA INTERCHANGE
19.1 INTRODUCTION Mention Electronic Data Interchange (EDI) and watch eyes begin to glaze over and heads begin to nod. So right up front, here is an admission: This is not the most interesting topic in this book; however, it is important. EDI involves the electronic transmission of data, usually between a buyer and a seller. Note Due to space limitations, this chapter provides a basic understanding of EDI; it is by no means intended to be an exhaustive study of the topic.
19.2 WHAT IS EDI? The National Automated Clearing House Association (NACHA) defines Financial EDI (FEDI) as the “electronic movement of payments and paymentrelated information through the banking system in a standard format between two parties.” EDI is the application-to-application exchange of business information in a standard format. 19.3 TECHNICAL BASICS: INTRODUCTION Several types of transactions can be done using EDI, each with its own set of instructions, known in the EDI world as transaction sets. Each transaction set is broken into three areas: The header, which contains data that pertain to the whole transaction. • The detail, which contains information that is applicable to one line item.
•
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•
The summary, which is a small piece containing summary and control details.
As might be expected, the detail section can have many lines, each containing relevant information. The information within each area is called a segment, and certain segments may be used in more than one area. All transaction sets begin with a header, called a transaction set header, and end with a trailer, known as a transaction set trailer. To ensure that everyone is “on the same page” in their interpretation about EDI, standards were developed. The most commonly accepted are those conforming to the American National Standards Institute (ANSI). ANSI uses the term X12 to denote standards that cross industry, function, and company lines. It is not uncommon to hear discussions about ANSI X12 standards. One of the most common transmissions is that of the purchase order from the buyer to the seller. In EDI, this is referred to as an 850 transaction set. The other two transaction sets that accounts payable professionals are apt to run into are the 810s, which represent invoices, and 820s, which involve payment orders/remittance advices. Many companies today are comfortable transmitting information electronically, but just as many resist sending money in this manner. Corporate America is still far too attached to float and stretching payments to use Financial EDI to any great extent. And whereas large companies typically have large-enough technology staffs to help get EDI programs up and running, many midsize (and, in fact, a few larger) companies do not. Not only might these companies not have the technical resources to devote to an EDI project, they simply may not have enough transactions to justify hiring an individual qualified to handle EDI. To fill this market need, a number of companies, initially known as value-added networks (VANs), have emerged to provide such an intermediary service for those that need it. Not to be undone in their own backyard, the banks quickly entered the fray, offering intermediary services of their own. When a bank offers this type of service, it is known as a value-added bank (VAB). These third-party service providers will expedite EDI transactions, and many offer additional related services. 19.4 WHY EDI? Competitive pressures have forced many accounts payable managers to take a hard look at not only their costs, but also their entire accounts
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payable process and how it relates to other systems in the company. In this challenging environment, innovative payable professionals often become corporate leaders in recommending and educating their companies about EDI. Companies are turning to EDI for a variety of reasons, with cost reduction heading the list. The current reengineering craze, along with the downsizing that many have undergone in the last few years, is forcing many managers to turn to EDI as a way of handling increased workloads with smaller staffs. And to their amazement, they have found themselves mostly pleased with the results. The inefficiencies of a paper-based system, combined with the fact that EDI allows for timelier invoicing, are helping to overcome resistance to the concept. Perhaps the most notable reason for turning to EDI in the first place is that trading partners demand it. And once they have tried it, many companies find they like it and expand their use of it. FEDI also helps reduce the incidence of check fraud. The typical manual accounts payable system is a labor-intensive process, with many chances for error. One place where substantial savings can be achieved is by altering the three-way matching process that is typical in many companies. In this method, before an invoice is paid, it is usually matched against a purchase order and the receiving documents from the material management system. Consider this: If the purchase order is matched against the receiving documents, why is an invoice necessary? What if matching the purchase order against the receiving documents were sufficient to pay a bill? (a) OPPORTUNITIES FOR SAVING.
In order for this two-way matching to work, cooperation from both the purchasing and the materials management people will be needed. As a first step, determine whether the current purchase order system is adequate. Does it generate electronic copies? If it does not, using EDI will be problematic. Assuming that the electronic copy is available, is it available to the accounts payable department in an electronic format? Find out whether the output from materials management is available in electronic form, and available in this form to the accounts payable department. And, finally, does the accounts payable department have the ability to match electronically the purchase orders with the output from the materials management department?
(b) IS THE PURCHASE ORDER ADEQUATE?
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In all likelihood, if EDI is not already being used, one or more of the areas just described will be lacking, and programmers will be needed in order to complete the necessary matching. Once this is accomplished, it will be possible to electronically match and pay suppliers through the ACH—or by check if financial EDI is not being used. For items without purchase orders, such as employee travel reimbursements, an electronic invoice will have to be generated and fed through the accounts payable system. (c) EXTERNAL REQUIREMENTS. Once the internal requirements are in place, work with external participants, that is, the suppliers you wish to pay electronically. The first step is to build a secured vendor file. This file should contain the vendor’s name, its bank’s name, ABA, and routing number, and the supplier’s checking account number. Some suppliers will resist handing over account numbers, and they will have to be paid by check. The vendor file will also need to contain some indication by item as to the method of payment: ACH, wire, or check. Also put in this file the invoice number, purchase order number, and adjustment reason data and codification, information typically on the payment stub. Now you are ready for the second step: selecting suppliers for your EDI program. Start with those that are already EDI-capable. Try to sign up a few that will be easy wins so that your organization will have some early successes. Then, when the company is a bit more experienced with EDI, it can tackle those vendors that are resistant.
19.5 GETTING STARTED It is imperative that a sponsor or champion of the EDI concept be identified within the company. He or she has to be a fairly high-level person who has the clout to see that the project comes to fruition. The sponsor must be educated and convinced of the long-term importance of EDI to the company. Without this support, it is likely that the EDI project will be relegated to the back burner as soon as something that others view as more pressing appears. This seemingly simple requirement can mean the difference between the success and failure of a project. Do not try to convert a large portion of your payments to EDI right away. Start slowly, waiting until the company has built up some confidence and expertise with what it is doing before expanding. That way, if something goes wrong—and something always seems to go wrong—fixing it will be relatively easy. Also, if an error entails contacting outside parties, it will only have to be done with a few companies.
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Once you become involved with EDI, it is very easy to get caught up in the technical aspects of the process. But remember, the reason for using EDI is for business purposes. Do not get waylaid by technical questions. At all times, maintain this business focus. Ideally, start the program with someone who has some EDI experience. Avoid, if at all possible, launching this effort with another novice. By starting with a company with experience, your company will dodge the bullet when it comes to making the obvious mistakes. That is not to say that mistakes will not be made—just the easily avoidable ones. 19.6 BUSINESS INFRASTRUCTURE REQUIREMENTS Once the decision has been made to go ahead, it will be necessary to put certain infrastructure changes in place in the accounts payable department. For one, the manager of the accounts payable department will have to ensure that the rest of the department recognizes the importance of their role in the transformation. Accounts payable plays a crucial part in the implementation and success of any financial EDI program at any company. Unfortunately, they are often not brought in until the last minute. Once the team realizes this and steps up to the plate, half the EDI battle will have been won. Having accepted their role in this effort, it will be necessary to provide the staff with adequate training about EDI. This will help ensure the success of the program. Without adequate training, the program will flounder, increasing its odds of failure. Next, it is usually advisable to appoint one person as the EDI coordinator. Give this person the overall responsibility, not only for the program, but to become the departmental expert. By having one individual as the focal point for the process, it is less likely that it will become “nobody’s baby.” Inevitably, the introduction of Financial EDI means that the existing work process will have to be redesigned to accommodate the new methodology. This is not necessarily bad, and some take it as an opportunity to review their entire workflow process. Typically, the accounts payable department in an EDI environment has three components: It handles vendor relations, it acts as the disbursement facilitator, and it serves as the control point. This is not that different from the way many corporations run accounts payable without EDI. However, some (rightly or wrongly) view that final check signer as a control feature, and that is gone with EDI. Tight up-front controls are essential for a successful EDI program or duplicate and erroneous payments will multiply.
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19.7 MANAGING ACCOUNTS PAYABLE EDI Once the company has completed all the work necessary to get itself EDIready, the lion’s share of the ongoing work falls on the shoulders of the accounts payable staff. To have a productive ongoing program, it will be necessary to: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
Train the EDI coordinator to read EDI data. Educate others who will have to deal with a lack of paper invoices. Use trading partner agreements. Manage the EDI vendors. Advertise the company’s EDI readiness. Develop and maintain a plan and goals for the EDI efforts. Perform a vendor analysis, looking for those with which a high volume of transactions is done, not necessarily high-dollar transactions. Stay current with ANSI X12 standards. Maintain a dialogue with trading partners. Measure productivity. Create a cumulative EDI transaction log. Test, test, test.
19.8 ACCOUNTS PAYABLE EDI OPPORTUNITIES “But is it worth the effort?” you ask. There are many advantages to using EDI, including continued business viability; automated data entry; fewer error corrections, due to improved accuracy of data; increased velocity of accurate information throughout the organization; improved trading partner relationships; reduction in postage costs; decreased cost of paper supplies; fewer late payment charges; fewer lost discounts; comprehensive audit trail; and decreased product costs. Even if these benefits are not enough to make a company consider using EDI, there is another, often compelling reason to start to move in that direction. Many large companies, most notably in the auto industry, are insisting their suppliers use EDI if they intend to continue to do business with them. Thus, some companies that thought they would never go down the EDI trail were forced down it. And a remarkable thing often happens in these cases: These reluctant Jennies are finding that using EDI makes their lives easier. These companies then begin to expand their own use of EDI, often demanding that their suppliers convert or else.
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19.9 ACCOUNTS PAYABLE EDI SUCCESS FACTORS It is easy for an EDI program to fall off the track and turn into a disaster. Fortunately, there are certain strategies that can be employed to limit the likelihood of that happening. Those wanting a successful end to their EDI story should: • • •
• • • •
Identify a champion and seek out a sponsor. Identify and communicate to all stakeholders. Continually educate not only themselves but also all affected parties. This technology changes constantly, so it requires constant education to keep from being left in the dust. Join and attend EDI user groups and conferences. This will greatly help in the education effort. Maintain at all times a business focus. Communicate with the executives of the company on a business level that they will understand. View EDI as one of many solutions to the ongoing business concerns. Market the fact that the company is EDI-ready.
Following these guidelines will greatly improve the chances of hitting an EDI home run. 19.10 SYSTEMS REQUIREMENTS When deciding whether to implement Financial EDI (FEDI), senior management sometimes forgets that the accounts payable systems will have to be modified and, in many cases, strengthened to meet new requirements. If this is not done in the planning stages, the company may discover at the eleventh hour that the existing computer systems will not accommodate this new technology. But accounts payable managers responsible for the implementation process are well aware that the systems will need to be updated. And the sooner this is recognized and investigated, the more likely it is that the FEDI program will be successful. Those turning to FEDI expand the methods by which they pay their bills. They can now use a check, a wire transfer, an ACH credit, an EDI transfer, and, most recently, corporate procurement cards. Thus, getting bills paid no longer means just having a check run. In order to successfully implement a FEDI program, managers must enhance the following aspects of their systems: modify the Remit to Address field, include a payment method indicator, review trade terms, produce an electronic output file, and
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improve the system flexibility. But before any of these items are changed, the entire accounts payable production cycle needs to be reviewed. An examination of the accounts payable production cycle will help identify areas that need to be strengthened when FEDI is implemented. As no two companies do things exactly alike, weaknesses in this cycle will not be identical. There are a few areas of commonality, however. Companies that place much of the emphasis on checking and control after a check has been produced will need to modify their procedure, because EDI payments will be completed before this stage is reached, hence the control and checking will not take place at all. Controls over repetitive payments also need to be reviewed. This is especially important if the repetitive payments are to be stopped at some point—say, if a loan is completely repaid. Document control and storage procedures, along with retrieval processes, may also need to be changed.
(a) PRODUCTION CYCLE.
As noted, to begin with, the Remit to Address field will need to be modified to cope with a variety of formats. It will have to handle not only addresses where checks should be sent, but also bank transit and routing numbers and account number information. That is the only way that a payment will be able to reach a bank account electronically. Not all systems are set up to deal with this, and early detection of the deficiency is vital.
(b) REMIT TO ADDRESS.
In most systems, it will be necessary to add a field to indicate the method of payment desired. That way the system will know whether to generate a wire, a check, an ACH credit, an EDI item, or even a credit card payment (still a rarity today, but in the future, possibly a big player). Then, when the accounts payable system is run, it will know not only which payment method to use, but also what type of information to look for in the Remit to Address field. These first two items should be preset for payments made to the same vendor for the same type of goods. Once the system is set up correctly, it never needs to be modified, except for changes relating to operations.
(c) PAYMENT METHOD INDICATOR.
The first thing to consider is which terms are actually used. The invoice may say 2/10 net 30, but is the check mailed on the tenth or eleventh day? Are the terms really 2/14 net 30? Then there is the question of what the vendor thinks the terms really are. Most companies that consider FEDI will try to renegotiate terms. Even with vendors (d) REVIEW TRADE TERMS.
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that insist that the check be in their lockbox on the tenth day, there is the matter of when the funds become available. Giving up the float and renegotiating the terms are the two main reasons that FEDI has not been as successful as nonfinancial EDI. The matter of terms has to be evaluated internally, and a decision made. Either renegotiate with the suppliers or adjust the terms within the system to reflect the reality. Thus, 2/10 30 might be entered in your system as 2/14 net 30. A company that wants to take the discount but not give up the float might try adjusting their system in this way for a few smaller invoices. If the supplier does not complain, go full speed ahead with the larger ones. In order to use FEDI, an electronic output file will be needed to be sent to the bank. Is the company’s system set up to do this? If not, can it be modified so such a file can be produced? Many banks will access this information online from a PC or by magnetic tape. Check with the FEDI bank to determine which options are available. Once it is known what the bank can handle, it will be easier to determine how to meet its requirements. By talking to the bank early in the process, some time and much aggravation will be saved. The bank may have other customers using the same systems as the company, and they may be able to save your company some trouble by showing how they modified their system to meet the bank’s requirements. Why reinvent the wheel?
(e) ELECTRONIC OUTPUT FILE.
One thing is apparent: The system will have to be flexible to meet all the demands of the suppliers, especially dealing with the 800-pound gorillas. Even when paying them, they are in the driver’s seat, requiring their customers to do things their way. And there is one thing for certain: No two of the big suppliers will do things the same way. So in this game, once again, flexibility is key. Paradoxical as it may seem, at many companies, the accounts payable managers are not involved in the planning stages for the implementation of an FEDI program. They are typically informed at the last minute and left to deal with the problems that ensue because all the little changes needed to make the program work smoothly were overlooked. Accounts payable managers whose companies are considering such a program must demand to be included in the planning stages. This will ensure that none of the crucial day-to-day details will be forgottenthat is, until the program fails. Accounts payable professionals who are involved (f) SYSTEM FLEXIBILITY.
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from the beginning will give their company a much better chance for success with their FEDI programs.
19.11 TRADING PARTNER DIRECTORY One of the most common complaints of many wanting to use EDI is the fact that it is difficult to determine which companies have the capability to receive EDI payments, thus to find trading partners that are willing and able to work with them. And, as mentioned earlier, those sticking their toes into the EDI waters for the first time should, ideally, start with a partner that has already had some success with EDI. How does an accounts payable manager find such companies? To help in this matter, NACHA’s Bankers EDI Council has developed a list of Corporate Payment Key Contacts. This listing can be used to: determine whether a trading partner originates or receives financial EDI; identify the name of the contact for that trading partner; and discover its financial capabilities. The list is broken into two categories: those companies that can receive and those that can originate. Many companies are in both categories. To obtain a copy of this list, contact NACHA at (703) 742-9190, or send a fax to (703) 787-0996. The list is updated three times a year. (Note: Companies that are EDI-capable and are not included on the list are urged to contact NACHA at the numbers given and ask for a Corporate Payment Key Contacts update form.)
19.12 EDI STANDARDS One of the many issues that hang like a cloud over EDI is the existence of more than one set of standards. As those who use it are only too well aware, there are multiple settlement systems (ACH and Chips), multiple data transmission mechanisms (including VANs, VABs, and the Internet), and multiple data format standards (most notably, ANSI X12 and EDIFACT). So what is a company to do? Which standard should it choose? Answering that question is not as complicated as it might appear at first. Choose standards based on what your trading partners are using, advise most experts. It is likely that ANSI will remain the U.S. standard; thus, if you are dealing domestically only, the choice is simple: ANSI. If your company is global, then other decisions will have to be made in this regard.
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19.13 EFFECT ON SUPPLIER PARTNERSHIPS Accounts payable professionals who are looking for ways to improve their relationship with purchasing can do so by enhancing supplier relationships, something that is usually out of the realm of most accounts payable managers. The most successful EDI programs are those that identify the benefits for both sides. By pointing out these benefits and making the EDI program as flexible as possible, the accounts payable manager can accomplish this. Flexibility is not an attribute normally associated with EDI programs. 19.14 CONVINCING MANAGEMENT Most accounts payable professionals know the benefits of using EDI and FEDI in the accounts payable department, but convincing upper management can be another story. But by presenting the advantages in a clear and concise manner, it may just be possible to make your case. If, for example, you can show management how to increase their net profit margin by 33 percent, you will have their full and undivided attention. The greatest benefits from EDI come when there is a full cycle implementation, starting with the purchase order (PO), through the delivery/invoice stage, and ending with the payment. Many companies take the opportunity to reengineer their work cycles as they implement EDI. When done simultaneously, the benefits increase exponentially. Some of the cost savings that result directly from implementing FEDI include postage costs, check stock, labor, reconciliation costs, and check fees. But this is only the beginning. There are other benefits that may not be directly attributable to FEDI, but that would not be possible without it. These include: Inventory reduction • Improved cash forecasting and accuracy • Reduction in accounts payable fraud • Lower incidence of errors and, consequently, less time spent resolving discrepancies •
Sophisticated technology makes it harder for those intent on committing fraud and, at the same time, implements controls at lower costs. And, with no checks around, there is no concern that someone, either in the department or mailroom or elsewhere, will walk off with a handful of checks— either written or blank.
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19.15 FEDI APPLICATIONS Most companies are already using FEDI, and they do not even realize it. Any company that has a direct deposit payroll program has already begun to use FEDI. The other major application is vendor payments. But there are a variety of other applications: tax payments, pension fund payments, child support withholding, utility payments, and healthcare payments. Insurance companies also use it to make annuity payments. 19.16 COST-JUSTIFYING FEDI Small savings can make a big difference in certain circumstances. For example, a company with $200 million in sales and $160 million in sales costs has a gross margin of $40 million. If variable expenses are $16.4 million, and fixed expenses are another $20 million, there is a net profit of $3.6 million, or a net profit margin of 1.8 percent. With the implementation of FEDI, the company in this example was able to decrease the cost of sales by 0.5 percent and variable expenses by 1 percent. On the face of it, these savings do not seem earth-shattering. The net profit margin increases 33 percent to 2.4 percent. These numbers will get management’s attention. However, keep in mind that these increases represent only the quantifiable improvements. It is difficult to quantify the effects of improved customer service, greater accuracy, and more accurate cash flow forecasting. Accounts payable professionals who are able to present the benefits of FEDI and back them up with attention-grabbing numbers will be well on their way to winning over an initially uninterested management team. 19.17 GETTING UP THE EDI LEARNING CURVE Most professionals, regardless of their training, know very little about EDI, so the accounts payable professional who falls into this category need not feel alone or inadequate. More important, there is much they can do to get shorten the learning curve. By doing this, and before the rest of the company catches on, accounts payable professionals may put themselves in the unique position of becoming the FEDI authority within their companies. Becoming the company resource for anything is never a bad career move. The following subsections describe what accounts payable professionals can do to become the EDI expert in their companies.
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Meet with other people knowledgeable about EDI. You can do this under the auspices of attending trade shows, professional meetings, conferences, and seminars. Some that might be useful include: (a) DEVELOP A NETWORK.
•
• • • • •
Local EDI/electronic commerce (EC) user groups. Find these by looking in the excellent magazine, EDI World. The magazine can be reached at (305) 925-5900. The dues for these groups are usually minimal. Industry/trade associations. Association for Financial Professionals, which can be reached at (301) 907-2862. NACHA affiliate groups. NACHA can be reached at (703) 742-9190. Software vendor steering committees. ANSI ASC X12. This group meets three times a year, with workgroups meeting more frequently.
(b) READ, READ, READ. Education can be the key to success in any endeavor, and the EDI field is no exception. Much of this learning can be done in your spare time by reading relevant publications. Several useful publications that include EDI information are: • • • • • •
Corporate Financial EDI User Guide AFP Journal EC World EDI News Corporate EFT Report IOMA’s “Report on Managing Accounts Payable”
Vendors are also a wonderful source of information. Ask the salespeople who call to add your name to their vendor newsletter mailing list. Also visit the vendor’s Web site regularly, if one exists. When attending conferences and trade shows, buy tapes and obtain handouts from as many sessions as possible. Knowing what is available is crucial to the accounts payable professional who wants to stay on top. Even if your organization already has an EDI program in place, or falls into the category of “never gonna happen here,” it is still important to know what is available. You may change jobs, or your company may change its
(c) STAY INFORMED AS TO WHAT IS AVAILABLE.
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focus. It is amazing how things can change when a new boss comes in or when a big supplier says “Jump!” Shrewd accounts payable managers are informed before their companies are ready to move. The EDI areas that you should investigate on a regular basis include: hardware, software, VANs, VABs, models, applications, and best-in-class practices. By identifying companies with best-in-class practices, you can approach them and ask how and why they did what they did. This will be less difficult if you already know someone at the company from your networking. (d) GAIN EXPOSURE. Professionals who have accumulated a wealth of EDI information are in a position to become a resource for others. This will enhance their reputations, and is not as hard as it may seem. Some ways to do this are:
Speak at industry meetings and/or conferences. • Publish articles. Most trade magazines are happy to get contributions from practitioners who have successfully implemented some new EDI technique. • Volunteer. • Get involved in the relevant organizations. •
19.18 INTERNET EDI Although the technocrats have been singing the praises of EDI for years, corporate America’s acceptance has been painfully slow. Many find the topic excruciatingly boring, difficult to understand, and, occasionally, expensive to implement. The standards issues have not been resolved to all participants’ satisfaction, further hurtling EDI into the abyss for many corporations. All that is about to change as the Internet invades the EDI world, just as it has many other facets of everyday life. The Internet levels the playing field by allowing small companies to play for the same cost as their much bigger cousins. In short, it lowers costs and decreases processing time for all participants, regardless of size or technical know-how. In spite of this new level playing field, a surprisingly small number of companies have stepped up to the plate and begun to play. EC World estimates that few companies are now using Internet EDI. The publication theorizes that the reason is corporate fears regarding security. It is anticipated, though, as companies become comfortable with the various methodologies now available for handling a secure transaction, this will
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change. Additionally, as executives become comfortable with e-mail and continue to look for ways to reduce costs and improve productivity, EDI will look even more attractive. Thus, it is imperative that those accounts payable professionals who have largely ignored the topic begin to get up to speed on EDI. (Unfortunately, its increasing importance doesn’t change the fact that reading about EDI is anything but stimulating.) 19.19 WEB EDI: AN IDEA WHOSE TIME HAS COME “EDI promised you the moon,” began Harris Bank’s Hamish Forrest at a recent accounts payable conference. Forrest believes that many companies have found that their EDI programs do not live up to the original expectations or the original business case. The theory sounded great and management teams across the country bought into the theory; in practice, however, it was quite different. Accounts payable professionals who were running the programs discovered that although they were EDI-capable, many of their trading partners were not. This was due to EDI’s cost, its inflexible nature, its user-unfriendliness, the technology, and the fact that it was primarily a mainframe application. “Due to these gaps, plus a number of other critical issues,” says Forrest, “companies have started to look at the Internet as an alternative means of delivering business documents.” 19.20 SECURITY AND STANDARDS ISSUES Those concerned about the possibility of interlopers viewing corporate secrets, manipulating private data, or worse, diverting funds, have steered clear of the Internet. These issues are exacerbated as each group tries to force its own standard as the market. To date, such strategies have only resulted in less-than-optimal usage, as corporate America throws up its collective hands and waits to see which company and standard emerges as the winner. Recognizing that no one wins in these circumstances, several groups have taken a different tack and are dealing with these concerns. 19.21 WHY THE INTERNET? As these issues are addressed, the Internet will become the ideal medium for transmitting information, thanks to its ease of use. Already, EDI documents are being translated into HyperText Markup Language (HTML) format, the Internet standard, and from HTML format, as well. The Web
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servers that host these networks also typically handle e-mail, encryption, and digital signatures. As most reading this are well aware, the Internet can be accessed from any PC that is properly (and relatively inexpensively) equipped. Thus, even the smallest of companies can complete a transaction, from purchase order to the payment stage, online. This capability opens the EDI world up to anyone with a PC. Accounts payable professionals who have seen use of the Internet and EDI beginning to trickle into their everyday workplace will soon find it bursting into their departments and infiltrating many of their transactions. It is only a matter of time. 19.22 SPECIAL APPLICATION: ACH DEBITS FOR TAX PAYMENTS Any accounts payable manager recommending the use of an ACH debit is likely to see scowls, or worse, on the faces of management. Just the idea of letting another party debit a company’s bank account can raise questions about the manager’s business judgment. “Are you crazy?” was the response one such professional received when she mentioned the idea to her boss. Take this notion one step farther and imagine suggesting that the party you would like to allow to access your account is none other than the federal government. In many organizations this would be considered lunacy. But this is exactly what a small but growing number of companies are doing. In some companies, the consequential-damage issue regarding nonpayment or late payment of taxes has also helped management reconsider its position on this issue. Several banks have developed products to allay some of management’s fears. Before delving into this topic in detail, it is necessary to take a look at a few related issues, including these:
(a) BACKGROUND.
Almost every organization has some experience with the ACH, although many do not associate the most common usage with the ACH. Any company that has a direct deposit payroll program is using ACH credits. • Not everyone realizes that anyone can initiate an ACH debit against a bank account. Unless a company has specifically advised its bank that no ACH debits against its accounts are to be honored, any and all such transactions will be accepted. Most companies have never given this matter much thought and so have not apprised their banks to reject such exchanges. So, if management’s first reaction is that •
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they would never allow such an action, you might cautiously suggest that, by virtue of their inaction, they already have. • The federal government and many state governments are already requiring certain categories of companies to make all tax payments electronically. The current federal guidelines, for example, state that any company paying the federal government more than $50,000 in taxes must make those payments electronically. Basically, corporations are offered the option of paying through an ACH credit or an ACH debit, with the federal government—big surprise—much preferring the ACH debit method. Firms can also use a Fedwire, but there is a debate as to whether one can be used in anything but emergency situations. The federal government has made it clear that it prefers the ACH. Companies going the Fedwire route do so at some minimal risk if the payment does not make it. The credit method has been perceived to be the less risky model by most. But is it really less risky? By using the credit method, only the account user has access to the account and, thus, is the only party that can release the funds for payment. However, if something unforeseen occurs with the payment/transfer, the business (tax payor) is liable and may be subject to interest penalties or fines. When moving in uncharted waters, it is always possible to imagine the worst, and that is exactly what happens when the topic of ACH debits arises. Everyone envisions a decimal point being shifted or a zero or two added, or worse. The concerns of businesses regarding ACH debits can be broken down into three main areas: (b) ELECTRONIC FEDERAL TAX PAYMENT SYSTEM REGULATIONS.
The issue of letting anyone debit a firm’s bank account. • The need for control over the timing of the debit to make sure there are adequate funds in the account to cover the transaction. • The need to regulate the amount of the debit. •
Several banks have developed a service that mitigates both the real and perceived risks associated with the debits. It allows a company to tell the bank when to expect the debit transaction and how much it should be for, while still giving the federal or state government the responsibility for initiating the transaction as it prefers. This completely removes the liability for late payment from the shoulders of the company.
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By working with its customers, the banks have developed a method of allowing the government to debit the business account by sending an 820 file to the bank, to ensure that only authorized payments are made for the proper amounts within a prespecified time period for a prespecified amount. Some of these products introduce a much-needed flexibility into the process. By setting tolerance levels, a company avoids the problem that might be encountered if the dollar amount or date is off slightly. These variances may be as little as a dollar or one or two days. Whether or not most companies will allow ACH debits for tax payments, it is becoming increasingly clear that electronic payment mechanisms will become a standard way of operating for some portion of payments made by virtually all U.S. companies within the next few years. Within that time period, accounts payable professionals will have to become conversant with all the options. In the short run, however, there is a more pressing concern: deciding whether to stick your neck out and recommend ACH debits.
(c) MAKING THE MOST OF ACH DEBITS.
CHAPTER
20
IMAGING
20.1 INTRODUCTION With technology prices dropping, combined with the push for higher productivity and lower operating costs, imaging systems are beginning to appeal to a growing number of companies. Imaging is the comprehensive capture, storage, retrieval, and management of digitized paper documents and/or computer-generated data files. Initially, it was used in concert with highcapacity optical storage subsystems, digital scanning devices, and modified laser printers. This no longer is always the case. Imaging helps accounts payable departments in the following ways: •
Reduces storage costs, due to less need for filing cabinets.
•
Improves accuracy, because information is not rekeyed, but entered once.
•
Reduces clerical time spent filing and retrieving documentation.
•
Reduces time and frustration related to routing invoices for approval, which can be done electronically.
20.2 POOR MAN’S IMAGING At a recent accounts payable conference, one of the speakers mentioned putting a $75 scanner on all clerks’ desks. Clerks needing to send copies of invoices or checks run the document through the scanner, download it into the software, and fax it to the appropriate party. This “poor man’s” version of imaging saves the staff time spent at the copier and fax machine. 175
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20.3 PLANNING FOR FULL-SCALE IMAGING The most successful imaging programs, such as the one used at a very large construction company, take into account the requirements of all affected departments. The accounts payable manager describes the process as follows: We spent last year meeting with all departments involved directly (purchasing and accounts payable) and indirectly (billing, cost engineers, etc.), working out ways to easily accommodate everyone’s needs to access information. The advance work paid off within a month of the imaging system installation. Everyone felt comfortable and appreciated its convenience. Accounts payable has especially benefited. The department can bring up purchase orders immediately for review with invoices. We no longer have to wait until they are printed, distributed, and filed before we can access them. Accounts payable no longer has to maintain paper files for each fiscal year, and lost and misfiled check copies are no longer a concern. We have seen a great savings time-wise: We are able to process more invoices quickly and have more time to spend processing invoices, as opposed to filing all the paper.
20.4 USING FULL-SCALE IMAGING WITH E-MAIL When imaging is married to e-mail, productivity savings can be impressive. The manager of disbursement services of a large utility company explains how it works in his shop: During the last year, we have implemented an online approval process for our service-related invoices. This has eliminated as much as five days’ mail time each way throughout the company. Approvers have the option of requesting, at the click of a button, a fax copy of the invoice, which has been scanned. Imaging invoices and the associated online approval process has greatly reduced the amount of paper the processors must work with, while ensuring that the authorized employee performs the approval.
This system completely eliminates the chance of the paperwork getting lost in the mail. Of course, using any of these large-scale systems will work best at larger companies, which are willing to make the financial investment necessary to obtain imaging equipment.
20.5 IMAGING ON A SMALLER SCALE Although, as described so far, it might seem that imaging will work only in organizations willing to invest large sums of money, this is not true. As
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indicated earlier, though imaging equipment is not cheap, there are several options for those looking to make a smaller investment. These include: •
Outsourcing the imaging work to a third party. Even large companies are taking this as a first step, to gauge whether using imaged documents is a big productivity saver.
•
Using imaged documents that others provide. The most notable example is getting the paid check file back from the bank on a CD-ROM. You can then load this onto the network and allow any party with a need for or interest in this information to access it. If your company is reluctant to use imaging, this is a good first step. As people become familiar and comfortable with this process, they may grow willing to look at additional applications.
Accounts payable professionals who image their checks report the ability to go into the file, find the check copy, and “copy and paste” the information into a letter. This is a handy feature when writing to a vendor that claims not to have received payment. As most banks image both the front and back of the check, you will be able to include the vendor’s endorsement showing where the item was deposited and when the check cleared the bank. Sending information in this manner makes the communication almost instantaneous. Compare this to the old method of digging out the check, making a photocopy, and mailing or faxing it. Mail has the inherent time delays, and fax copies are often of such poor quality that the endorsement and dates are almost impossible to read. Today, relatively inexpensive technology is within the reach of virtually every company, even if it is not planning to use full-scale imaging. The point is, imaging is here to stay. Those accounts payable professionals who find ways to use itbe it full-out or as a supplemental responsewill improve their departmental productivity while eliminating some of the more tedious work for staff. 20.6 OVERVIEW The imaging process consists of: •
Capture and index
•
Delivery
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Storage (both online and archived) • Retrieval •
The most critical step in the procedure is the capture and indexing phase, because the other steps depend on it. Most companies that use imaging do so for a variety of reasons. They tend to see benefits in the following areas: • • • • •
Improved processing Improved security Integration Customer service Document storage
Of course, as with any new technology, there are issues that need to be resolved. They include: •
Index structure. This is not standardized, and those purchasing imaging systems should make sure that the index structure offered is one that will meet all their requirements.
•
Cost. Although prices have dropped, this technology is still expensive by certain standards. Make sure you understand all the costs before purchasing a system. This is also important if you do not purchase your own equipment, choosing to go with the offerings of a third-party service provider.
•
Lack of standards. Many experts believe that although there is no conformity among manufacturers currently, standards will emerge within the next few years. It is in the best interests of the manufacturers, especially since there does not appear to be any Microsoftsize imaging providers.
•
Legal acceptance. Some professionals are concerned about not having an original document in case of legal action. Currently, most professionals feel confident that the best evidence rule will hold up; that said, it’s important to point out it has not been tested at the state level in all locales yet. Needless to say, no one is anxious to be the test case.
•
Disaster recovery. The issues in this arena are virtually the same as in a paper-based environment.
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20.7 IMAGING IN PRACTICE: GROWING PAINS As with any new process, companies will experience growing pains following the implementation of imaging systems. The companies that allow their banks to image paid checks for them typically also allow them to destroy the checks. This policy, known as truncation, can cause concern in auditing and legal circles. The following describes the experiences at a number of companies. The checks written at an insurance company using this approach were not of a size to cause significant concern. The company decided that, even though it was not comfortable with the current rulings regarding the legal acceptance of imaged copies in the event of court action, it was willing to accept this risk. This company did not feel it had a large financial exposure, as it does not use this process for claims checks. Another company’s internal auditors were not happy about the process, so it turned to an outside law firm that researched the issues regarding rules of best evidence. After the company received a satisfactory opinion from its attorneys, it decided to move ahead. And, finally, because the checks are destroyed, as one accounts payable professional pointed out, certain costs are eliminated. He revealed that his company no longer paid check-sorting fees. A move to imaging can also save some bank fees, though it still is not free. Another professional stated that imaging costs between one and two cents per check more than microfilm. Of course, the time saved not having to deal with microfilm (or microfiche) is not factored into the cost. Overall, the problems of imaging are far outweighed by the benefits, which include: •
Information is at people’s fingertips. No longer do they have to write down information, pull a check from the file, make a copy, then mail or fax it to whomever needs it, and, finally, refile the original check, hopefully correctly. Instead, the phone call is taken, and without even getting up from the desk, a copy is retrieved from the computer, and with a few clicks is faxed to whomever needs it. And, of course, this eliminates all cases of misfiling.
•
Clerical personnel who never had access to a PC at work were thrilled to be given the chance to learn. Sure, there was a learning curve, but a very short one (usually a few hours or less, in most cases). Morale was lifted by this job-enrichment feature, a side benefit that, in most operations, came as a complete surprise.
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By using cut-and-paste features in conjunction with e-mail and computer faxing, internal requests for information can be turned around very quickly. • Efficiency and storage savings are important. Because imaged information is saved on CD-ROMs, the amount of space needed for storage is significantly reduced. •
20.8 LEGAL ACCEPTANCE As noted, companies using imaging do not keep original documents. Though this is one of the advantages of using this new and dynamic technology, it is also one of the primary areas of concern. As most accounts payable managers are well aware, original documents are usually required when a legal controversy develops; and with imaging, the original is long gone by the time the lawsuit unfolds. This issue has some Nervous Nellies worried, but, while worth considering, it is probably overblown. Although, as stated earlier, the matter has not been tested in every state, most legal experts believe that the imaged document or check will be accepted by the courts, if you can demonstrate that it is your standard business practice to use imaging. Helping the cause is the fact that the IRS and the Federal Reserve have been leaders in the move to accept imaging, a fact that might be used to prod management if they are dragging their feet when it comes to implementing this technology. In legal cases, it is also important to show that the imaged document is stored in a manner that prevents alteration. It is also though that the issue will fade in importance as the use of this technology becomes more widespread and accepted. Finally, microfilm and ASCII files have been accorded circumstantial trustworthiness in federal courts since 1975. Many believe that this acceptance will be extended to other electronically archived documents as well.
20.9 DISASTER RECOVERY Every professional worries about disasters, both manmade and natural. Whether a paper-based or imaging system is used, and whether a system crashes or is attacked by a virus, or is destroyed by fire or flood, the result is the same. The information is lost. Most companies have addressed this issue for their paper systems; now those contemplating imaging have to do
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the same for this new system. The simple solution is to store duplicate images offsite. Discussing the matter with both your vendor and your peers at other companies is a good first step to devising a workable plan for your company. Evaluating these matters carefully with them will enable you to determine which of their concerns and problems apply to the operations of your own company. You may be surprised to discover that the concerns that once stood in the way of implementing an imaging system at your company have evaporated.
20.10 FREQUENTLY ASKED QUESTIONS ABOUT IMAGING To help readers just getting up the imaging learning curve, we’ve prepared the following list of commonly asked questions. What is imaging? The comprehensive capture, storage, retrieval, and management of digitized paper documents and/or computer-generated data files. It is normally used in concert with high-capacity optical storage subsystems, digital scanning devices, and modified laser printers. Who needs imaging? Any organization in which paper plays a central role in the day-to-day success of the enterprise. Accounts payable departments certainly meet this criteria. According to ComputerWorld, 95 percent of all documents are in file cabinets. The cost of owning and maintaining a standard file cabinet is $880 per year. Executives spend more than 150 hours a year looking for information that was misplaced, misfiled, mislabeled, or lost. The cost of each misfile averages $120. How does imaging work? Documents are fed into a scanner that digitizes the information and then indexes it. This allows the end user to later retrieve the actual image of the document if needed. Is imaging just for big companies? Absolutely not. A number of lowcost products are available on the market today. Of course, these are generic imaging software packages that would need to be customized for individual accounts payable applications. Alternatively, software customized for AP can be purchased. Do you need a lot of expensive equipment? Not necessarily. While high-end, super-fast equipment can still cost a bundle, inexpensive
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scanners are well within the price range of most accounts payable departments. Of course, the inexpensive models bought at the local computer shop will not have all the bells and whistles of their higher-priced competitors. What about the software? Will the staff have to forgo raises in order to pay for it? Again, the cost will depend on how many users you will have and which bells and whistles are added to your system. To put the software question in perspective, Optika Imaging Systems, Inc. indicates that its averagenot smallestorder is for $25,000, and this includes five users. Is it difficult to learn to use? That all depends on the computer sophistication of those using the imaging system. According to Optika, many find that it actually enhances the computer skills of their staff. What is COLD? Computer to laser disc (COLD) is a term frequently associated with imaging. It is a microfiche and green-bar-paper replacement solution to process, retrieve, display, and search report information produced from any host computer using optical disk as the primary storage mechanism. Most accounts payable managers welcome any technology that keeps them from having to deal with microfiche or search through those horrible computer runs on green-and-white paper. 20.11 PREPARING DOCUMENTS FOR IMAGING It is true that imaging systems can be incredibly fast, but there is a caveat to this claim. Many who use these systems report that fast speeds are possible only if all the papers fed into the imaging system are in perfect condition. This is rarely, if ever, the case. And most making the claims about speed do not factor in the amount of time necessary to prep documents before they are imaged. This might include tasks such as removing staples and paper clips, copying poorly printed documents, smoothing out wrinkles, and reducing or enlarging documents that are either too small or too large to image easily. Clearly, it is imperative that adequate consideration be given to these details when planning to use a full-blown imaging system. Only a few years ago, imaging was the province of the very large, technologically sophisticated companies; and it was rather expensive. With costs dropping and the capabilities of computers growing exponentially,
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imaging is now within the reach of leading-edge companies of all sizes. As these trends accelerate, more companies will turn to imaging as management continues to expect staff to do more with less.
CHAPTER
21
THE INTERNET, E-MAIL, AND E-INVOICING
21.1 INTRODUCTION Technology has given accounts payable professionals three resources that they did not have a decade ago: the Internet, e-mail, and e-invoicing. Those who are successful are not only learning all about these new technologies but are finding ways to integrate them into their everyday work lives, thus making themselves and their departments more productive. Not all companies have embraced these technologies, however, meaning that accounts payable professionals who educate themselves in these areas can be in the driver’s seat at these companies. 21.2 E-MAIL Without a doubt, e-mail is now a standard tool in most AP departments. A few ways that the technology is being used in leading-edge accounts payable departments include: • • • • • •
To notify individual employees that their T&E reimbursement has been electronically deposited in their bank accounts. To send follow-up messages to invoice approvers when invoices cannot be located. To contact a vendor with a question or discrepancy. To broadcast a message to the entire company regarding month-end cutoff closing dates. To broadcast a message to the entire company regarding a change in any accounts payable process or procedure. To communicate at any time with those in different time zones. 184
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To more easily communicate with those whose spoken English is difficult to understand. • To send copies of purchase orders, canceled checks, or any other document that has been imaged. •
It should be obvious that e-mail can be used in any situation where a phone call would be used; and because it does not matter whether the recipient is available at the time the e-mail is sent, the frustrating game of telephone tag is eliminated. E-mail also makes accounts payable professionals more productive because they no longer must spend time being politely sociable for a few minutes with every person they call. When e-mail is tied into an imaging system, it is also possible to copy and paste, or attach, a copy of a document. No more running to the copy machine to make a copy and then to the fax machine to send the copy. E-mail makes the lives of those who use it a little easier, and it is great for adding a little humor to the workplace, as many circulate jokesunfortunately, sometimes of questionable taste. Good general guidelines for using e-mail are: Keep your messages short and to the point. Divide any run-on sentences into two or more. • Use the subject line to clearly state the topic of your message. • Most important, never respond quickly in anger to an e-mail message. Wait a few hours and review the response. Many an executive has come to regret a response made and sent in haste with temper flaring.
•
21.3 THE INTERNET To most, the many uses for e-mail are obvious; in contrast, the applicability of the rest of the Internet is not as clear. Some use it for research purposes, to, for example, find product or legal information. A number of companies have gone so far as to set up a site that vendors can access to find out the status of a payment. This greatly reduces the number of calls coming into the accounts payable department. But recruitment is becoming one of the major reasons accounts payable professionals are turning to the Internet. The Internet is an ideal tool for recruiting for the most skilled employees in today’s tight labor markets. When looking to hire someone who is computer- and Internet-proficient, what better place to start than the Internet?
(a) FOR RECRUITMENT PURPOSES.
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“But where should we start?” many ask. With a profusion of new job banks, applicant Web sites, and Internet-based employment services, it is difficult to know how best to use these new tools, or which of the new services are the most cost-effective. In essence, there are several ways to recruit on the Internet. Many experts predict that use of the Internet will cut the time and cost of recruiting by 50 percent within three to five years. Examples of how it is being done today include: Postings on the company’s Web site. This requires asking the company Webmaster to put the job listings on the company’s Web site. Though certainly one important avenue to explore for recruiting, it is not necessarily the easiest route. The first and perhaps most difficult aspect of this approach is scheduling time with the Webmaster to put up what, in a growing midsize company, can amount to 10 to 20 jobs per month. Typically, the Webmaster has a dozen other departments to deal with, in addition to your single request. So, getting his or her attention may take more time and effort than it is worth. Then there is the problem of handling the resumes that come back from the Russian Nuclear Science Commission, for example, or in hard-to-read formats such as ASCII text. One easy way to deal with some of this is to simply state that only U.S. domestic English-speaking candidates need apply. • Newspapers that post on the Internet. Nearly two dozen newspapers from The Wall Street Journal to the Houston Chronicle now automatically post their classified adds on one or more of the large online databases of current jobs, like Careerpath.com or Online Career Center. Both sites are easy and fast to use, with searching by region, keywords, and job descriptions. And each offers a wide variety of professions, not just computer and engineering. • Internet resume databases. There are now eight major databases where job seekers are posting resumes. Monsterboard.com and Careermosaic.com are two examples. Monster Board’s resumeposting feature is free for applicants and allows them to change a resume as needed and to send it along to the human resources department at the company that posted a job they are interested in. It costs a company roughly $500 per month to advertise on Monster Board, to post 20 to 30 jobs. Additional features of this Web site are a database of some 4,000 companies, to which companies can add their own profile for applicants to scan; and a service for job hunters that •
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will automatically alert them when a job that meets their criteria comes up. 21.4 CASE STUDY: AN ACCOUNTS PAYABLE DEPARTMENT WEB SITE The Internet is the ideal tool to help harried accounts payable professionals deal more effectively with the challenges they encounter. At a recent accounts payable conference, Intel’s accounts payable controller, Jeff Lupinacci, explained to attendees how his department uses the Internet, and offered guidelines on how payables managers could do it themselves. To begin, do not assume that this was some expensive, fancy project that only an accounts payable department in a Fortune 500 company like Intel could afford. Lupinacci did not use high-powered consultants, but rather accounts payable staffers. The entire project cost under $10,000and that was several years ago; today, it might be less, thanks to falling technology prices. (a) SETTING OBJECTIVES. The most important step in setting up an accounts payable Web site is to determine your objectives. What do you hope to accomplish with the site? Lupinacci determined that Intel needed better customer service both for his internal and external customers, and set out to solve the following problems with the Web site: •
• • •
•
Reduce phone calls. The department received a large number of phone calls from both employees and suppliers. To reduce this number, the company employed 15 people to handle these phone calls. Educate client base. A search was on for a better form of marketing and educating Intel’s client base as to accounts payable requirements. Get feedback. The department needed a method for continuous feedback from customers. Reduce costs. The department required a way to reduce high printing costs of accounts payable forms, as well an easy way to distribute them. Centralize access. Centralized access was necessary so that pertinent information could be distributed to those who worked outside the accounts payable department.
Getting information technology (IT) resources allocated to any department can be a problem, but an
(b) IDENTIFYING RESOURCES AND CONTENT.
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accounts payable department that requests those resources to build its own Web site would perhaps face more obstacles—especially three years ago when both internal and external sites were considered novel ideas. Undeterred, the folks at Intel charged ahead; Lupinacci was also lucky. The site for employees was ultimately put up on an intranet (a closed Internet site for company employees only). For this purpose, the company’s local area network (LAN) was used to host the site. A 486 personal computer served as the Web server. Lupinacci pulled together a team of three people who worked on this project for a four-month period. To ensure the Web content was just right, the team spent two months identifying the information to include on the site, then brought in content/process experts to validate the information. (c) DESIGNING THE SITE. If it is not easy to find information on a site, many people will not use it; it’s as simple as that. Recognizing this fact, the Intel team spent a good deal of time making sure the data was logically arranged. This meant creating a design “bible” before the programming began. It was critical that all information be clear. Lupinacci says that they spent roughly a month arranging the information arranged and making it logically navigable. He also notes that they went through many revisions and “looks” before agreeing on the current design. To ensure that the site was easy to navigate, they limited the amount of animation and pictures. The group identified the appropriate color palette and other visual branding. They also decided which bells and whistles were needed. Finally, the visual identity created for accounts payable was used on all subsequent marketing efforts. (d) PULLING THE CONTENT TOGETHER. As the group reached the point at which the content solidified, they began converting the files and graphics into formats used on the Web. They chose Anawave’s Hotdog Pro and used very few graphics because of their increased demands on the systemgraphics, though they make a site visually pleasing and entertaining, also reduce the speed at which it loads, thereby frustrating users. The formatting was difficult to accomplish because sites may appear one way on one computer using one browser and another on a different computer. The group had to find a format that looked good on multiple configurations. Lessons to learn here for those developing their own sites is to take cross-system compatibility into consideration and test their new site on more than one computerif possible, on an IBM clone and an Apple, and,
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of course, Microsoft Explorer as well as Netscape Navigator. Also keep in mind that, from time to time, it will be necessary to create new content or update old. Therefore, make allowances for this in your budget process and allocate staff time to take care of this chore. Quality control is another issue. Lupinacci emphasizes the importance of proofreading the site content, as it is very easy for spelling errors to creep in. It is also important to install hardware that can support the number of visitors you anticipate at the site. He recommends spending at least two weeks testing and quality-checking the site, and strongly warns against launching too early. Instead, tell only a few loyal users and let them experiment with it until you are sure you have worked out all the kinks. When Intel’s accounts payable department launched its Web site, access was limited to those in the department. Feedback was solicited via survey and e-mail, with Lupinacci providing incentive for everyone to check it out. The test phase lasted three weeks, with more than 100 people providing input.
(e) TESTING THE SITE.
You may think that once your home page is up and running, the battle is over. On the contrary, it has just begun. The next task is to make others aware of your Web site. Moving forward, you will have to include on all business documents the Web address or universal resource locator (URL). Intel used a mass mailing to inform its employees of the home page. This was sent not only through the internal mail but also via e-mail. In this way, within eight months, Lupinacci was able to establish a 79 percent awareness level within the company. In addition to the mailing, posters announcing the site were hung in company cafeterias, and an article was published in the in-house IT publication. (Organizations that have company newsletters can post announcements there as well.) Intel also took one-on-one opportunities to market its site: Whenever an employee called the accounts payable department with a question that could have been answered by accessing the Web site, they were pointed in that direction. A word of caution is in order here: If your accounts payable department develops such a site, recognize that you will never get 100 percent use compliance. Still, if you eliminate more than half the calls coming into the department, that’s more than incentive enough to move forward with the effort.
(f) MARKETING YOUR ACCOUNTS PAYABLE HOME PAGE.
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As mentioned, for a Web site to remain effective, it must be updated frequently, says Lupinacci. If it is not, visitors will stop coming. He recommends checking for accuracy on a regular basis, especially if the organization is in a continuous improvement mode. As the company changes its accounts payable policies or procedures, the Web site must be updated to reflect these. To help Web sites stay fresh, many include a “What’s New” section (or page), which is updated daily, weekly, or monthly—whatever is appropriate for the business. At Intel, the accounts payable “What’s New” page is updated every two weeks. Lupinacci also suggests creating links to key business partners as they get their home pages up and runningfor example, to Finance Information Systems, Purchasing, and Corporate Travel. The links a visitor chooses will depend on the nature of the business and whether other departments within the company have their own sites. He reviews the site monthly to ensure data accuracy. Expect to receive e-mail requests from your Web page. At Intel, the customer service center was established as the mechanism for replying to this correspondence. In addition, one full-time employee has been assigned to maintain and update the accounts payable site. The amount of resources needed to allocate to the site will, of course, depend on the complexity of the site and how much and how often new data is added. Lupinacci noted that it is important to monitor hardware, as well. What is adequate today may not do the job a year or two down the road.
(g) MAINTENANCE.
After the site has been up and running for a while, the amount of user feedback will diminish greatly, but not completely. Thus there a “gatekeeper” needs to be assigned to the site, someone responsible for conducting a centralized review of the content, target audience, and placement of the material on the site. Likewise, responsibility for content must be assigned so that appropriate information is supplied for updates and improvements. Lupinacci recommends that content be reviewed quarterly and that outdated material be removed in a timely fashion. You’ll also have to monitor who is visiting the site—that is, the “hits.” The last thing you want on an accounts payable site is teenagers or hackers peering through its content. Hit counters are not enough, says Lupinacci. He wants to know who hits which pages and how long they stay there. This is the information he feels he needs to keep the site in top-notch form. To that end, he captures customer feedback via e-mail. He also surveys his
(h) POSTIMPLEMENTATION.
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customers annually and at point of service. As an added feature, he involves select customers to participate in usability testing. Lupinacci also benchmarks internally with other functional groups, and continually surfs the Net looking for ideas and standards. Unfortunately, he says, it is still hard to find other accounts payable sites, although there are a few. The accounts payable function is only starting to get the recognition it deserves and, with it, the resources to accomplish what Lupinacci has. 21.5 WHAT TO INCLUDE ON AN ACCOUNTS PAYABLE WEB PAGE An accounts payable Web site or page should be accessible via any company intranets, as well as the Internet. By building on the experiences of their peers, accounts payable professionals will be able to construct the best possible Web sites for their companies. (a) INTRANET. • • • • • • • • •
For intranet users, the accounts payable page should offer:
Answers to frequently asked accounts payable questions An accounts payable contact list, complete with phone extensions and responsibilities Accounts payable deadlines for check requests An accounts payable policy and procedures manual T&E policy and forms Petty cash policy and forms Purchasing card information All other accounts payable forms Copies of past issues of the internal accounts payable newsletter, if you have one
(b) INTERNET.
For Internet users, the accounts payable site should include:
Payment status of open invoices • Accounts payable contact list, with phone numbers and responsibilities • Company invoice and supplier policies • Company W-9 policy for independent contractors •
21.6 ELECTRONIC INVOICING The paperless office has long been the dream of innovative, forward-thinking accounts payable professionals. While this is not likely to happen in the near
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future, certain innovations are bringing this dream one step closer to reality: imaging and workflow technology, to name two. But there’s another innovation that could make the paperless office a reality for virtually all accounts payable departments, and make expensive imaging equipment obsolete in the process: electronic invoicing (e-invoicing). This section reviews the products of five companies currently offering electronic invoicing services. No two are identical, but each addresses certain of the obstacles accounts payable professionals might run into when implementing electronic invoicing. (a) WHAT IS ELECTRONIC INVOICING? E-invoicing is the electronic delivery of invoices, primarily over the Internet, to the accounts payable department. No paper is received. The accounts payable department forwards, via e-mail, the invoice to the person who needs to approve it. The information is then available, without further keying, on a network for data retrieval purposes.
In addition to eliminating mountains of paper, accounts payable professionals like electronic invoicing because it:
(b) WHAT MAKES E-INVOICING ATTRACTIVE?
• • • • •
Reduces the number of mistakes caused by rekeying of information. Eliminates problems caused by unreliable mail delivery. Makes it easy to route invoices for approval. Reduces costs. Takes the onus off accounts payable to make up for others’ shortcomings in processing paper.
Why then, if electronic invoicing is such a great technology, aren’t companies signing up en masse? Because there are a number of obstacles, which include:
(c) USAGE.
• • • • • • •
Cost Implementation time Budget constraints Internal resistance to change Lack of ease of use Difficulty in signing up partners Fear of the unknown
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Accounts payable professionals who can identify exactly why their companies are resistant to using e-invoicing are in the best position to assuage those concerns and to demonstrate that electronic invoicing is the way to go. If budget constraints and/or cost are issues, iPayables’ Kim Rawlings suggests presenting “compelling ROI (return on investment) data to build the business case for the initiative.” She is willing to help other accounts payable professionals interested in her product to make their case. BillingZone recommends the same approach. Its representatives point out that Electronic Invoice Presentment and Payment (EIPP) offers both billers and payors a significant value proposition by eliminating paper from the process. BillingZone says that improved customer service, cash management, and accuracy in tracking and taking discounts are added benefits that can be factored into the equation. Those facing the more obtuse complaintssuch as “it will take too long” or “our vendors won’t use it”are encouraged to rely on documentation supplied by the service provider. “We lay out a well-defined process and work with clients to ensure that the project is managed,” says Open Business Exchange’s Martha Perlin. Many of these vague complaints vanish when the parties understand what is expected of them and how the electronic invoicing process will work. Many accounts payable professionals encounter, thus must overcome, fear of the unknown when trying to implement a new process. “Validating the concept is probably the lengthiest process involved to garner buy in from companies as a whole,” points out Direct Commerce’s Lisa Sconyers. “The result of such an application offers big money savings opportunities as well as extreme process streamlining, but our current economic market has instilled fear and conservatism toward implementing new technology,” she concludes. Sconyers has a few recommendations for accounts payable professionals who face this dilemma. She suggests calling and getting referrals from customers already using the product. She points out that her company can quickly and efficiently configure and integrate a pilot program in a matter of days, to give potential clients the opportunity to test the product firsthand without any risk. Xign’s Chris Rauen recommends that the accounts payable professional search for a solution that accommodates the buy-side processing needs, simplifies supplier enrollment and ramp-up, and provides material benefits to both trading parties. (d) OVERCOMING THE OBSTACLES.
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Many companies now provide electronic invoicing products, each with distinct advantages and different functionality. Therefore, any company interested in pursuing the e-invoicing route should base its decision on its:
(e) SELECTING THE BEST SERVICE.
Existing internal processes Budget • Corporate culture • Willingness to mandate change both internally and externally
•
•
Then it’s a good idea to check out these vendors’ Web sites and/or contact those whose products interest you. Although e-invoicing may seem like a leading-edge approach today, in just a few short years it will be commonplace. Remember when p-cards were considered innovative? 21.7 EVERYDAY AP USES FOR THE INTERNET What is the number-one reason why accounts payable managers are using the Internet? Respondents of a recent Managing Accounts Payable Benchmarking Survey say they are using the Internet for invoices: to receive them electronically and then to forward them to the appropriate personnel for approvals. This is further evidence that e-invoicing is starting to take hold in corporate America. The survey also revealed several other interesting insights, which lead to the conclusion that accounts payable is changing rapidly from a manual clerical function to one that requires research, analysis, and a thorough understanding of the entire business process. (a) THE DATA. Virtually every accounts payable professional with Internet access at work uses e-mail. Previous studies have shown that in excess of 90 percent of accounts payable professionals have and use e-mail at work. Thus, e-mail usage is a given. But what did the survey indicate about Internet usage:
Overall, just fewer than 30 percent of those making significant use of the Internet did so with regard to invoices. They either received invoices electronically or went to vendors’ sites to pick up their invoices. • Almost an equal number of accounts payable professionals reported using the Internet for various types of research purposes. This proves that accounts payable professionals are starting to play a more important role within their organizations.
•
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As just stated, a number of companies are receiving invoices electronically or are going to vendors’ sites to pick them up. Some are using third-party systems, while others are simply taking in the invoices attached to an e-mail. A few others are expanding the practice, for example: (b) INVOICES.
Using a file transfer protocol (FTP) site to receive parts freight vendor invoices. • Receiving invoice data in text files from a container lease company. Each invoice, in this example, contains 2 to 1,000 records. • Having vendors enter invoice information on customers’ Web sites.
•
Anyone who still thinks that accounts payable associates do nothing but process paper may be surprised at some of the tasks these professionals research on the Internet:
(c) RESEARCH.
• • • • • • • • • • • • • • • • • • • •
Confirm correct addresses. Check UPS and FedEx tracking codes. Verify zip codes. View bill of lading (BOL) and signed receipts at freight company sites. Verify tax information. Verify currency conversion rates. Check vendors sites for tracking information. Research regulatory information. Report independent contractors to the state. Look up the licenses and status of subcontractors. Research property tax bills. Verify new vendors. Check airline, car rental, and hotel rates. Obtain signed proofs of delivery. Check vendor sites for statements and past-due invoices, where available. Use information to present new procedures and ideas. Find additional information about suppliers. Locate 1099 information and company card account/transactions. Find floor-plan financing information. Research outstanding balance issues with vendors.
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All accounts payable professionals who have played telephone tag with vendors, or have had to suffer through a long drawn-out telephone message, appreciates the convenience of “talking” with suppliers via e-mail. Accounts payable professionals are using e-mail effectively for dispute resolution, to follow up on invoice status, and to obtain vendor information that may not be included on the invoice. Some are also using e-mail to request copies of lost or missing invoices; and internally, to obtain branch approvals, verify receipt of goods, and respond to credit inquiries. (d) COMMUNICATE WITH SUPPLIERS.
When corresponding with their banks, accounts payable professionals have found a dozen ways to use the Internet. They include: (e) BANKING.
• • • • • • • • • • • •
Putting a stop payment on a check. Processing bank transfers. Looking up checks. Making payroll tax payments. Banking online. Conducting wire transfers. Making direct deposits. Executing currency exchanges. Sending file transfers to the bank. Paying federal taxes. Viewing bank statements. Using positive pay.
P-cards are a natural for the Internet, and many accounts payable professionals verify their billings and pull reports directly from the Internet. While some regularly download p-card and T&E information, others take the downloaded T&E information and upload it directly into the employees’ expense reports. It’s obvious that the Internet is playing an important role in the everyday life of accounts payable professionals everywhere.
(f) OTHER.
21.8 CASE STUDY: PUTTING THE WEB TO WORK FOR ACCOUNTS PAYABLE We’ve all heard the expression, “Don’t work harder, work smarter.” Companies everywhere are starting to do just that by taking advantage of the
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Internet to control areas such as invoice handling, T&E, and procurement. Speaking at a recent accounts payable conference, Charles Schwab’s Vice President Sandy Campos explained how her company harnessed the power of the Web to achieve these goals. “Just when you think you understand the game,” began Campos, “somebody changes the rules.” That’s certainly the way it has been in accounts payable at Schwab over the last few years. She said that Schwab experienced tremendous growth in the last five years of the 1990s. The firm’s operational and administrative functions struggled to keep pace with the growth, utilizing the obvious strategy: It hired more people to handle the ever-growing transaction volume. Then, one day, a light went on. The firm realized that hiring more people was not an effective long-term prescription to address its corporate growing pains. Instead, Schwab needed to free up people to focus on the core business. Campos says that the way the company is doing this is by creating a selfservice environment, which offers streamlined, paperless, seamless, online access to information. This sounds wonderful in theory, but how can accounts payable departments achieve this goal?
(a) BACKGROUND.
At Schwab, it wasn’t difficult to identify the processes that were ripe for improvement. Campos says the company decided to focus on those processes that were in support of employee and thirdparty self-service and that were manually intensive and repetitive in nature. Others identified for improvement were those that were challenging to control, time-consuming, managed by several organizations, paper-based, and geographically dispersed. With so many areas fitting these descriptions, the difficult part was to identify those accounts payable functions that did not meet the criteria.
(b) GETTING STARTED.
In accounts payable, Schwab’s goals were focused on three specific areas: (c) GOALS.
Cycle time. The company wanted faster processing, to eliminate duplicate data entry, and to reduce errors. Additionally, it wanted online update and edit capabilities and workflow. • Information availability. Ideally, the company wanted real-time access to current information, to reduce printing and distribution costs and to eliminate paper. •
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•
Process controls. The company wanted to enforce requirements and standards and to automate the audit process by applying defined business rules and policies.
(d) WHAT SCHWAB ACCOMPLISHED.
The company implemented a number
of electronic initiatives, including: •
•
•
•
• •
•
Invoice handling. Invoices are scanned to create a digital image, which is electronically routed to cost center managers for online review and approval of the expenditure. This replaces a manual paperintensive process whereby invoices were received in accounts payable, copied, and then sent via internal mail for review and approval by the appropriate cost center manager. eT&E. Replacing the paper reimbursement forms that had to be completed and mailed to accounts payable for manual data input and payment processing was an e-mail-based T&E application (eT&E). It is routed electronically for approval, processing, and payment. Reimbursement now occurs in two to three days instead of two to three weeks. eTimesheets. Paper timesheets that were mailed or faxed to payroll twice a month have been replaced with a Web application. Employees record their hours electronically twice a month. Travel planner. Instead of calling a corporate travel office to coordinate reservations for business travel arrangements, most travel plans can be made by accessing an internal Web site and reserving airline tickets, hotel rooms, and rental cars. Employee 401K and stock option statements viewable via an intranet. Formerly, these were printed and mailed quarterly. Ariba procurement. Employees log in to the Web-based Ariba application to place orders through online catalogs. These orders are automatically routed to preferred vendors. This system replaces a paper-based system that required approvals and was mailed to purchasing for creation of a PO and sourcing. Financial reporting. Managers with access to FIN!Web have real-time access to revenue and expense data for their assigned cost centers, and have the ability to electronically record accruals and reclasses. This replaces a system from which analysts ran endless reports each month for e-mail distribution to appropriate managers for review.
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The last item shows just how much the game has changed. When the email distribution methodology was introduced at Schwab, it was considered a big improvement over the old system, from which reports were printed and distributed to the appropriate managers. And indeed it was a major improvement over the old; but, as this example demonstrates, as soon as something becomes a best practice, it becomes commonplace or standard and, eventually, obsolete. Those who know Campos realize that she is not one to rest on her laurels or accomplishments; her future goal is to take Schwab farther down the information superhighway. Some of those planned enhancements are: • • • • •
Web-based payments Electronic invoicing Electronic pay stubs eAction forms Web benefits enrollment
Clearly, Campos is a big fan of Web-based technologies. In closing her remarks at the conference, she noted, “There are countless opportunities for your company to improve both internal operating efficiency and the bottom line by putting the Web to work for you.” Savvy accounts payable professionals will follow her advice.
CHAPTER
22
ENCRYPTION AND DIGITAL SIGNATURES
22.1 INTRODUCTION For good reason, when transmitting data over the Internet, many professionals are concerned about the lack of security. The solution to the security problem lies in encryption and digital signatures. Fortunately, these new technologies are becoming readily available to accounts payable departments. One company that has already made great strides in using the Internet and incorporating these state-of-the-art technologies is Chevron. 22.2 BASICS At several recent conferences, James M. Burstedt, Chevron’s manager of accounts payable reengineering, and Ed Ames, a Chevron analyst for electronic commerce and a cofounder of the Unclaimed Property Holders Association, explained encryption and digital signatures, and how they are reflected by Chevron’s corporate policy. (a) CORPORATE POLICY.
The Chevron policy states:
Information and the systems supporting it are key company assets, requiring prudent and proactive protection by information owners and users alike. It is the policy of the company to secure these assets from external and internal threats through a combination of technology, practices, processes, and monitoring, based on risk and the value of the assets. The goal is to minimize the potential for damage, either purposeful or accidental, to the company’s computer and communications systems, company data and information.
This policy allows Chevron to focus its resources to protect its most important asset: its information. Like other companies, Chevron needs to protect its information from hackers, pranksters, dishonest insiders, competitors, and information terrorists. It is concerned about viruses, interception, 200
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prying eyes, alteration or loss of data, communication blocks, and system disruptions. However, the biggest concern is unauthorized access. Burstedt and Ames began by pointing out how security breaches can occur: by an intruder masquerading as an employee; eavesdropping; data being changed en route; e-mail addresses being changed en route; or passwords and identifications being cracked or stolen. They then identified the defenses that stop unauthorized access to computer information transferred over the Internet, among them: authentication (digital signature and private key/hash), encryption, digital certificates (ID validation/nonrepudiation), firewalls, and strong passwords. The consequences of not having these defenses can be severe. Financial loss, damage to the company’s reputation, loss of business, legal actions, and the loss of strategic information are only a few of the possible results. When an employee’s laptop is stolen, for example, the biggest loss is not the cost of the laptop, but the strategic information stored on the hard drive. Thus, Chevron relies on what it calls “secured messaging.” (b) ORIGINS OF THE PROBLEM AND SOME SOLUTIONS.
Chevron defines secured messaging as the use of encryption and digital signatures. But before defining these terms, a few words on what the latter is not. It is not a digitized signature, the manual signature by an individual on an electronic device such as those used by certain department stores for charge card purchases. Burstedt and Ames provided the following definitions:
(c) SECURED MESSAGING.
Digital signature. Unique to a person, and requiring a private key, digital signatures can be verified as belonging specifically to and used solely by that person. A digital signature is linked to data, so that any change to the data will invalidate the signature. It is also nonrefutable, which means that a person can prove he or she sent a communication and, conversely, cannot deny that he or she sent it. It is the equivalent to having a document notarized in the paper world. Encryption. This is the capability to transform electronic information into an unreadable format, which can be converted back to its original readable state only by specific individuals previously authorized to do so. Encryption engines, also known as encryption algorithms, are now powerful enough to generate truly random keys, taking this responsibility out of the hands of people. It also allows for session keys that can be used once or multiple times and then discarded.
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The word “algorithm” may trigger memories of high school math class to many reading this. An algorithm is a detailed sequence of calculations performed in a specific number of steps to achieve a desired outcome. A hash algorithm is a function that reduces a message to a mathematical expression; it is called a one-way hash because the expression cannot be reversed. For example, if every letter of the alphabet were assigned a number (a = 1, b = 2, etc.), any name could be reduced to a single digit. Burstedt and Ames chose the name Julius Caesar to demonstrate a hash algorithm because he was one of the earliest users of encryption. (d) BACK TO MATH CLASS.
J 10
U 21
L 12
I 9
U 21
S 19
C 3
A 1
E 5
S 19
The sum for Julius = 92
The sum for Caesar = 47
9 + 2 = 11
4 + 7 = 11
A 1
R 18
11 + 11 = 22 2+2=4
Therefore, the hash total for Julius Caesar is 4. Altering any original message or file, including changing the spelling of a word, eliminating apostrophes, or changing a comma to a period, will result in a different hash. Messages are encrypted and decrypted using public and private keys. Expect to hear much more about public key infrastructure (PKI) in the upcoming months as commerce continues to move to the Internet. The Chevron speakers offered a clear explanation of how these keys are used:
(e) PUBLIC KEY INFRASTRUCTURE.
Two sets of electronic keys are used to encrypt and decrypt documents. Public keys can be shared, while private keys are known only to their specific owner. An encrypted document is created using the sender’s private key and the receiver’s public key. The receiver decrypts the document using the sender’s public key and the receiver’s private key. The public key is the certificate authority. Separate pairs of keys can be used to encrypt or digitally sign to strengthen security. . . . Whatever is locked by a private key can only be unlocked by the corresponding public key, and vice versa. Encrypting and sending with the sender’s private key and the receiver’s public key can therefore only be decrypted with the receiver’s private key and the sender’s public key. Use the private key to create the digital signature/hash.
Currently, there is a major debate over standards setting for the PKI —a question that probably will not be settled soon, as a number of entities have a vested interest in becoming the standard setter. These concepts may be new to many reading this, but it is imperative that anyone who works for a
22.3 Case Study
203
company that uses the Internet understand these concepts. Remember, there was a time, not too long ago, when the whole idea of the Internet seemed alien. 22.3 CASE STUDY Are you sure that every check and wire request you receive is valid? Are you concerned that perhaps some of those requisitions for large-dollar payments from overseas may not be from legitimate sources? Do you want to verify that the money you send goes where it is supposed to go? Does using the Internet for data transmission make you uncomfortable? The accounts payable folks at Chevron shared these concerns, in particular about requests for payments coming from overseas. Although Chevron’s security project started with accounts payable, the hope was that it would be broad enough to eventually encompass other applications in all departments. Chevron had three main objectives for the technology solution it devised: employ commercial software to support encryption needs throughout the company; install software that would initially be used to encrypt e-mail and documents for storage and distribution; and develop an application for the payment request process using encryption and digital signatures. Chevron felt that it was important to use encryption to: (a) PROJECT SCOPE.
• • • • • •
Protect data from unauthorized access. Transport confidential data via the Internet. Use digital signatures to authorize transactions such as payment requests. Ensure that the person who sent the encrypted note was the author, and provide confirmation of receipt. Prevent exposure of confidential data when laptops are lost or stolen. Select an industry leader as a software provider to increase the likelihood of interoperability.
Although many people within Chevron already used encryption with e-mail, it was the goal of this project to include those submitting payment requests and the international sales staff in that group. (b) ACCOUNTS PAYABLE BUSINESS DRIVERS. Chevron launched its project with a pilot application. Although the accounts payable department there
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Ch. 22 Encryption and Digital Signatures
makes extensive use of both evaluated receipt settlement (ERS) and electronic data interchange (EDI), it still receives 11,604 manual payment requests annually. At the time of the pilot program, of those transactions: 35 percent were for less than $1,000 10 percent were for amounts between $1,000 and $5,000 55 percent were for amounts over $5,000, representing 99 percent of the dollars. Certain financial transactions were being authenticated with manual keys, but the company did not feel that the manual process sufficiently protected the company against potential theft. Chevron also felt that confidential data was not adequately protected. Finally, the company’s information protection compliance policy required higher levels of protection, such as encryption. (c) PILOT APPLICATION. The participants in the pilot study had very definite ideas about what they wanted. Unfortunately, what they wanted and what was available were at odds. The pilot program had a number of objectives, many of which were technical and were intended to set the groundwork so the program could be expanded after the accounts payable portion had been successfully implemented. Specific goals for accounts payable included:
Create an automated payment request form incorporating digital signatures. • Market the electronic form to company personnel. • Link the payment request form to encryption (digital signatures and validation). • Address the legal implications of digital signatures and human resources issues of inappropriate use. •
(d) DEVELOPING AN ELECTRONIC FORM. The accounts payable department now had the opportunity to reengineer its existing practices through the development of an automated payment request form. Specifically, it:
Replaced all existing payment request forms. • Made blank forms available through the company intranet, eliminating the need to print and store forms. • Included all pertinent fields for both domestic and international payments.
•
22.3 Case Study
• • • • • •
205
Included a pop-up window with help information for each field. Employed encryption software for digital signature functionality. Required multiple digital signatures for preparation and various approvals. Prevented unauthorized changes using the digital signature lockdown feature. Allowed for the verification of each digital signature against the certificate authority file. Included instructions for completion of the form and processing steps.
(e) PASSWORDS. Burstedt and Ames gave advice regarding the use of passwords that is applicable to everyone, not just those implementing a hightech security system. Chevron advocates the use of robust passwords, those that include both upper- and lowercase letters and alphabetic and nonalphabetic characters. In addition, they cautioned against the sharing of passwords, recommending the practice be expressly forbidden. (f) PILOT SURVEY AND RESULTS. To make sure they were on track and to uncover any unforeseen problems, the team at Chevron conducted a pilot survey. The survey covered: • • • • • • •
The enrollment form and process Downloading and configuring of encryption software Downloading and configuring of electronic form software General instructions Ease of use of encryption and electronic forms Technical support Results and recommendations
They were pleased to find that user satisfaction was very high—thought they also discovered that users preferred receiving a hard copy of the documentation rather than being pointed to the Internet for instructions. They were also able to identify who should be using encryption, based on customer feedback. Burstedt and Ames, who see the accounts payable function evolving into a more analytical one, concluded by saying that use of technology allowed them to reengineer the accounts payable processes. They and their team demonstrated what the future of accounts payable can be for those who grab the technology ball and run with it.
CHAPTER
23
E-MARKETPLACES AND XML
23.1 INTRODUCTION Technology continues to rapidly invade accounts payable operations and change the way the function is handled at companies of all sizes. Two of the latest breakthroughs, e-marketplaces and the eXtensible Markup Language (XML), are already having an impact on many accounts payable departments. To clarify how these will alter the payment process, this chapter turns to Harris Bank’s Hamish Forrest and Covansys’ Terri Hinder, who spoke at length on the subject at the IOMA/IMI Advanced Accounts Payable Institute. 23.2 E-MARKETPLACES E-marketplaces or exchanges are rapidly changing the way business is conducted. Probably the best known is Covisint, for the automotive industry, described on its Web site (www.covisint.com) as: “A global, independent e-business exchange providing the automotive industry with leading collaborative product development, procurement and supply chain tools that give its customers the ability to reduce costs and bring efficiencies to their business operations.” Other exchanges include: Paper industry: www.paperfiber.com/exchange Steel industry: www.gsx.com/home_page.html Coal industry: www.thinkenergy.com Aerospace industry: www.exostar.com It’s important to point out, however, that most exchanges, at least at this point, are not as well developed as Covisint. 206
23.2 E-Marketplaces
207
In addition to being generally for industry across the board, e-marketplaces can be categorized more specifically, as follows: (a) TYPES OF E-MARKETPLACES.
Open marketplaces, which are usually for MRO or indirect goods. • Closed or private marketplaces, which typically are part of a select industry and usually for direct goods. • Horizontal or vertical, marketplaces, which can be open or closed • Auction and reverse auction marketplaces. Reverse (or downward) auctions have the capability to drive costs down dramatically. •
Recently, Emerson Electric faced the challenge of consolidating millions of dollars of printed circuit-board purchases across 14 global divisions. The company used freemarkets.com, the current market leader, for the auction-type exchanges. It purchased goods that historically would have cost $36.1 million. Emerson had 43 ISO 9000-certified suppliers. The downward auction resulted in 755 bids being placed. The company introduced several new qualified suppliers and consolidated its supply base from 58 to 9, saving $10 million in the process. Emerson is not alone; John Deere recently signed on with freemarkets.com. (b) THE RELEVANCE OF E-MARKETPLACES TO AP. With the kind of savings just mentioned, corporate America is bound to take notice and, subsequently, flock to these sites in droves. Forrest believes that e-marketplaces are changing the way companies do business with their trading partners, meaning that they too will be affected. Ultimately, he warns, the payment mechanism will change as well. E-marketplaces provide a better return for companies because the savings go directly to the bottom line. Companies realize savings that can be attributable to both better pricing and process improvements, with better pricing accounting for only 20 percent of the savings. E-marketplaces also help control “maverick” purchasing, while opening new sales channels and providing industry information. They also help automate the payment process, ultimately replacing checks with automated clearinghouse (ACH) payments.
Companies are finally focusing on the long-ignored payment function. (More than one exchange has failed because of the lack of this focus.) Despite the changes wrought by the Internet, 80 percent of
(c) MEANING FOR AP.
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Ch. 23 E-Marketplaces and XML
all B2B payments are currently being made by check. Companies are trying to squeeze all possible cost savings out of the procure-to-pay cycle, however, and are now focusing on the payment process. One of the innovative ways they are doing this is through the use of payment engines, which are electronic triggers for payment Payment engines initiate the optimal payment vehicle based on rules you input. A simple example might be that an electronic shipping notice would trigger a payment 30 days after the date on the shipping notice. Forrest listed three of these engines: Financialsettlementmatrix.com Clareon.net Surepay.com With their expertise in the payment process, Forrest says that it is only natural that banks be involved in the payment process, in a trusted thirdparty role. 23.3 XML Hinder provided a practical definition for XML. She calls it the glue that holds e-commerce together. She claims that all you need to understand about XML is that it is formatted as tag-data-tag. An example of a well-formed XML statement is:
Hello, world! You may not understand the formatting, but you certainly can understand the intent of the message. Additionally, Hinder explained that: Legal XML documents are called well formed. • A well-formed document describes a logical tree. • If a well-formed document conforms to an optional set of constraints (called a DTD), it is also valid.
•
23.4 HOW ACCOUNTS PAYABLE PROFESSIONALS CAN PREPARE THEMSELVES The best way to start is learn as much as you can about e-commerce, XML, and the new payment initiatives. Visit the Web sites mentioned in Section 23.2, as well as ebXML.org, to learn as much as you can. At this point,
23.5 How to Participate in the E-Commerce Revolution
209
there are only a few experts on these topics, so with a little effort you can become one of those “in the know.” Find out if there is an exchange for your industry. You can do this by talking with the purchasing manager or by doing a search on the Internet. Simply go to www.google.com or one of the other search engines; as your search parameters enter your industry type and the word “exchange” (e.g., paper + exchange). Get involved. Find out what your company is doing. Many companies are already working on e-commerce initiatives, and a few even think to get their accounts payable managers involved. Section 23.5 contains some additional advice for accounts payable professionals who want to become members of the e-commerce team at their companies. Don’t be surprised if you are rebuffed when you recommend to purchasing that it participate in e-marketplaces. The very fact that these portals are so adept at reducing costs and improving purchasing efficiency means they can also significantly reduce the number of people needed to handle a company’s procurement needs. Thus, many in purchasing do not necessarily see exchanges as a good thing. And to be completely honest about the matter, these exchanges, if adopted companywide, will ultimately have the same effect on the accounts payable staff. With fewer invoices coming in, many companies will be able to reduce their accounts payable staffs. This does not mean, however, that accounts payable professionals should argue against the use of e-marketplaces; that would simply be a waste of time and effort. “Don’t go kicking and screaming,” warns Hinder. You can lead the charge or be left behind; the decision is yours. Accounts payable professionals who understand what is happening and take every opportunity to learn about these changes and become comfortable with them will be well positioned to remain part of the management team at their companies in the twenty-first century. (a) CLOSING THOUGHTS.
23.5 HOW TO PARTICIPATE IN THE E-COMMERCE REVOLUTION Although many accounts payable professionals would like to take part in the e-commerce changes, they do not know where to start. To help in that regard, following is a list of activities, based on excellent advice from Hinder, that
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Ch. 23 E-Marketplaces and XML
they can do to ensure they are not left behind when e-commerce takes off in their organizations: • • •
• •
• •
Take an active role in your company’s e-commerce initiatives. Ask to be included on the team in your industry’s B2B exchange. Research the cost of becoming a buyer on the B2B portals. (They are not free; most of the exchanges are supported through transaction fees.) Work closely with industry associations. Actively pursue the procurement e-commerce directions, keeping short-term solutions as flexible as possible so as to be ready for standards changes as they become available. Take advantage of free e-commerce offerings available from your customers and suppliers. Read everything you can about e-commerce and the changing world of technology.
PART SIX
SPECIALTY TOPICS The three chapters here are not really related by any factor other than the fact that they do not go anywhere else. First, Chapter 24 discusses Purchase-cards have stormed into the accounts payable world because they simply make so much sense. Their use continues to grow. • Second, Chapter 25 describes the use of post audit firms to check for duplicate payment heads the list. Companies who incorporate use of a post audit firm into their accounts payable processes will recover as much of their duplicate payments as possible. In this Part, we will investigate how these firms can compliment your own duplicate payment checking routines. • Third, along with the rest of the corporate world, accounts payable needs to measure its output and productivity. To know if you are effective, however, it is necessary to measure your performance against the performance of others. Leading edge accounts payable departments, benchmark on a regular basis.
•
211
CHAPTER
24
PURCHASING CARDS
24.1 INTRODUCTION If asked to identify the hottest trend to hit accounts payable in the last few years, most experts would pick the purchasing card, also referred to as a p-card or a corporate procurement card. The purchasing card is being used in companies of all sizes, and the impetus for its use may come from purchasing, or treasury, or accounts payable itself. Regardless of its origin, the p-card is making the lives of accounts payable professionals easier in the companies that use them. Even if the only benefit of their use was to reduce the number of small-dollar invoices flowing through the department, it would be enough; but there is more. Use of the cards greatly reduces the friction between purchasing and payables, the amount of paperwork, and the amount of storage space necessary for that paperwork; it probably even has an impact on the number of duplicate payments a company makes but never discovers. With procurement cards, the payment is effectively made at the time of purchase, thereby completely eliminating the invoice. Simply, if there is no invoice to be paid, there is no chance that it will be paid twice. Companies have discovered that use of the cards also boosts morale, as employees who are given the cards feel empowered to make certain decisions on their own, and thus feel better about themselves. Despite all these pluses, a number of companies are reluctant to give cards to employees, fearing that an employee will go shopping “on the company” or commit some sort of fraud. To assuage that fear, most companies have instituted extensive controls, one of which is to require their employees to sign a statement acknowledging that they understand they can be fired on the spot for misuse of the card. Few people are willing to 213
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Ch. 24 Purchasing Cards
risk their jobs in exchange for a few trinkets. In truth, however, most people are honest; and that fact, coupled with controls, reduces the incidence of fraud perpetrated from use of these cards. (Various types of controls that can be put in place will be discussed later in the chapter.) 24.2 WHAT IS A PURCHASING CARD? A p-card is a specialized type of corporate card that has sometimes been referred to as the “poor man’s EDI.” Experts estimate that the potential payment market for this card is in excess of $500 billion annually. Those who use it successfully see it as a tool to reduce purchasing costs. It also drastically reduces the expenses related to making the payments for those purchases. Users of the card also report that it is a wonderful employee empowerment mechanism. And, despite skeptics’ concerns about abuse, next to none have been reported. 24.3 HOW A PURCHASING CARD DIFFERS FROM A CONSUMER OR CORPORATE CARD The differences between a p-card and a consumer or corporate card can be broken into three categories, which are of the utmost importance to payables professionals: controls, accounting information, and reporting. None of these features is available with traditional credit cards. Individual transactions can have a dollar limit set. These limits can be as low as a few hundred dollars, to ensure that the card is used only for the low-dollar items for which it is intended. Limits also can be set for individuals on a monthly basis. Finally, limits can be set on the types of merchants where the card may be used, to prevent anyone from taking a trip to Tahiti at the company’s expense. Some managers have expressed concern about the accounting information. Default accounting distributions are set up when the cards are first issued. Additionally, the information can be automated; and for those with EDI capabilities, it can be transmitted electronically. Finally, all the required detailed reporting is generated through the billing statement. This does not mean that all accounting issues are adequately addressed, however; it is a well-known fact that they are not. Nevertheless, many who use the card feel the minor inconveniences are more than offset by significant advantages and cost savings. And, remember, the card is generally used for low-dollar purchases.
24.7 User Feedback
215
24.4 WHY USE A PURCHASING CARD? At most companies, orders for less than $1,000 make up more than 50 percent of transactions processed—that at some companies, this percentage is significantly higher. These very same orders account for less than 5 percent of the total payment dollars. Given that processing costs typically range from $50 to $150 per transaction, significant processing costs can be saved by moving as many of these small transactions to a purchasing card that requires only one payment. Experts estimate that, on average, it costs up to $150 to process one purchase order. Users of the purchasing card report that savings of up to 90 percent of processing costs can be realized. Last, those using the card say it greatly simplifies the procurement-to-payables process. 24.5 HOW DOES THE PURCHASING CARD WORK WITHIN THE COMPANY? The manager sets guidelines and monitors the transactions as they come through on a monthly basis. The employee uses the card to order goods from the supplier, then saves the receipts against which to verify the charges on the monthly bill. The supplier receives payment from the card issuer, typically within three days of the purchase. This is attractive to most suppliers, as it dramatically improves their payment terms. Some companies have used this fact to renegotiate better pricing from their suppliers. 24.6 PLAN ADMINISTRATOR Some p-card programs get bogged down because employees do not know how to use the cards correctly or when to use them. A plan administrator is, therefore, necessary to ensure the success of the program. The plan administrator is responsible for answering the numerous questions participants in such programs seem to have, so that they don’t become frustrated and end up not using the cards. If the program at a particular company is not large enough to warrant a fulltime administrator, someone should be assigned the responsibility on a parttime basis. After all, if no one uses the card, the program becomes worthless. 24.7 USER FEEDBACK To make sure the program is working according to plan, solicit user feedback. This is the only way to identify both problems and progress. On the
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Ch. 24 Purchasing Cards
positive side, users report that the card is extremely useful in emergency situations and with new vendors, that the card eliminates the time lag many experience as a new vendor goes through the credit-checking routine. When a p-card is used, there is no need to establish a credit line and no delay. However, this can be costly, as will be discussed in the next section. Because p-cards are so new, not all vendors accept them, causing problems for users. But as their use becomes more widespread, this problem should solve itself, although it will probably never completely disappear. Once people begin to use a p-card, they often fall in love with it. They find it much more convenient than filling out POs and dealing with accounts payable when a disbursement is not made on a timely basis. Accounts payable managers report that this can even become a problem with those who try to use the p-card for everything. Occasionally, they report, they have to rein in overactive users who use it where other payment mechanisms are preferable. 24.8 VENDOR FEEDBACK In the beginning of any program, it is also important to solicit vendor feedback. This is especially important if a company has trouble signing up new suppliers for the p-card program. Most vendors like the card because they receive payment faster and the billing and receivable process is simplified. However, there is one serious drawback from the vendor’s standpoint: Use of these cards is costly on any large transaction. Most p-card vendors must pay somewhere between 1.75 percent and 5.0 percent on any balance charged on a p-card. On a $50 balance, most vendors do not object to paying a dollar or two for the service, as they do not have to check credit, print and mail an invoice, set up a receivable on their ledger, deposit a check, and apply cash—all of which is costly. But as the dollar amount of the receivable increases, so does the fee, as the fees are based on the value of the transaction. On the face of it, this should not be a major issue for the customer. But it is. Eventually, all costs are passed back to the customer. If it costs your vendor an unreasonable amount to process your payment, it is only a matter of time before the vendor will incorporate those charges into its pricing scheme and pass them back to the end user. Thus, do not add to vendor costs, as they will surely be passed right back.
24.9 Control Features
217
24.9 CONTROL FEATURES As noted at the beginning of this chapter, one of the most frequent objections to p-card use is that the cards will be used improperly, thereby putting the company at risk. In practice, there has been little reported fraudulent card use, and this objection can be easily overcome by putting the proper controls are in place. These controls include: •
•
•
•
•
•
Choose recipients carefully. By assigning the cards only to trusted employees, employers can give themselves some level of comfort. And, as noted earlier, an additional, and powerful, deterrent to misuse is to require card recipients to sign a statement to the effect that misuse of the card will result in automatic termination. Set card guidelines and procedures. At the same time a procurement card program is launch, also establish detailed guidelines and procedures. Distribute copies of these regulations to all affected. This may seem an obvious step, but it is not always taken. Limit the dollar amount of each transaction. This is certainly a good way to minimize losses should fraud occur. The dollar limit can vary by employee, usually based not only on the level of trust but on the anticipated need of the employee. These limits can always be raised if necessary. Limit the total dollar amount that can be spent each month by each employee. In addition to a per-transaction dollar amount, another form of risk control is to give each employee a monthly allowance. This, too, can vary by employee and area of responsibility. Most companies that use p-cards establish both per-charge and monthly limits. Use standard industrial code (SIC) blockouts. Companies concerned that an employee will take the card and go Christmas shopping or take a trip to Tahiti can use SIC blockouts. By disallowing charges at certain SIC codes, a company mitigates this issue. Of course, this matter can also be addressed by setting the aforementioned dollar limits. And face it, of an employee would charge a vacation on a company credit card, the company has more serious issues with this person. Set a departmental budget. Another concern associated with corporate procurement cards is that users will buy things for the office that are not absolutely necessary. This rarely happens, but by setting budget levels at the departmental level, management can ensure that it doesn’t.
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•
Conduct a monthly review of all charge card statements, complete with a supervisor’s signature. This after-the-fact review will uncover any inappropriate spending and assure management that proper oversight is being given to all expenditures. In a rare case of p-card misuse, an employee was discovered to be buying himself a computer— piece-by-piece. One month he purchased a hard drive, the next a printer, then the CPU, and so on. Without the supervisory review, these items might have slipped through, as they all came within the dollar amount and allowed SIC codes.
•
Reserve the right to review. At any point in time, senior management is within its rights to review the statements for the entire company or any one department or individual. And it’s not a bad idea to have internal auditors, and perhaps even the external auditors, periodically spot-check the statements.
•
Set up workable dispute resolution procedures with vendors. One of the advantages of receiving an invoice that does not need to be paid for 30 or more days is the leverage it gives to the purchaser. If the goods turn out to be substandard or defective in any way, the purchaser can withhold all or part of the payment. This then forces the supplier to negotiate in good faith. But when the supplier has already been paid, it has less incentive to resolve disputes. In fact, the only incentive is the promise of future business. By establishing dispute procedures in advance, the purchaser avoids this issue. Lest some readers think that the vendor will have little interest in developing such a mechanism, remember two things: First, the vendor wants to do additional business, and thus needs to accommodate its customers; second, the vendor is also interested in using the procurement card, as it lowers costs on both sides of the table. If a customer is dissatisfied with the service received when the procurement card is used, it will stop using it, forcing the vendor back to more costly billing and collection procedures.
•
Establish supplier guidelines. Doing so will guard against inappropriate use of the card. It will also put the vendors on notice as to what is expected of them. Remember, in most cases both the buyer and the seller benefit from the use of the procurement card.
•
Institute card cancelation procedures. This action puts everyone on notice that the card can be revoked at any time the corporation sees fit. This is especially important in the instance of employee termination.
24.10 Maximizing Cost Savings
219
Regardless of the reason, the accounts payable manager will want the ability to immediately cancel a card. This should be done in any case, whether or not the parting was amicable. Failing to cancel a card under these circumstances is begging for trouble. Most card issuers will be able to handle this requirement. All these controls are aimed at ensuring that a company is not put at risk by instituting a corporate procurement card program. But the reality is that a company is always at some degree of risk. An employee can submit a phony invoice, steal a check meant for another, or filch a blank check. So, in many ways, a procurement card program, if handled correctly, will actually reduce the level of risk, by limiting dollar amounts. And as noted at the beginning of the chapter, many companies that use the card report an unexpected side benefit: an increase in employee morale. Employees are pleased that the company would trust them with the card, hence take their responsibility for it seriously. If, after pointing out all the controls that can be instituted and all the benefits to be gained, management is still reluctant to move forward with a program in your company, point out one other aspect to consider: When procurement cards are used, the number of small invoices drops, often dramatically. The money saved by not having to process those invoices, print checks, and then mail checks is often remarkable. By comparing this figure with the small amount that might be lost due to the use of the procurement card, many who were originally reluctant change their tune. 24.10 MAXIMIZING COST SAVINGS Most accounts payable professionals are well aware of the cost-savings potential associated with corporate procurement card programs, but many do not realize that this is only the beginning. There are also ways to make the purchasing card program generate money for the company—although the card issuer will not reveal these techniques without being asked. Here is what some innovative accounts payable managers are doing to squeeze a few more dollars out of their p-card programs: •
Negotiating favorable terms for the payment of the P-card bill. In most instances, payment on these cards is expected within seven days of receipt of the bill. A number of companies have succeeded in getting these terms extended to 14 and even 21 days. A company with an average bill of $1,000,000 each month might be able to add
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$25,000 to its bottom line by getting the card issuer to agree to accept payment on day 21 instead of day 7, assuming it invested the money at 5 percent. Those borrowing at higher rates would see an even greater savings. Perhaps not an extravagant amount of money to many, it is not a bad return for the few conversations it might take to get the card issuer to agree to these terms. Those just setting up a program might make the payment terms one of the negotiating points, especially if several issuers are bidding for the business. • Negotiating rebates from the card issuer. This is a subject the card issuer will never initiate. Nevertheless, numerous managers reveal this is going on at certain levels. In order to qualify for these rebates, your company will need to make purchases using the card at a reasonably high level. It has been suggested that the minimum program should be about $500,000 per month in expenditures on the card before the issuer will even entertain discussions about a rebate. Rebates are generally quoted in basis points, with 100 basis points equaling 1 percent. At this level, a company might expect a rebate in the neighborhood of 5 basis points, or $25,000 per month, or $300,000 on an annual basis. As programs get larger, the number of basis points the card issuer is willing to rebate grows. It has also been suggested that really big programs might be able to earn as many as 50 basis points in rebates. As with the terms, when establishing a new program with several issuers bidding for the business, this issue can be used as a negotiating point. • Rolling T&E programs into purchasing card programs. There are several reasons why enterprising accounts payable managers might wish to take this action. Obviously, doing so makes it easier to qualify for rebates, as just discussed. Also, certain cards will allow travelers to get cash advances on the cards. Finally, by taking this action, the accounts payable department deals with one program rather than two. All that said, the main force behind such moves appears to be the desire to qualify for as large a rebate as possible. • Using p-cards for larger dollar expenditures. As noted, p-cards typically are used in organizations for small-dollar purchases. The initial idea was to eliminate as many small-dollar invoices from the accounts payable department as possible—and that is still a motivating force. However, as these programs succeed, many are trying to push the envelope a little further. Initially, certain merchants were reluctant to take the p-card because they did not want to give up the discount on
24.11 Considering a Program
221
larger items. While no one minded paying the card issuer $1 for a $50 transaction (assuming a 2 percent discount), many suppliers were not willing to give up that amount on larger transactions. On a $5,000 sale, this discount could be $100, again assuming a 2 percent discount fee. Therefore, many accounts payable managers trying to make this happen are running into the obvious stumbling block at their vendors– and who can blame them? There is, however, some hope on this front. Certain card issuers are offering a special high-dollar discount for larger invoices. Again, they do not advertise this practice, so the company accepting the card will have to ask its service rep about it. However, general indications are that it should be possible to get the discount reduced to somewhere around 1 percent for amounts over $4,000. Accounts payable managers who meet with resistance from their suppliers might suggest that the vendor talk to its processor about getting such a discount reduction. Needless to say, this will not be attractive to all vendors, but it will definitely increase the number willing to accept purchasing cards. As the number of vendors accepting your company p-cards grows, so will the amount of money coming through the program. Not only will the number of invoices in the department be reduced, but the company may qualify for those rebates nobody is talking about. There has been talk that, due to increased competition among card issuers, this number is dropping.
24.11 CONSIDERING A PROGRAM No doubt there are readers who work at companies that currently are not even considering a p-card program. If this is simply because no one has put the issue on the table, they may be in an excellent position to become the “missionary.” If you want to accept that role, begin by reading everything you can find about p-cards and their use. Talk to peers at other companies who are already using the card and ask how they have benefited. And if they are willing to divulge the information, ask for real-dollar savings figures you can then take to your company’s management. Even those employed at companies still refusing to consider purchasing card programs can use these strategies. If the sticking points can be identified, it might then be possible to find others who faced the same challenges and overcome them—perhaps by starting very small and gradually growing the programs.
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To start your research, additional information is available from these major issuers: American Express: (800) 686-5493 • MasterCard: (800) 219-1013 • VISA: (800) 847-2421
•
Another good source of information about p-cards is the Internet— specifically, of course, the Association of Purchasing Card Professionals (www.napcp.org).
CHAPTER
25
POST AUDIT FIRMS
25.1 INTRODUCTION As more and more CFOs focus on the bottom-line impact of payables, they are pushing accounts payable managers to wring the last cent out of their operations. These managers want to make sure that not one extra penny is paid to vendors, suppliers, or freight companies. Accounts payable managers do their best to make sure that the company’s profits do not leak from their operation, but this is often beyond their control. Duplicate payments still are made on occasion, and discounts are not taken. When this happens, it is up to the company making the mistake to take the necessary steps to get its money back. If the company waits for the receiving company to find the mistake, identify the cause, and return it, they may be waiting a long, long time. To address this growing need, post audit firms have emerged. These companies, also referred to as payment or profit recovery firms, will come in after the fact, review the payments a company has made, and then identify those payments that have been made more than once; they will also point out discounts that could have been taken and charges that were paid but should not have been. Typically, these firms work on a contingency basis, collecting only if they can recover money on behalf of their clients. As might be expected, no company likes to admit to using one of these post audit firms, but many do—including a large portion of the Fortune 500. And companies that do not use them should, for the simple reason that it does not cost anything up front; that is, if a company’s controls are as good as it thinks, the profit recovery firm will find nothing and so will be paid nothing. The best of these companies will also point out weaknesses in a client company’s controls, to help the client tighten its practices, thereby saving more money in the future. 223
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25.2 WHY ARE ACCOUNTS PAYABLE AUDIT FIRMS NECESSARY? An audit can rapidly uncover a number of problems. Poor controls, incomplete documentation, and rush exception checks are just a few examples. Other departments may not be providing all the information AP needs to do its job. In some instances, businesses do not even realize they have paid twice or too much for goods or services, or paid for something the supplier failed to provide. Many believe that once the money is gone, it is gone. This is not true. It is often possible to get money back, and that is exactly what astute AP professionals do. In order to address these problems, a growing number of corporations are turning to AP audit firms to review their accounts payable systems, with a twofold goal: to discover overpayments and to identify procedural weaknesses in the overall operation. Very often these weaknesses lie outside the accounts payable area. By cleaning house, not only does the company get some of its money back, it closes the loopholes that allowed the overpayments in the first place. This is not a case of locking the barn door after the horse is gone, but of getting the horse back in! 25.3 HOW POST AUDIT FIRMS WORK It is really not very complicated. The audit firms come in and review your records. This is their area of expertise, so they know where to look and which companies are the most likely to hold on to extra payments. Some companies believe that requesting statements from their vendors will allow them to identify all credits. What they do not realize is that not all vendors list credits on their statements. The audit firms know which companies are likely to omit credits from their statements even when asked to show all activity. They will look for: • • • • • • • • •
Duplicate payments Missed discounts Missed co-op funds Incorrect invoices Overlooked allowances Excessive transportation costs Purchase price variances Overpayment Sales tax errors
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Real estate lease overcharges • Other lost opportunities •
25.4 ACCOUNTS PAYABLE BENEFITS The first reaction of many accounts payable managers is to see post audit firms as a threat rather than a service. Nothing could be further from the truth. By identifying overpayments and their causes, these firms help the accounts payable manager tighten controls within his or her own organization, and crack the whip at other departments when required. Many accounts payable managers experience great difficulty in getting other departments to change their mode of operation as it relates to accounts payable. However, when they have data from a third party showing how the company lost money because of sloppy procedures, they have more clout within their organizations. Additionally, they will have the proposed changes recommended by the audit firm. The accounts payable manager who recommends such a service to management and then gets money back for the company will look like a real hero. 25.5 COSTS The accounts payable managers in well-run organizations often express the concern that they would be spending money needlessly for such a service. This fear is groundless, however, as these firms work on a contingency basis—again, they get nothing if they find nothing. And, if they only find a small amount, they only earn a small amount. In other words, the more they benefit, the more you benefit. That said, depending on the volume and nature of your accounts payable department, the auditors’ fees can be as high as half of what they recover. This can be negotiated, and the field has gotten quite competitive. Remember that, without their services, not only would your company get nothing, but in many instances it would not even know it was entitled to any payment. In addition, you are closing loopholes for the future. Audits of average organizations generally show that between 0.1 and 0.2 percent of total payments made can be retrieved. To put this in perspective, a company that has $100 million in payables (not sales!) would recover between $100,000 and $200,000. Of course, some companies would receive more and some less. Such overpayment can plague any company. In one instance, an audit firm uncovered a duplicate payment to itself.
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25.6 GETTING MONEY BACK As you might expect, most vendors who are presented with a claim for a repayment or credit are not thrilled; some are even embarrassed. Such repayments are typically made either by check, credit memo, or as a deduction against a future invoice. Accounts payable professionals who suspect their organization might benefit from a post audit service can recommend one of the firms profiled in the next section. What do you have to lose? 25.7 SELECTING THE BEST PROFIT RECOVERY FIRM The number of profit recovery firms out there can seem overwhelming, and some executives don’t even know where to start when it comes to identifying the best company to handle their companies’ accounts. To help you make the determination, the following is a list of questions, supplied by RECAP, Inc.: Does the firm have experience in your industry? Familiarity with industry practices and vendors is essential to catch all erroneous payments and to avoid falsely identifying legitimate payments as erroneous. • Does the firm obtain refunds from vendors, or simply do chargebacks, credits, and reversals? Some firms collect their fee after notifying the vendor that you will be taking a credit for an erroneous payment. Your company should be able to decide whether it wants to accept a credit or insist on a refund, and the payment recovery firm should not receive its fee until the refund arrives or the credit is used. • Does the firm pursue low-dollar recoveries? Because most payments are for less than $500, a large pool of potential erroneous payments exists. However, because of the difficulty involved in sifting through such a massive volume of data, some firms are reluctant to search for these items, preferring instead to concentrate on the big-dollar recoveries. A good payment recovery provider will pursue low-dollar items, thereby increasing the total amount recovered and providing a better understanding of the types of errors that have occurred. • How much of your staff ’s time and how much space at your site will be required? Some post audit firms require desk space and •
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telephones at your site and/or frequent use of your staff, systems, and equipment. Make sure that the disruptions to your operation will be minimal and that any use of your systems and equipment does not adversely impact your staff’s productivity. •
Can you trust the firm to maintain your company’s confidentiality? Many companies do not want outsiders to know that they have outsourced payment recovery. If this is the case in your company, be sure the payment recovery firm is invisible to your vendors and that your company name will not be included on advertising or promotional materials without your express permission.
•
Can the payment recovery firm accept electronic data in the format most convenient to your company? The systems staff at your company should not have to do any custom programming or conversion to provide files from the purchasing and accounts payable systems. The payment recovery firm should be able to accept recent backups of the files in the preferred media.
•
Will the payment recovery firm suggest enhancements to the current process on an ongoing basis? Your company should not have to wait until the end of the project to receive an audit report. Within 60 days of providing the data for analysis, the payment recovery firms should give you suggestions specific to your operation so that you can begin to eliminate many types of erroneous payments.
•
Does the recovery firm’s process take into account the sensitivity of vendor relationships? Many of the vendors may also be customers or potential customers, so they should always be treated with respect and provided with substantiating documentation and given adequate time to resolve erroneous payments.
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Will your company be in control of correspondence with its vendors? Your company should approve each claim before the vendor is notified and be made aware of any contact made with the vendor on its behalf.
•
Ask for and check at least three references before hiring a post audit firm. The references should be companies in your industry or related industries and of approximately similar size to yours. When you contact the references, be sure to ask if they had problems with the firm in any of the preceding nine areas.
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25.8 OTHER CONSIDERATIONS As alluded to in the questions in the last section, there may be times when a company chooses not to pursue an erroneous payment. Some of the reasons might include: The payment was made to a key vendor and the hiring company makes a decision not to pursue the reimbursement for fear that such action might hurt the relationship. This is especially important if the payment is small. • Occasionally, there are political considerations. The company to whom the erroneous payment was made may, for example, be owned by a member of the board of directors; so rather than bring the matter to this person’s attention, and risk offending that person, the payment is forgone. • If there is any chance of negative backlash, a company may also choose to avoid pursuing repayment.
•
25.9 REACTION TO PROFIT RECOVERY FIRMS Whereas many companies love payment recovery firms, their accounts receivable managers are growing to hate them. They consider them a real nuisance because investigating such claims often requires going back through records that have been shipped off to cold storage. Some companies, primarily the larger 800-pound gorillas, are: Refusing to look at claims that are more than 24 months old. • Refusing to look at large batches of claims, instead insisting that each claim be sent individually. • Writing clauses in sales contracts limiting reviews to 24 months. •
These trends make it imperative for a company intending to use a payment recovery service to hire one relatively quickly and frequently. 25.10 SELF-AUDITING There are companies reluctant to pay others to do a task they feel they should be able to complete themselves. An approach that has been used successfully by several companies undertaking a self-audit is: 1. Use the invoice amount and the invoice date. 2. Take two to three years of payment history.
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3. Create a program that uses that history and a subset of the accounts payable master and creates a report that is stratified in two or three different ways. 4. Have someone familiar with the company’s payments review the results and then check against hard-copy data (invoices and purchase orders). 5. When the information is verified, collect what is owed to the company. 25.11 SELF-AUDITING FOR DUPLICATE PAYMENTS As indicated, many companies are incorporating duplicate-payment checking routines as part of their normal processes. Some of the later versions of enterprise resource planning (ERP) systems contain duplicate-payment checking routines. Those who have such systems should make use of those functions. Other approaches include: Running a check of invoice numbers against dollar amounts. • Double-checking to make sure all large payments (the dollar level will vary from company to company) have not already been made. • Requiring a second signature and/or authorization for large payments.
•
25.12 CURRENT STATE OF DUPLICATE PAYMENT AUDIT INDUSTRY Several factors that have changing the industry dramatically in the last few years include: An influx of newcomers to the profession. • Competitive pressures, forcing pricing downward. • A greater reliance on technology to check for duplicate payments prior to the release of payments by companies. • The incorporation by companies of duplicate-payment checking techniques in their normal day-to-day procedures. •
Thus, the industry is being forced to change and adapt. Many firms are changing their product offerings, often expanding into related areas.
CHAPTER
26
BENCHMARKING
26.1 INTRODUCTION Benchmarking has become a hot topic in virtually every department in corporate America. Accounts payable is no different. Ed Koch, the former mayor of New York City, used to get away with asking his constituents, “How am I doing?” but such an informal survey would not be adequate for most of the powers that be. Today it seems everyone wants to measure their companies or company processes against those of others in the same field, but in the accounts payable arena, the amount of data available for this purpose is limited. But when a meaningful measuring tool can be found, benchmarking can provide a wonderful resource for those who really do want to know how they are doing. As long as benchmarking is done carefully, everyone can benefit. Benchmarking will reveal who is doing a good job and which department needs some process improvements. It is also a wonderful way to identify inefficient processes. If other companies in the same industry can process double the number of invoices than at yours, for example, then your company needs to do some investigating. 26.2 WHAT IS BENCHMARKING? In the business world, benchmarking is the process by which a company measures its performance against that of a group of similar companies. Those that come out on top are typically referred to as world class or best in class, the group all companies want to be in. But getting there is very difficult to do. For if it were easy and every company could do it, then that performance would be considered average, not world class. 230
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As just stated, benchmarking must be done carefully, in order for it to be accurate. It is very easy to get off mark, especially in accounts payable departments, where processes are not cut and dry and the same from organization to organization. What can go wrong in a benchmarking effort? Just about everything under the sun. But by carefully asking the following questions, accounts payable professionals can avoid some of the obvious benchmarking problems:
(a) BENCHMARKING CAVEATS.
Are you comparing similar processes? Unfortunately, every company does things a little differently. This means that the process at one company will be different from that at the next. For example, in preparing a check, some companies will have the checks computersigned at the time the check is printed, whereas others will have the check signed by hand. Some will require only one signature, others two. Some will allow lower-level employees to sign checks; others will require relatively high-level (read: highly paid) employee signatures. All these details will affect the number of checks a clerk can prepare, as well as the cost for preparing the checks. • Are you benchmarking your company against those in a similar industry and of similar size? Both these factors will affect processes and costs, as just discussed. For example, invoices received in certain industries are rather straightforward and relatively easy to process, while others are difficult to read and may have many deductions and other adjustments. How and where these issues are resolved will also affect the number of invoices an individual can process. • Are the benchmarking costs reported fully loaded? If they are, rents in different parts of the country can have a significant impact on costs. Depending where in the country a company is located, a low rent can hide myriad problems, whereas a high rent can make it look as if problems exist where none actually do. • Are there any special circumstances surrounding your operations? If, say, clerks are expected to perform special chores not normally performed in most accounts payable departments, this will affect the outcome of the benchmarking. If, for example, one of the clerks has to handle petty cash in addition to processing invoices, numbers will be lower than if he or she devoted 100 percent of the time to invoice handling.
•
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Posing these questions is not meant to discourage those interested in benchmarking. It is a good practice, when used intelligently. Which means, rather than look at the results as being etched in stone, use benchmarking data as a guide for making departmental process and productivity improvements. 26.3 SOURCES OF BENCHMARKING DATA There are a number of places that accounts payable professionals can find useful benchmarking data. They include: Consultants such as KPMG periodically survey their clients. The results published by these firms tend, however, to be more relevant for large Fortune 500 companies; they are not especially useful for middle-market companies. • The IOMA publishes annually its Benchmarking Accounts Payable Survey. Subscribers to the newsletter, “Managing Accounts Payable,” are given the opportunity to participate in the survey. Respondents are given the results for free (those who wish to order the survey can call IOMA at 212-264-0360). • Several personal consultants, such as Watson Wyatt, tabulate average salary data for a wide variety of job titles, including those related to accounts payable. This data is extremely useful in determining whether departmental salaries are adequate.
•
26.4 BENCHMARKING APPLICATIONS Generally, people tend to think of using benchmarking to measure staff performance or costs, but a growing number of accounts payable professionals are finding ways to use the practice to improve their operations. By “thinking outside the box,” it is possible to develop methods of measuring for productivity improvements. Some of the nontraditional ways benchmarking can be used include: Maximize vendor relationships. Identify high-producing employees. • Measure customer service for problem resolution. • Identify problem makers. • Reduce duplicate payments. •
•
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Many accounts payable professionals have at their fingertips valuable vendor information that can be used to track the volume, both by dollar amount and items ordered, by vendor. If you have this information readily available, use it to identify high-volume vendors, then assign each to a single staff member. This can help to smooth the relationship with key suppliers. With this information, a savvy purchasing department can also negotiate quantity discounts, where applicable, and solidify relationships. Rather than order the same item from a dozen vendors, the company can limit its purchases of a particular article to two or three vendors. Limiting the number of vendors in this way will result in a larger quantity being ordered from each, giving purchasing additional strength to negotiate discounts. This information can typically be accessed from the accounts payable systemsomething most purchasing departments do not have access to. Teaming with purchasing to obtain this data and analyze it can enable both departments to come out winners.
(a) MAXIMIZE VENDOR RELATIONSHIPS.
Another way to look at the numbers is to determine how many transactions each employee handles. Even if the system cannot calculate this factor, it is often possible to do by hand with a little effort. Use these numbers to determine which staff members are producing the largest number of invoices. Are they more efficient because they are doing something different, or are they just more efficient? This is another place where it is important to make sure apples are being compared with apples. Sometimes an employee looks as if he or she is processing a large number of invoices when in truth, the employee is simply handling the easy, no-problem invoices. (b) IDENTIFY HIGH-PRODUCING EMPLOYEES.
(c) MEASURE CUSTOMER SERVICE FOR PROBLEM RESOLUTION. Track customer service inquires by type. This will help the department identify areas that should be changed or processes that need tightening. If a large number of calls are received because deductions are not clearly identified, the company may want to include a note on the check stub specifying such deductions to help eliminate some of the calls. Of course, if the vendor does not view the deductions as legitimate, the problem will not be solved—in which case you will need to determine whether these deductions should be taken or if they are actually costing more than they are saving. Similarly, if an unduly large number of complaints revolve around the work of a certain staffer, a little retraining may be in order.
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Track the quality of incoming work. In many companies, the accounts payable department cleans up the mistakes made by a variety of those in other departments. These errors are often made through carelessness, laziness, or sometimes just plain lack of knowledge. By identifying the culprit departments and then the cause of the errors, it is often possible to fix some of them. Once again, a little training may be called for. On occasion, however, more aggressive action may be needed. For example, forcing the offending party to fix a mistake will eventually correct the problem. Initially, this approach will generate more work for accounts payable, but ultimately the department will be rewarded with better incoming work. For example, if the purchasing manager often forgets to code invoices before submitting them for payment, send them back. Many accounts payable professionals fall into the trap of simply looking up the codes themselves, because it’s easier than sending it back. But it does not encourage the purchasing manager to complete the form correctly the next time—why should he or she take the time to look up the correct codes if accounts payable will do it for him or her?
(d) IDENTIFY PROBLEM MAKERS.
(e) REDUCE DUPLICATE PAYMENTS. Keep a log of all duplicate payments, including where the error originated. It is possible that a pattern will emerge, making it clear who or where the problem is. Then it is imperative to make the parties at fault aware of their errors. As can be seen from the examples discussed earlier, benchmarking can lead to productivity improvements that will also make the lives of everyone in accounts payable just a little less stressful, while possibly improving the company’s bottom line.
26.5 CASE STUDY: HOW TO START OR IMPROVE A BENCHMARKING PROGRAM Most accounts payable professionals know they should be benchmarking the performance of their departments. And many are already doing a fine job of it; however, a few have confided that they don’t know where to start. To help those readers, as well as those who are looking to tweak their existing benchmarking processes, two metrics experts from the Gap shared their benchmarking experiences at a recent accounts payable conference. Debbie Vander Bogart, the Gap’s director, and Bennae Stanfield, manager, explained the basics, then pointed out some of the pitfalls to avoid when establishing a benchmarking program.
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Vander Bogart and Stanfield highlighted the many advantages of benchmarking. In addition to using it to justify headcounts, projects, and so on, the procedure helps improve existing processes and eliminate inefficiencies in the accounts payable department. It also flushes out other issues that might not have surfaced without close inspection. For example, if someone on the staff is making extra copies or looking up G/L codes that should be handled by purchasing, the issue will surface during the flowchart stage. More than one accounts payable manager experienced a real eyeopener during the documentation phase. Here are the 10 steps used by the Gap in its benchmarking process. Readers interested in benchmarking can use this procedure either to develop a plan that will work in their own companies or to fine-tune their current processes. (a) THE PROCESS.
1. Set objectives. Vander Bogart and Stanfield recommended that the process be used to establish both quality and service indicators and that the initial goals be relatively simple to measure. Once you are comfortable with the process, you can go after the more complicated metrics. 2. Market your program before you begin. “Build up for a big launch” is the recommendation of the experts from the Gap. Make sure everyone knows what you are going to do and what your objectives are. For example, set a quality goal that states you will process invoices within five days of receiving them in the accounts payable department. 3. Identify your current processes. They might not be what you think they are. The speakers suggested that you flowchart the full process for your department. Don’t do it from memory; rather, follow the workflow through the department. They also strongly recommended that you break out each individual task in the process. 4. Include the entire staff in observations. Time and motion studies will not have credibility if only a few people are included. The speakers cautioned, however, that standing with a stopwatch, timing the staff, is not a positive experience for anyone involved. To make this easier, they suggested picking a 15-minute time frame and simply counting how many invoices are processed. Be creative when establishing the metrics, and try to have some fun. 5. Create, calculate, and update worksheets. Do this only after the metrics have been agreed upon.
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6. Share the results of the benchmarking endeavor with the entire staff. It is imperative that the results of the project be communicated to those being measured. Be creative and avoid finger-pointing. 7. Review the workflow charts to identify those areas that can be eliminated or reworked to be more efficient. Each person will have his or her own way of performing the same task. By taking the best from each, it may be possible to develop an incredibly efficient procedure. Don’t forget to ask the staff for input at this point. The people doing the work every day usually have very good ideas about how it can be improved. 8. Establish customer service agreements between the accounts payable department and your internal business partners. This can be based on the criteria you have established through your metrics. The speakers suggested that these agreements be tailored to the individual requirements of the businesses. Accounts payable departments that handle various divisions may do very different work for each. 9. Set a specific schedule for the ongoing evaluation of the metrics. Continue observing, measuring, and, most important, communicating the results with the staff. Make sure the staff understands that you are simply trying to tweak the system to make it as efficient as possible, not to take punitive action against anyone. 10. Periodically review your actual processes against your flowcharts. Why? Because without realizing it, the staff will gradually change the process, incorporate some shortcuts, and possibly come up with even better ways of doing things. Conversely, some bad habits may sneak in and you want to be in a position to identify those practices and stop them as quickly as possible. (b) A FEW POINTERS. Both Stanfield and Vander Bogart noted that benchmarking can become an overwhelming project, if you let it. Don’t let the project take over, or you will get frustrated. Understand that it will take time, especially if you want to do it right. But don’t let that deter you—the sooner you get started, the sooner you will get finished. It’s also important to recognize that benchmarking may put off the staff. They may feel they are being watched and treated like factory workers. The keys to preventing such misconceptions are communication and marketing. These can mean the difference between the success and failure of your benchmarking program.
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Realize that success won’t be immediate. But when you do have successes—and you will—make sure to celebrate them with your staff—no matter how big or small. The speakers said that, at the Gap, ice cream and balloons were two simple ways they thanked the accounts payable staff for their outstanding efforts. And to add some fun to the effort—yes, some accounts payable departments do have fun—the Gap took its accounts payable department outside for a picnic, which doubled as a brainstorming session. Vander Bogart and Stanfield brought along squishy stress balls in the shape of a heart to hand out. The balls, printed with “I love Accounts Payable,” are given to internal customers, especially those that might have issues with accounts payable. In conclusion, though benchmarking is not easy, it can provide accounts payable managers with the ammunition to get what they need for both the department and the staff. This alone makes it worth the time and effort.
PART SEVEN
REGULATORY ISSUES The nature of some of the payments made in accounts payable is that they require regulatory filings. These include 1099s and 1042s for payments made to independent contracts, as well as filings with the states for sales and use tax and unclaimed property. All of these have intricate rules for the proper way to handle the filings. If done incorrectly or not at all, the company could end up with fines and penalties as well as increased scrutiny from regulatory authorities. The rules for these functions are not intuitive and those responsible for the functions need to keep up to date on the latest rules for the functions–which continually change.
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CHAPTER
27
FORM 1099 AND FORM 1042-S
27.1 INTRODUCTION Employee or independent contractor? That is the question facing many accounts payable professionals. Often, there is no straightforward answer. However, the penalties for getting it wrong can be significant. Note The information provided here is intended only to give the reader an overview of this important subject. It is beyond the scope of this book to provide comprehensive coverage. See Section 27.8 for additional resources where you can learn more about this topic.
27.2 BACKGROUND Each year in January, companies must provide W-2s to all their employees so these individuals can complete their income tax reports. At the same time the W-2s are given to the employees, the information is provided to the Internal Revenue Service (IRS). Usually, that process is straightforward. But there is a second part to this scenario that is less so: It involves those individuals who do work for the company but who are not employees. Companies making payments to independent contractors must report their income to the IRS as well. The information is reported to the contractor on a form known as a 1099. Those receiving 1099s must include the amounts reported on them as income. In order for a company to complete a 1099, it must have the entity’s tax identification number (TIN). If the entity is a person, it will probably be that individual’s Social Security number. If the receiving entity is a business, it 241
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will be its TIN. This information is usually obtained by filling out a W-9 (which is similar to a W-4). So far, this might seem straightforward, but it can turn into a nightmare for the accounts payable department. Why? To begin with, getting W-9s filled out tends to fall through the cracks in many organizations. When year-end rolls around, the accounts payable staff is often faced with the unenviable task of not only identifying all those payments that will require 1099s, but also of obtaining all missing W-9s. Tracking down those missing W-9s is a particularly onerous undertaking, as many individuals who receive such income would rather it not be reported to the IRS. If the Social Security numbers for these individuals cannot be identified, then the income cannot be reported, hence those people will not have to pay income tax on the income. Thus, once the funds are received, the vendor has no incentive to provide the necessary TIN. The second difficulty in obtaining W-9s revolves around the transient nature of many vendors. Many are long gone by the time year-end arrives, so that even if they were willing to provide the TIN, you might have trouble locating them; and even under the best of circumstances, when you can locate them and they are willing to provide the necessary information, this is still a thankless task. 27.3 BEST 1099 PRACTICE Virtually every expert on this topic will recommend holding back the first payment until the W-9 has been received. When your company owes money to vendors, they are most likely to provide whatever is asked. Once you have paid the funds, you have relinquished your strongest bargaining chip and the vendor is now in control. Therefore, no matter how many complaints come from the various powers that be, accounts payable professionals need to stick to their guns on this issue. If a vendor will not supply a TIN when it is owed money, why would it supply it later on when there is no incentive? It cannot be emphasized strongly enough to hold off payment until the necessary information has been received. 27.4 WHAT IF THE 1099 IS NOT FILED? There is a penalty of $50 for each 1099 not filed. If you’re thinking, “Well, that’s not so bad,” think again, because that is just the beginning. The IRS can also require the 31 percent backup withholding of the amount distributed. If the vendor disappears, so does the money; and, logically, if the payment is large, so will the 31 percent. As an example, on a $100,000 payment,
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the backup withholding would be $31,000. The point is, the penalties for not filing a 1099 can be substantial, so do not let anyone gloss over the issue. When pressure comes from upper management to make a payment without having the information on file needed to complete the year-end 1099, calculate the costs to the company and ask management if they are prepared to pay the IRS the required amount should the W-9 not be forthcoming. 27.5 WHO SHOULD RECEIVE A 1099? Needless to say, this is not clear, either. Independent contractors definitely receive 1099s. Generally, these are nonemployees who receive payments subject to backup withholding taxes. Form 1099 are also given to directors. Many, but by no means all, people prefer to have the income reported on a 1099 instead of a W-2, because many expenses can be written off against 1099 income that cannot be written off against W-2 income. Corporations typically do not get 1099s, with the exception of medical corporations and lawyers. The rules relating to medical corporations and doctors are very complicated, and if you deal with these entities, be sure to get additional information. Employees generally do not receive 1099s; likewise, neither bonuses paid to employees nor employee expenses are reported on a 1099. Only under very special circumstances would an individual who is considered an employee and receives a W-2 also earn money that is reported on a 1099. The IRS will look very suspiciously at a company that pays someone as an employee on a W-2 and on a 1099. (a) EMPLOYEES AND 1099S.
To avoid trouble with the IRS over whether an individual is an employee or an independent contractor, be sure to document your files correctly. More than a few companies, including some that you would never expect, have run into trouble when the IRS concluded that they were wrongly categorizing employees as independent contractors. Notably, Microsoft has had a rather lengthy battle over this issue. A person or entity categorized as an independent contractor typically works for more than one company, hence reports income from several sources. However, this is clearly beyond the control of the hiring company, which means it must maintain complete files documenting the independent contractor status of its hires. Each file should contain:
(b) DOCUMENTATION.
A W-9 • A business card •
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A contract detailing the agreement with the independent contractor • Invoices from the independent contractor on its letterhead • Anything else that will clearly indicate the independent contractor status
•
These files should be kept as part of the vendor files, not as part of the employee files. After all, independent contractors are considered vendors. 27.6 LETTERS INSTEAD OF W-9S Occasionally a vendor will provide a letter, instead of the W-9, with the TIN number. This is acceptable if it contains a signed statement to the effect that the information supplied is true and accurate, and that false documentation may result in a penalty of perjury. 27.7 B-NOTICES Most accounts payable professionals who are responsible for sending out 1099s have also had the dubious pleasure of sending B-notices. But while most AP pros know how to issue 1099s, fewer are as familiar with the proper handling of B-notices. Attendees at a recent accounts payable conference were fortunate enough to hear the American Payroll Association’s (APA) James J. Medlock (a.k.a. “Mr. 1099”) address this issue. Payments made to independent contractors must be reported to the federal government in the beginning of the year for the prior year. These amounts are also reported to the independent contractor on a 1099. The contractor is then required to include those amounts in his or her income tax calculations. The problem arises when the TIN provided does not match the name reported. Should this occur, the unlucky accounts payable manager will receive a CP2100A notice from the IRS, reporting that the TIN is missing. And, note, the IRS considers a TIN to be missing even if you provided one if it does not match the name on its records or is incorrect in any way. You are then required to send a B-notice to the independent contractor. There are three kinds of B-notices: the first, second, and third (or subsequent). (a) WHAT IS A B-NOTICE?
In addition to reviewing your records to ensure that you did not make the mistake, check to see if this is the first time you have been notified about this particular individual or entity. Your subsequent actions will depend on the answer to this inquiry. Assuming that this is the first occurrence, send a letter to the independent contractor, along with a W-9 (b) FIRST NOTICE.
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form, in an envelope clearly marked that important tax information is contained within. Medlock said it’s also a good idea to send a self-addressed, stamped reply envelope. Make sure the envelope is marked that important tax information is enclosed. The second time the IRS notifies you, different steps must be taken. And a word to the wise: The IRS will not identify the second notice as such; so, as just described, you must check your records to determine if the IRS has notified you about this particular taxpayer within the last three years. After checking your records and determining that you have been notified about this particular taxpayer, and that you did send the first B-notice, prepare a second B-notice. It is not necessary to send along another W-9. This time, too, Medlock suggests including a return envelope. And, again, clearly mark the outside of the mailing envelope as to what is enclosed. Use language such as “Important Tax Return Document Enclosed.” Keep very detailed and accurate records of all these transactions. Should an envelope be returned for a wrong address, keep it in your files. Then try to find the correct address for the taxpayer, and if successful, send the notice again. The APA strongly discourages accepting any of this information verbally. By putting the information in writing, the taxpayer is certifying that the TIN is correct. If the taxpayer does not respond, the company then is required to begin withholding 31 percent of payments made to that individual as backup withholding taxes. The notice to the company can come in the form of an SSA Form 7028 or an IRS letter 147C. Either must be received within 30 days in order to avoid the withholding.
(c) SECOND NOTICE.
(d) THIRD AND SUBSEQUENT NOTICES. Once again, it will be necessary to check prior-year records to confirm whether this is the third or subsequent notice. If it is, no action is required if the name and TIN reported are the same as in prior years. However, if the name and TIN do not match, you must treat the notice as a first notice and begin the process again. Medlock’s information made it clear that getting the W-9 may be only half the battle for accounts payable professionals. If the information reported there does not match what the IRS has on its records, the accounts payable manager’s job is not complete.
Note For more information about B-notices, visit the American Payroll Association’s Web site, www.americanpayroll.org, or purchase its excellent book, Accounts Payable Preparing for Year End and 2005.
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27.8 TYPES OF PAYMENTS REFLECTED ON 1099S Several types of payments must be reflected on 1099s. These include: Payments of $600 or more • Royalties or broker payments • Certain sales of consumer products • Payments subject to backup withholding •
27.9 MORE HELP FROM THE IRS The revised edition of the IRS’s Worker Classification Training Manual: Employee or Independent Contractor was recently released. It is designed to provide guidance to IRS field agents for use in audits on income and payroll tax issues. The document, which is more than 100 pages long, seeks to provide agents with both guidance and factors to consider in determining whether an individual or entity providing services to a company is an employee (for which the company should withhold income and payroll taxes and pay a share of payroll taxes) or an independent contractor (for which the company has no such responsibility). Though written for IRS agents, accounts payable managers interested in learning more about the employee/independent contractor issue will also find useful guidance in this manual. The IRS also has released a revised Classification Settlement Program (CSP), under which the IRS will make a standardized settlement offer to an employer once it determines that the employer has classified its workers improperly. The CSP is intended to shortcut the employer’s process of obtaining relief at the appeal or judicial level. Thus, the offer, if given, is expected to reduce costs for both the IRS and employers, by essentially jumping straight to the bottom line. This should also make life a little easier for those accounts payable professionals dealing with this issue. 27.10 IT’S 1099 TIME: CHANGES IMPLEMENTED IN 2002 Never the easiest task facing the accounts payable professional, 1099s continue to head the list of migraine-provoking year-end projects. The IRS, in an attempt to capture more information, identify possible tax cheats, and—at least in theory—make things easier for those issuing these forms, instituted some changes in 2002. Speaking at several recent conferences, Balance
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Consulting’s research director Marianne Couch and Michael Boyle delineated some of these changes and offered excellent advice on the general issuance of Form 1099s. There are two philosophies for handling 1099s. Balance Consulting recommends the so-called how-to-be-safe approach— though it concedes that a whole group of companies take the what-canwe-get-away-with approach. As strongly stated earlier in this chapter, companies should get taxpayer identification numbers (TIN) before paying an independent contractor. Remember, if the TIN is not provided, the law requires back-up withholding of 30 percent. This means companies not only must withhold the money, they also have to turn it over to the IRS. So most accounts payable departments do whatever they can to get the TINs. (a) BACKGROUND.
Note The withholding requirement rate will fall to 29 percent for 2004 and 2005, and to 28 percent for 2006 through 2009. The rate then jumps to 31 percent for tax years starting in 2010—unless the tax code is changed again.
Expect a renewed focus on TINs. They can be one of the following: SSN (Social Security number) • EIN (employer identification number) • ITIN (individual taxpayer identification number; for foreign workers) • ATIN (adoption taxpayer identification number; for adopted babies before an SSN is issued) •
ITINs are relatively easy to recognize. They look like Social Security numbers but begin with a 9. Since September 11, 2001, there has been a greater focus on resident and nonresident aliens, and this trickles into the 1099 world. Greater emphasis is being put on Form 1042-S, which companies will be required to file when payments are made to aliens. Expect more of an emphasis on this issue in the next few years. (b) A FEW WORDS ABOUT W-9S. As you now know, the W-9 is the form used by many companies to obtain TINs. But what you may not know is that when setting up a new vendor, you must use a form that was revised in January 2002. This refers to the correct backup withholding rate and directs nonresident aliens to use Form W-8. Whether you use the government W-9 form or create your own substitute W-9 form, it must contain a statement
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that says, “Use this form only if you are a U.S. person.” All companies using their own W-9 forms (i.e., substitute W-9s) must make sure this statement is on their substitute W-9s. (c) NEW IRS TIN MATCHING SYSTEM. One of the many problems accounts payable professionals have with 1099s is that numerous independent contractors provide TINs that do not match the name they have provided. The proverbial DBA (doing business as), the minor misspellings, and other assorted clerical issues all lead to additional work in accounts payable. If there were a way to verify this information upfront, life would be a little easier for the accounts payable professionals handling 1099s. Now there is. As this goes to print, the IRS is unveiling a new system that allows registered payors to submit a list of names and TINs to the IRS for verification prior to the filing deadline. Couch indicates that payors will have two methods for submitting names and the matching TINs to determine whether they are accurate as per the IRS:
Using an interactive session, up to 25 requests can be submitted per session. Response time: seconds. Availability: Possibly November 2003. • Bulk submissions of up to 100,000 requests can be submitted per session. Response time: 24 hours. Availability: Possibly May 2003. •
Note Use of either of these systems requires registration. If you are interested in participating, Boyle suggests that you e-mail Sharon Wilson of the IRS, at
[email protected] indicating that you want to participate. Alternatively, you can call her at 304-264-5777.
Here’s how it will work: The payor will provide the name and TIN of the payee, and the IRS will respond with one of the following codes: 0 = Name and TIN match 1 = TIN missing or not nine digits 2 = TIN not currently issued 3 = TIN/name combination does not match 4 = Invalid request 5 = Duplicate request Watch out for those number 5s. If the IRS suspects you are on a fishing expedition, warns Couch, it will cut off your access for 96 hours. The beauty
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of these systems is that if they are used on an ongoing basis, the accounts payable professional will be able to determine that the TIN does not match the name, and the correct information can be obtained before the vendor is paid—when you still have some leverage. Effective February 14, 2001, the U.S. Treasury gave companies the option of posting payee statements electronically, rather than by mail. Couch notes that this process is not yet available for contributions and distributions of pensions, traditional IRAs, Coverdell ESAs (education savings account), Roth IRAs, and Archer MSAs (medical savings account). The IRS requires consent and disclosure for electronic versions of the statement. They must contain all the required information and comply with applicable rules relating to the creation of substitute statements. The statements must be posted on a Web site that is accessible to recipients on or before January 31. The information must be maintained and accessible until at least October 15 or 90 days after any correction is posted, whichever is later. Companies that follow all the rules and regulations, Boyle says, can post their 1099s on their Web sites, as long as they get the needed approvals upfront. He says that Balance and other companies will do this for companies interested in this process. Accounts payable professionals who are aware of these changes are in the best position to make sure their companies comply with all the applicable regulations. And those who take advantage of the electronic matching offered by the IRS will make their year-end 1099 work a lot easier. Now let’s just hope the IRS can get the program up and running quickly.
(d) ELECTRONIC POSTING OF STATEMENTS.
27.11 1042-S Form 1042-S is used to report all nonemployee payments made to nonresident aliens and payments made to nonresident employees who claim exemption from federal income taxes due to a tax treaty. The filing deadline for 1042-Ss is March 15.
CHAPTER
28
SALES AND USE TAX
28.1 INTRODUCTION Tax laws are rarely simple or easy to understand, and sales tax rules are among the most complicated and arcane of the lot. Not only do they vary from state to state, but even among counties and sometimes even among towns within the same state. Failure by a company to pay proper sales and/or use tax can result in fines. What’s more, states have been stepping up their sales and use tax audits in an attempt to generate income without raising taxes on voters. It is a painless way for states to increase revenues without offending voters. Worse, states cooperate with each other, and some auditors work for more than one state, so that a company that gets a visit from one state auditor is likely to be visited againæif it is found to be negligent. In four out of five companies, it is the accounts payable department that handles this function, not the tax department. Accounts payable professionals must analyze all invoices to ensure that the proper tax has been paid. If it has not, they need to make sure the sellers adjust the invoice and pay it, or that their company pays the necessary use tax. Sales tax cannot be assessed in a jurisdiction if the seller does not have substantial physical presence. This does not mean that no sales tax must be paidnever let it be said that Uncle Sam let a few bucks get away. It simply transfers the responsibility for collecting and paying that tax to the appropriate party. That is where use tax comes in. Each state has its own rules about that as well. 28.2 DEFINING SALES AND USE TAX Sales tax is a tax on the retail sale of tangible personal property. (It is important to note that it should be paid only on retail sales. It is also 250
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charged on certain services.) Use tax is a little more complicated. It is charged by many (but not all) states on the “privilege of storing.” In this case, storage means when the purchaser holds or controls property brought in from out of state that is not intended for resale. Generally speaking, if goods are to be used for demonstration or display, they are not subject to use tax. The rules for what is subject to use tax and what is not are very complicated and vary from state to state.
28.3 EDUCATION It is imperative that the accounts payable professionals responsible for sales and use tax learn what their state rules are. Start by finding out which rules apply to your state and states you deal with (Sections 28.6 and 28.7 contain descriptions of sales and use tax types). At first, these items may seem inconsequential; do not be fooled. In order to calculate a company’s sales and use tax liability, these concepts must be analyzed for each state from which the company buys. Any company that buys or sells goods outside its own boundaries is required to know the sales and use tax laws of all the states involved. There are a number of ways that accounts payable professionals with this responsibility can shorten the learning curve on sales and use tax. Padgett Thompson/AMA offers both a one- and two-day sales and use tax seminar at which participants are given advice relating to sales and use tax. Dates of local seminars can be obtained by calling 800-255-4141 or by visiting www.amanet.org/seminars/public. Those interested in detailed information about particular states should access individual state Web sites. As this is written the following states have no sales and use tax: • • • • •
Alaska Delaware Montana New Hampshire Oregon
If your company is located in one of these states, it does not necessarily mean you are free from sales and use tax responsibilities. Remember, you may be required to pay or collect the tax to other locales depending on the nature of your business.
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One excellent source of free information on the Internet is the Sales Tax Institute (www.salestaxinstitute.com). The firm also offers sales and use tax seminars for a reasonable fee, and its Web site contains periodic updates of information useful to those responsible for sales and use tax in their company. 28.4 POLICIES AND PROCEDURES An auditor who finds a company in noncompliance is likely to be more sympathetic if it has formal policies and procedures in place for handling sales and use taxes. The existence of such a policy indicates to the auditor that the company intends to pay its sales and use taxes, even if it does not always do so correctly; conversely, the lack of a formal policy implies the company has no plan to pay. Thus instituting a policy is a company’s first defense against an aggressive tax collector. And be aware that tax policies need to be reviewed and updated periodically, as the laws continually change. Another good reason to show good faith, in the form of company tax policies, is that auditors and other tax authorities communicate freely with each other, many believe among states and among the various taxing authorities within a state. This raises the odds that once a company is hit for back payments and penalties, the likelihood is that other taxing authorities will come knocking at their doors. 28.5 SALES AND USE TAX AUDITS There are those accounts payable professionals who dread sales and use tax audits because they do not know what to expect and are not sure that their companies are complying with sales and use laws 100 percent of the time. These concerns can be alleviated (or at least partially) through education and by regularly updating corporate sales and use tax policies and procedures. At its seminar on this topic Padgett Thompson/AMA indicated that accounts payable professionals can expect the following four stages in any sales and use tax audit: (a) WHAT TO EXPECT IN AN AUDIT.
Examination of sales • Examination of purchases • Balancing of the general ledger sales and use tax accounts • Review of journal voucher transactions •
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The examination of the purchases can be further broken down into the following three stages: 1. Purchases delivered into the taxpayer’s state from out of state on which the seller did not collect tax. 2. Purchases in which the taxpayer gave the seller an exemption certification where the property was not used in the manner for which the exemption was given. 3. Purchases in a nonseller privilege tax state where the seller failed to collect the tax at the time of the sale. The auditors will either do detail auditing or sample auditing. Should a notice for a sales and use tax audit be received at an inconvenient time, ask to reschedule for a time that works better. Do not use this tactic as an avoidance technique because the day of reckoning will come, and inevitably at an even worse time. To work effectively with sales and use tax auditors is not really complicated: Treat them courteously; give them a decent place to do their job (neither the best nor the worst work location). And do not give the auditors free access to all the company records; there is a more common-sense way to give them what they need to complete their work. Assign one person as the “go-to” source for all auditor inquiries. Empower that person do whatever is necessary to supply the auditor the needed information. This could include:
(b) WORKING WITH THE AUDITORS.
Searching the files for documents. • Asking other people within the company for information. • Researching issues.
•
The purpose of this approach is to ensure that the auditor is neither antagonized nor given unnecessary information. Most important, do not offer information not asked for. The last thing that any accounts payable professional should do is open a door to an issue that the auditor has not even considered investigating on his or her own. If the auditor misses something, it is not the company’s responsibility to point it out. Sales and use tax audits are pesky, annoying tasks that cannot be avoided. But by being well informed and facing them head-on, you will find that the anticipation of the audit is actually much worse than the audit itself. Are you ready?
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28.6 SALES AND USE TAX TERMINOLOGY Some terms surrounding the payment of sales and use tax that the accounts payable professional is likely to run into include: Shifting. The economic burden of paying the tax is “shifted” to the buyer. Absorption. The right of the seller to “absorb” the payment of the tax on behalf of the buyer, thereby making the tax a competitive tool of price negotiation. Separation. The tax amount must appear as a “separate” line item on an invoice or receipt from other elements of a sales transaction. 28.7 TYPES OF SALES AND USE TAX Additional terms include: Seller privilege. The seller has the privilege of selling and is liable for the tax measured by the taxable sales. Consumer levy. The buyer has the privilege of buying and is liable for the tax with the seller serving as the trustee or agent of the state in collecting the tax. Transaction. The transaction has the privilege, with the buyer liable for the tax imposed on the transaction. In the seller’s failure to add tax to the buyer’s invoice, the buyer and seller remain jointly liable. Gross receipt. The seller has the privilege and is liable for the tax measured by the taxable sales. 28.8 KEEPING UP TO DATE By now, it should be obvious that the person responsible for sales and use tax in his or her company has to follow the issues closely. Fortunately, much information is readily available. Here are some places to find it: On the Internet Those readers interested in weekly updates to individual state sales and use tax rulings can visit www.riatax.com/weekly/state.html to find the latest information. Online delivery of sales and use tax rate information is also available from the Research Institute of America’s (RIA) Checkpoint product. For more information call 800-431-9025, extension 3.
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In Newsletters Both the Bureau of National Affairs (BNA) and IOMA publish newsletters devoted exclusively to sales and use tax. To find more information about these publications, visit the following Web sites: www.ioma.com, www.bna.com. 28.9 USE TAX AND NEXUS Nexus is a state’s way of determining whether a company has a “physical presence” in the state. How are you supposed to know if your vendors have “triggered” nexus in your state? And, if they have not, why should it be your concern? Knowing how nexus is triggered and what your vendors are doing about it will put you in the best position to make sure your company is paying all the sales and/or use tax it is obligated to pay. Keep in mind, it is always the buyer’s obligation to pay, regardless whether its vendors collect and remit it as sales tax. If the seller does not collect it, the buyer is expected to remit it in the form of use tax. Therefore, it is imperative that accounts payable professionals fully understand all the implications of nexus. (a) PHYSICAL PRESENCE. Unfortunately, you can’t just check in the telephone book to see if a vendor has a listing to determine that a company has or does not have a physical presence in the state. At a recent seminar, the factors were spelled out that might trigger the nexus necessary to subject a nonresident seller to a state’s sales and use tax laws. They include: • • • • • •
Ownership in the form of inventory or equipment Ownership of a billboard Maintenance by a company of a building (office, warehouse, retail store, etc.) Lease or rental facilities Presence of an affiliate (parent or subsidiary) Participation in a trade show
28.10 SPECIALIZED SOFTWARE Several companies offer software that can be used to track sales and use tax. They include: Vertex Inc.: www.vertexinc.com DPC: www.salestax.com
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Taxware International: www.taxware.com Weiss Group: www.exemptiontracker.com 28.11 ADDITIONAL LEARNING OPPORTUNITIES As you can see, nexus can be difficult to determine, as everything connected with sales and use tax is involved. Attendance at seminars such as the ones run by Padgett Thompson/AMA will help those who have responsibility for this important function. Here is contact information for several organizations that run sales and use tax seminars: Padgett Thompson/AMA: 800-262-9699; www.amanet.org Baker, Shore & Associates, Ltd.: 716-439-6320; www.bakershore.com (Also available in Canada) The Sales Tax Institute: 312-986-1086; www.salestaxinstitute.com 28.12 HELP OTHERS HELP ACCOUNTS PAYABLE Administering the sales and use tax function for a company is not an easy task for accounts payable professionals. For one thing, the regulations vary dramatically from state to state, making it impossible for multistate businesses to design any sort of standardized approach for determining sales and use tax liability. What might be a smart tax move in one jurisdiction, for example, may not work, or may even backfire, in another. Perhaps more frustrating, costly, and difficult to manage, however, are the sales and use tax ramifications of decisions regularly made by employees in nontax departments. Complicating this problem is that many of these decision makers are unaware of the existence of sales and use taxes, let alone their impact. The result? Accounts payable is left to solve problems that are avoidable. But accounts payables professionals can help colleagues in other departments to ease this burden. What can accounts payable managers do to better administer the sales and use tax function? Become an information gatherer, says Diane Yetter, president of Yetter Consulting Services, Inc. and founder of the Sales Tax Institute (www.salestaxinstitute.com). Yetter suggests the following steps:
(a) GATHER INFORMATION.
1. Collect as much information as possible from as many sources as possible. This information can be used to determine nexus, evaluate
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taxability, prepare returns, defend audits, and evaluate business issues. In addition, make sure management understands the importance of keeping your department informed. 2. Be aware of all public communications produced by your company. This includes phone directory listings, annual reports, press releases, Internet postings, and marketing materials. These messages may provide taxing authorities with information contrary to what you have indicated on registration forms or audit inquiries, and may even thwart efforts to win tax incentives and audit negotiations. 3. Stay on top of product or business changes. When your company enters a new market, it may trigger new collection responsibilities. Enhancing services for existing products may also have sales and use tax implications. To evaluate the sales and use tax impact of certain decisions, it’s important to understand all aspects of the company’s business, stresses Yetter. After becoming familiar with state sales and use tax regulations applicable to your business, take a walk through your facilities to determine whether certain processes, items, or materials might be eligible for exemptions that otherwise might have been overlooked. Sales and use tax liability can also be lessened by “creative ordering” practices. For example, what if tractors purchased by the manufacturing department for use in the manufacturing process are nontaxable, whereas tractors bought by the inventory department are taxable? If older manufacturing tractors are still usable by the inventory department, it makes good business sense to transfer them to inventory as needed and order new tractors only through the manufacturing department, where the purchase is nontaxable.
(b) KNOW YOUR OWN BUSINESS.
One of the best ways to gather information is to make allies of colleagues in other departments, says Yetter. Make sure these allies have a basic understanding of sales and use tax, as well as a grasp of the importance of their own role in the company’s sales and use tax compliance process. Allies in the sales, accounting, credit, requisition, and purchasing departments are extremely useful, Yetter points out. She also suggested making friends in the following key departments: • Engineering. The employees in this department who requisition purchases know what they are buying; you do not. Teach them how to provide adequate product descriptions so that accurate tax determinations can be made. If possible, incorporate a taxability status
(c) USE CONTACTS IN OTHER DEPARTMENTS.
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indicator on the purchase order form. This way, engineering employees can indicate an item’s taxability, and accounts payable personnel can make the appropriate tax entries. •
Marketing. This department creates the company image. It issues press releases and handles public communications concerning company activities. With an ally in marketing, Yetter says, you’ll stay abreast of information before it is made public.
•
Legal. This department should already have some knowledge of sales and use tax issues, so that it can deal with audit defense and complex taxability decisions, Yetter says.
•
Information systems. The information systems or MIS department is a key player in sales and use tax administration, warns Yetter. It will participate in any tax automation project, for example, and will generally assist in gathering information for return preparation and audit defense. If the MIS staffers are familiar with sales and use tax issues, they will make sure that changes or proposed changes to the computer systems will appropriately address the applicable sales and use tax requirements.
•
Production/plant/operations. Because the people on the front line understand how the business actually works, they play a crucial role in determining the taxability of items purchased (and sold). Their assistance is very helpful, not only for audit defense, but also for making tax determinations that affect return preparation.
Remember, making sales and use tax liability determinations is difficult enough without management and other employees working against accounts payable in this very important task. Don’t let ignorance of sales and use tax issues on their part make your job harder—help them to help you. Various sources, accessible via various media, can help with sales and use tax questions and problems.
(d) TO LEARN MORE ABOUT SALES AND USE TAX.
Conferences www.salestaxinstitute.com www.amanet.org Newsletters/Publications www.bna.com
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Software www.taxware.com www.vertexinc.com www.salestax.com 28.13 INDUSTRY-SPECIFIC SALES AND USE TAX ADVICE No accounts payable professional who has been through a sales and use tax (SUT) audit would describe it as anything but stressful. The best coping mechanisms for such an experience are knowledge, preparation, and a good offense. As much of the difficulty of the audit experience is universal, establishing generalized audit strategies can be a great tactic for all types of businesses looking to protect their interests and limit their liability during an audit. Helpful as they are, however, such generalized audit strategies cannot address the industry-specific issues for which you will need to prepare. Your best bet? Anticipate the auditor’s industry-specific focus, says Yetter. To help with that, she provided the following overview of sales and use tax audit issues in the manufacturing, retail, telecommunications, and retail/wholesale industries. (a) MANUFACTURING.
Those in manufacturing should:
•
Review the beginning and ending of the manufacturing process in your state. Take the auditor on a plant tour, conducted by someone familiar with both the manufacturing process and SUT issues.
•
Use tax accruals. Auditors will look at out-of-state purchases, so make sure appropriate taxes are accrued on out-of-state taxable purchases.
•
Keep in mind that withdrawals of items from inventory for use in a taxable manner are subject to tax. If items are self-manufactured, tax is usually due only on the material costs, not on labor.
•
Identify what is taxable or not. Nonmanufacturing areas usually are considered taxable, including warehousing, shipping, and receiving; plant manager and production supervisor offices; and production administration.
•
Find all available exemptions in ancillary production processes. Packaging equipment and supplies may be considered exempt as part of the manufacturing process, as may research and development or
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production testing. Some processes may be considered production if they result in a product for sale; for example, waste-handling functions such as baling and shredding, if the waste products are sold. • Tax intraplant transportation. Though this is usually taxable, it may be exempt if necessary and essential to the manufacturing process (e.g., a crane that moves molten steel from one location to another). Check out how conveyor belts, forklifts, and trailers are taxed. Some original items may be purchased exempt as part of an overall machine, while repair parts are taxable because they are sold separately. • Provide documentation. If the predominant-test rule applies in your state, when mixed-use equipment is used in both a taxable and a nontaxable manner, documentation must be provided for the exempt use. Forklifts, packaging equipment, and conveyors fall into this category. •
Qualify used equipment. Equipment used to manufacture or generate electricity used in the manufacturing process may qualify for an exemption, including self-generation equipment such as cogeneration facilities. Another issue to consider is whether power equipment is included in the manufacturing exemption. Step-down equipment may not be exempt because it is too far removed from the production process.
(b) TELECOMMUNICATIONS.
Those in telecommunications should note the
following: • • •
•
•
Certain service equipment may be exempt or taxed at a reduced rate, including antennae, wiring, cable, and transmission towers. Various federal and state taxes, such as the federal excise tax, may or may not be included in the taxable base, depending on the state. Telecommunications providers may also be subject to various local taxes. Telecommunications may be treated differently from other taxable goods and services. Sourcing of long-distance communications and cellular phone charges may be an issue. Most states use the two-out-of-three rule in taxing telecommunications, but some states use a hybrid of the rule. States vary on the taxing of cellular phones sold at a discounted price below cost. Some require the provider to pay tax on the cost of the phone, while others may require the provider to pay tax on the phone’s retail price. Other states treat the transaction as a retail sale and tax the nominal amount charged.
28.13 Industry-Specific Sales and Use Tax Advice
•
Some states may calculate the taxable portion of private-line services using a ratio of in-state channel mileage versus out-of-state channel mileage.
(c) RETAIL/WHOLESALE. • •
•
•
•
•
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Those in retail/wholesale trade should:
Document exempt sales. Auditors will spend a fair amount of time reviewing exempt transactions and related documentation. Regularly review tax rates charged. This is especially important if rates have changed or significant local taxation is involved. An error of just a few days may result in significant liability. Document any deductions taken for bad debts. You must do this to substantiate the debt write-off; otherwise, bad debt deductions may be an issue if the company does not track the debts by state or taxability. Identify issues that may arise about the taxability of packaging and miscellaneous materials used in making retail sales. For example, some states will exempt the bag a customer uses to take new clothing home, but will charge tax on the hanger on which that clothing hangs. Note that shipping and handling charges may be taxed differently. This depends on what is included in the handling charge and how the charges are represented on the invoice. Be aware that promotional items mailed into a state may be taxable. This depends on the recipient, method of delivery, and whether the retailer has nexus in the state. Marketing materials are usually taxed, though the delivery of such materials to customers through the mail may not be taxable.
(d) CONCLUDING THOUGHTS. Don’t make the common mistake of assuming that the auditor knows more than you about your business. Auditors are accountants, not engineers, manufacturers, or computer technicians. You may have to educate them about your business. Also remember that regulations are just the tax department’s interpretations of state tax law, so challenge the auditor if you disagree with his or her interpretation of a particular issue (court interpretations are the law). The more knowledgeable you are about your industry, the more compelling your arguments will sound to the auditor. Don’t be afraid to speak up should it be required. Yetter’s advice is a good first step in that direction.
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28.14 AVOIDING A SALES AND USE TAX DISASTER How seriously does your company take its sales and use tax oversight responsibilities? Hopefully, a little more than Tyco International, whose chief executive has been indicted on charges that he conspired to evade $1 million in sales taxes did. Speaking at a recent conference, Deloitte & Touche’s manager, Brian Kelleher, recommended three approaches that would prevent such a catastrophe. He spoke about a managed compliance agreement, a reverse sales and use tax audit, and automation. Kelleher warned that a managed compliance agreement must be negotiated in advance with the state. He calls it a simplified method for reporting sales and use tax on purchases. Here’s how it works: (a) MANAGED COMPLIANCE AGREEMENT.
1. In most cases, the company enters into an agreement with the state for a period for three years. 2. The company should obtain a direct-pay permit from the state and then make its purchases tax-free. 3. Each month the company computes an effective tax rate and then remits to the state the tax based on the computed effective rate. There are many benefits to this approach. To begin with, cashflow is increased; second, it minimizes overpayments and underpayment, both of which can cause problems for a corporation; third, companies using this approach say that compliance is greatly simplified; and, fourth, they praise the reduced audit and compliance costs. As those familiar with the myriad sales and use tax laws are well aware, it is very easy to overpay sales or use tax. The rules are complicated and constantly change, and the personnel handling the function often are different from one year to the next. And compliance tools used by many corporations are not completely effective either. Thus, some companies hire outside experts to come in and identify refund opportunities. These same experts will also pinpoint potential areas where the company might have an exposure. In both these cases, the company can take one of two courses of action: either file for a refund, to pay excess taxes owed, or simply fix the problem to ensure future compliance. Kelleher says reverse sales and use tax audits have three phases: identify, quantify, and secure tax refunds.
(b) REVERSE SALES AND USE TAX AUDITS.
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Many companies that handle reverse audits for companies do so for a percentage of the savings. A company that undertakes a reverse sales and use tax audit benefits in three ways. In addition to the improved cashflow, it also receives recommendations to improve compliance; finally, its staff is educated, in order to prevent mistakes in the future. Technology is the ideal solution to nitpicky technical problems. And sales and use tax compliance certainly falls into that category. Several companies have developed software to assist in that endeavor, including: Vertex, Taxware, and CorpSales (a Deloitte & Touche product). (c) AUTOMATION.
(d) ADDITIONAL RESOURCES. Due to the constantly changing regulations, which, as noted repeatedly, vary by state and even by county, many accounts payable professionals subscribe to publications to keep them up to date. One of the best known is BNA’s “Sales and Use Tax Rates and Forms.” To find additional information about BNA’s products, go to www.bnasoftware.com/ soft/surfabout.html. Those who wish to educate their staff about sales and use tax will find the sessions given by the Sales Tax Institute of great interest. To find out when the next seminars will be given, go to www.salestaxinstitute.com.
28.15 CONCLUSION How serious an issue is sales and use tax? Here’s what New York District Attorney Robert M. Morgenthau had to say about the Tyco situation, “The state and the city are in a fiscal crisis. For someone who was so highly paid to fail to pay over a million dollars in sales tax is a serious crime. There will be zero tolerance in New York for tax fraud and tax evasion, and I hope the federal government will take a similar view.” I believe that Morgenthau is not alone and that other states will follow his aggressive actions. Is your company ready?
CHAPTER
29
ESCHEATMENT
29.1 INTRODUCTION What does your company do about checks that are issued but not cashed? Does it: Carry the outstanding checks on its ledgers forever? • Write off any amounts outstanding to miscellaneous income after six months or a year? • Turn the money over to the state? •
As strange as it may seem to those not familiar with unclaimed property laws, the correct answer in many instances is to turn the money over to the state. Uncashed checks fall under the Uniform Unclaimed Property Act, which requires every company and banking institution to file, annually, unclaimed property reports with the states, and to make a good-faith effort to find the owners of their dormant accounts. The process is known as escheatment, or simply escheat. 29.2 WHAT IS ESCHEATMENT? Every state and country has escheatment after some period of time. While the timing may vary, what is deemed abandoned property—whether tangible or intangible—and is unclaimed by its rightful owner must be turned over to the state or government. Escheatment then makes the state or government the legal owner to hold the property in a custodial for the rightful owner. State laws governing unclaimed property dictate that the company must attempt to locate the owner in a procedure called due diligence. If the 264
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owner cannot be found during a specified period of time, known as the dormancy period, the property is classified as abandoned. When the rightful owners cannot be found, the money must be turned over to the state. 29.3 WHAT IF YOU DO NOT ESCHEAT? States take this law very seriously. The 1995 Uniform Unclaimed Property Act allows penalties up to $25,000 plus 25 percent of the value of the property for willful failure to report. Claiming that you were not aware of the law has not helped companies, as ignorance of the law is not deemed an acceptable excuse. Companies can be fined up to $5,000 for inadvertent failure to report. A 12 percent penalty interest is also charged, and states do not waive this. The interest is calculated from the initial date of the obligation, which can be years. 29.4 DILEMMA The issue for accounts payable professionals is to make sure that their companies are turning the money over to the state as required—but not one penny more than they must. This is easier said than done. Here is why: •
•
•
•
•
The states are becoming more aggressive in their audit and collection approaches. There are reports that some states are working together. One auditor may actually represent two, three, or more states. The amounts of money involved are staggering. Experts estimate that states are currently holding $11 billion, with another $2 billion being escheated every year. This is believed to be only a small portion of what should be turned over. Not all uncashed checks have to be turned over. If those checks represent duplicate payments, which the payee recognized and did not cash, the money does not represent an unclaimed payment. However, the company has to be able to prove this factually. It cannot simply tell an auditor that it believes the check represents a duplicate payment. Money has to be turned over to the state where the intended recipient is believed to reside. Thus, most companies will find they are responsible for escheating to many states. Rules as to what has to be turned over and when vary by state.
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29.5 WHAT CAN BE DONE? It is not clear where the responsibility for escheatment should lie with the organizational structure. Is it a tax, legal, or accounts payable problem? Here are four different approaches used to handle this issue: The entire function falls under the accounts payable department. • Reporting unclaimed property to state authorities is currently handled by the legal department, based on information provided by the accounts payable department. • The function is handled in the accounts payable department. If funds have to be turned over to the state, the tax department handles the processing of forms and the filing. However, the accounts payable department is responsible for cutting the check. • The bank administration department handles the function. This department is actually under the umbrella of the treasurer’s sector. •
Many companies manage their escheat process using software called Freedom Tracker. It helps them manage the entire escheatment process. 29.6 NECESSARY DOCUMENTATION Every company should have a formal escheatment policy, which should clearly state who does what. As just explained, escheatment typically does not fall solely in the lap of accounts payable. It is likely that tax, legal, treasury, and other parts of accounting may be involved in the process as well. Which areas handle escheatment vary from company to company; in virtually all, however, accounts payable is involved, as the department generally provides the check information. It is important to keep every scrap of paper that might be of use in defending against an escheatment claim by the state. Thus, if a letter is sent to a vendor asking about an uncashed check, and the supplier has replied that the money is not owed, save both the letter and the envelope it was received in. They may be needed at a later point to support a claim that a particular check is not subject to escheatment laws. 29.7 SOFTWARE SOLUTIONS As indicated, escheatment is an issue that can be managed with software. To even try and complete the forms and track the information manually would be daunting. Several states offer simple forms that can be used, and
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will even transmit information electronically. However, these are available on a state-by-state basis. A much more attractive solution is to use software that covers all the states. One such solution is available from a company called The Freedom Group. Although most of this company’s products are devoted to the insurance industry, its escheatment product can be, and is, used by companies in many industries. The product, called Tracker 2000, tracks and reports unclaimed property to the states. As noted, each state requires abandoned funds to be reported annually. But each has different dormancy periods, aggregate levels, and reporting formats. Tracker 2000 keeps track of due diligence requirements and provides a link to Microsoft Word to create search letters. It will: Report on the amount of unclaimed property associated with each state. • Create search letters to send to owners to inform them of unclaimed property. • File reports on paper, diskette, CD, magnetic tape, or online, where possible. • Keep track of specific state information, such as property types and dormancy values, reciprocal agreements, and contact persons for each state.
•
For more information about this product, point your browser to www.freedomgroup.com. 29.8 WHAT CAN ACCOUNTS PAYABLE PROFESSIONALS DO? Recap’s Bob Metzger talked about escheatment at a recent accounts payable conference. Given the timing, his advice could be of great use to accounts payable managers who are questioned by their bosses about the proper techniques to handle this process. Several types of properties are escheated. They include customer or client property, shareholder property, vendor and employee payments, and property due you. Vendor payments are most likely to fall into the lap of accounts payable professionals. Metzger has some excellent advice for managers faced with this issue: 1. Start with your bank reconcilement and uncashed checks. 2. Review your policy on stop payments, voids, and reversals.
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3. Find out if outstanding checks are really due to payees or if payees were “made whole.” 4. Prepare and send payee notifications. 5. File with the appropriate states and governments. Share this information with your credit department as well. Corporations are supposed to escheat credit balances, as they represent unclaimed property. Not all companies are aware of this requirement. 29.9 WHAT IF YOU HAVE NOT BEEN ESCHEATING? After reading this far, do you now realize that your company should have been escheating but perhaps has not been doing so? As stated earlier, the penalties for this oversight can be quite severe. However, not all is lost. From time to time states announce amnesty programs. If your state does not have an amnesty program, discuss with management whether to go to the state and reveal your company’s omissions. Many states will treat with leniency those that come forward on their own. 29.10 PROFESSIONAL ORGANIZATIONS FOR UNCLAIMED PROPERTY OWNERS If, after reading how escheatment works, you’re thinking that the states get this money and hold onto a good portion of it forever, you are correct. There are two professional organizations involved in the escheat process. One focuses on the property holders and the other on the owners. Both have Web sites. They are: www.unclaimed.org www.uphlc.org 29.11 TYPICAL UNCLAIMED PROPERTY EXPERIENCE As explained, unclaimed property is supposed to be turned over to the state, but each state has different guidelines and requirements, making the process difficult for accounts payable professionals whose companies operate in or do business with companies in more than one state. To clarify the process and some of the misconceptions surrounding unclaimed property issues, Karen Anderson, a vice president of Unclaimed Property Recovery & Reporting, Inc. (UPRR) and a speaker at recent accounts payable conferences, shared
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her expertise. Her advice will get even the escheat novice headed down the right path. Most accounts payable professionals get involved in unclaimed property in one of the following ways: • The state sends a notice saying that the company needs to file an unclaimed property report or that the state is sending in unclaimed property auditors to the company. • While attending a seminar, company reps discover that the company has unclaimed property obligations. • The firm that recently purchased the company requires its subsidiaries to comply with unclaimed property laws. • The company complies with all applicable laws, including escheat.
(a) HOW IT BEGINS.
Whatever the reason, accounts payable professionals often, with little warning, find themselves thrust into reviewing unclaimed property obligations. (b) BACKGROUND. As you should now be well aware from reading this chapter, escheatment is a requirement that all unclaimed property be turned over to the state, the specifics of when and how varying from one state to another. Included in the definition of “unclaimed property” are uncashed checks and credit balances. After an uncashed check sits on the books for a period of time, some companies pocket the funds, erroneously writing it off as miscellaneous income. This money should be turned over to the state in a process referred to as unclaimed property or escheat. (c) GOING THROUGH THE ESCHEAT PROCESS. For those companies that have no unclaimed property procedures in place, getting started can seem an overwhelming task. To make it easier, Anderson recommends a very methodical approach, which includes a breakdown by state of the minimum due-diligence amount and the dormancy periods by state. (d) OTHER IMPORTANT FACTS.
Anderson points out several other useful
facts, such as: Forty-one states have fall deadlines. The remaining nine states have spring deadlines. • Accounts payable professionals can expect more audits as state governments look for ways to generate income. • Accounts payable professionals should be aware that many firms are performing audits for several states at the same time. •
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•
Never volunteer extra information during an audit. Give the auditors the documents they ask for and nothing more. There is no reason to give them ammunition for an audit for a different state.
Many in the field were counting on the much-ballyhooed “business-to-business (B2B) exemption” (called the vendor-to-vendor exemption by the states) to take care of the escheatment problem. It is based on the theory that outstanding balances between two business partners actually represent a duplicate payment, or that the difference has been taken care of in a separate transaction. Under this explanation, it would not be necessary for companies to turn over the unclaimed property to the state. Here’s what happened. Nine states (Illinois, Iowa, Kansas, Maryland, Massachusetts, North Carolina, Ohio, Virginia, and Wisconsin) have enacted legislation enabling the business-to-business exception. “But,” warns Anderson, “there are very few situations where it actually applies.” Why? Anderson explains that the difficulties arose in the ruling of Texas v. New Jersey. In simple terms, this ruling found that if one state (in this case, Texas) does not require the unclaimed property to be turned over, then another state (in this case, New Jersey) can demand, under its guidelines, that the property be turned over to it. Anderson says that the only time a professional can feel safe not escheating is when the transaction involves two companies in a no-escheat state, and neither has responsibilities to escheat to any other state. For most readers, this ruling negates the business-to-business exception. If you have more detailed questions about the specifics of your company’s situation, UPRR advises companies on appropriate escheat procedures. Karen Anderson can be reached at 212-971-3333 x24 and via e-mail at
[email protected] or by visiting the UPRR Web site at www.uprrinc.com.
(e) B2B EXEMPTION.
29.12 AN UNCLAIMED PROPERTY GAME PLAN Once a company decides to get serious about unclaimed property, it needs to develop a set of policies and procedures for the process. Anderson has provided the road map below, which will also be useful to those already complying if they want to review their current procedures. 1. Assess the situation: Review past compliance. Has the company ever reported unclaimed property? If so, what, when, and where?
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Has the company ever been subject to a state unclaimed-property audit? If so, what were the results and what states were part of the audit? Are there any subsidiaries to be included? Has the company made any recent acquisitions that should be included?
2. Determine eligible property: Does your company have some of the property types covered by most states? These include: vendor checks, payroll checks, customer credits, refunds, gift certificates, common or preferred stock, and long-term debt. Which states are represented among the names and addresses to be reported? If this is an initial filing, what about years that may not be on the books? 3. Perform due diligence: What due diligence is required by state? Specifically, focus on: the minimum dollar amount, timing, method, and content notice. What about operational due diligence? This might include developing a strategy to minimize unclaimed property liability and reviewing potentially reportable items. Prepare the due diligence letter. This should include the following important elements: response deadline, identification number and amount, property type/reason, instructions for claiming. 4. Prepare reports and remittances: Identify due dates for states. Prepare a cover sheet with signature. Use the proper media (paper, diskette, etc.). Use the proper report format. Include the remittance (check, wire transfer, etc.). 5. File reports and remittances: File on time to avoid penalties and interest. Get extensions in writing. Only some states will grant them.
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6. Follow up and do reconcilement: Reconcile general ledger to detail. Reconcile paid items to appropriate accounts/divisions. File any necessary holder reimbursement claims with the states. Establish a filing system for reports and work papers. 7. Celebrate!
PART EIGHT
MANAGEMENT ISSUES As accounts payable professionals expand their horizons, and the world becomes more focused on the big picture it is necessary to learn about several new areas, specifically the implications of the Sarbanes-Oxley Act, Office of Foreign Assets Control (OFAC), disaster recovery, Six Sigma, Balanced Scorecard, and outsourcing—a very different world than we lived in just a few short years ago.
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ETHICS
30.1 INTRODUCTION Life in the corporate world has in recent years been affected by events few could have foreseen just a few short years ago. The terrorist attacks of September 11, 2001, as everyone knows, prompted more intense focus on payments made to foreigners; and corporate accounting scandals in the same year resulted in the passage of the Sarbanes-Oxley Act. Until the accounting scandals erupted in 2001, ethics was not a topic covered in much detail in many business books, or for that matter in most business schools. But since the well-publicized transgressions of a few individuals at Enron, Tyco, Arthur Andersen, and elsewhere, corporate ethics and corporate governance are now topics of widespread attention at both public and privately held firms nationwide. 30.2 SECTIONS OF SARBANES-OXLEY ACT PERTINENT TO ACCOUNTS PAYABLE (a) SECTION 302: CORPORATE RESPONSIBILITY FOR THE FINANCIAL REPORTS.
The principal executive financial officers must certify that: •
They have reviewed the report.
•
The financials are true.
•
The financials present fairly the financial condition of the company.
•
The company has internal controls in place.
•
They have disclosed material deficiencies.
•
They have disclosed material changes in internal controls. 275
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The annual report must contain an internal control report stating responsibility of management for establishing and maintaining internal controls: (b) SECTION 404: MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS.
They must provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles. • They must provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets. • They must maintain records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the company’s assets.
•
30.3 CASCADING CERTIFICATIONS It should come as no surprise that many chief executives and chief financial officers are not comfortable signing their financial statements without some kind of guarantee from the staffers who prepare the numbers. This has given rise to a new level of certifications, referred to by a variety of names, including cascading certifications, upstream certifications, and subcertifications. No set language or requirements have been established for these certifications, so companies that use them create their own. They typically contain language similar to that included in the certifications given to the Securities and Exchange Commission (SEC) by the top executives. Some have harsh penalties in them if fraudulent information is provided, and others do not. There has been some controversy over those that do contain the severe language. 30.4 SARBANES-OXLEY ACT: A CASE STUDY In the aftermath of the aforementioned financial accounting scandals, CEOs and CFOs must now certify the accuracy of their companies’ financial statements. They must also attest to the adequacy of the controls in place in their organizations, under threat of fine and possible imprisonment for knowingly attesting to falsified documents. Few high-level executives have such
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intimate knowledge of the detailed operations of their firms, so they must rely on the work of subordinates. At first blush, the certification requirements might seem to have no impact on the accounts payable department, but anyone familiar with corporate America knows that many executives will not sign such a document unless they have assurances from their staff. This is just one of the ways the Sarbanes-Oxley Act is impacting accounts payable departments. (a) HISTORY. Pennsylvania Power and Light (PPL) is a public traded utility and, as such, must comply with the new regulations. The company has set up several teams to look at various processes, review control objectives, and identify potential risk points. The teams then identify and document steps taken to mitigate the identified risks. Accounts payable manager Brian Krom points out that the risks in question are accounting rather than processing risks. He is on the three teams that affect accounts payable: the supply team, the settlements group (that reviews both inbound and outbound movements of funds), and the human resources/payroll team. The groups have identified a number of risk points and are now implementing controls. Although most of these issues are “upstream” from accounts payable, many are areas that accounts payable staffers long wanted addressed. Now they have the mechanism in place to address the problems. In the past, some had been looked at, but not to the level that accounts payable would have liked. However, Krom says that, since the passage of Sarbanes-Oxley, company management is listening and addressing the issues. (b) MOVING FORWARD. Krom says that previously he had been required to certify the department’s work internally; but as a result of the act, the process has been formalized to include upstream certifications. Accounts payable already knew where the problems were; now it had the clout it needed to address them. He believes accounts payable will be different a year from now, that it will have a little more influence over the control structure. He also thinks he may be able to get more results, not more work. The new environment at PPL has resulted in an improved status for the accounts payable department. “Processing invoices isn’t the hard part,” notes Krom, “making sure they are legitimate and properly controlled is where the difficulty lies.” He is positive about the process, as his team is able to address a number of issues they have wanted to for a long time. Overall, he sees the move as
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advantageous, although the downside is that a lot of work must be done in a very short period of time—“short-term pain for long-term gain,” says Krom. Not all accounts payable managers will find their firms as receptive as those at PPL. Nevertheless, Krom suggests that accounts payable professionals who want to improve controls and minimize risk points get started soon, because the easiest way to get management’s attention is to start providing examples. Begin by identifying the problems—you may be surprised at what you find. Every time a risk point is identified, and especially when an erroneous payment slips through, document it with a memo, copying those whose attention is needed to make the control changes. And whenever you uncover a problem that involves a violation of the law, note that. Krom is concerned that processing controls are being overlooked in the current rush to end questionable financial reporting. Thus, he cautions his peers not to lose sight of process issues. He suggests that it is important not only to account for something correctly but to also make sure it is for a good business reason. Finally, he notes that, given the current environment, the timing is good to make process changes that improve controls. Management teams in general are more receptive to change now, so take advantage and attempt to implement those pet process control projects that in the past have been put on the back burner. For example, management at your company might now be more receptive to:
(c) ADVICE TO PEERS.
• • • • •
Ending rush manual checks, or severely limiting them. Eliminating the petty cash box. Implementing positive pay. Spending money for staff training. Reviewing escheat procedures.
In short, Krom says, strike while the iron is hot. Once the furor over the accounting scandals dies down, management may return to its old philosophy spending little on accounts payable initiatives. 30.5 FOREIGN PAYMENTS The events of September 11, 2001, ratcheted up the attention focused on payments made to foreigners; specifically, U.S. companies are forbidden from making payments to certain groups and countries. Some accounts
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payable professionals assume that because theirs is a domestic company, they do not have to be concerned about these prohibitions. That thinking can get your company into trouble. It is now known that terrorist groups and other restricted companies deliberately use domestic-sounding names to get by these restrictions. Here’s what you need to know regarding payments to foreigners. 30.6 OFFICE OF FOREIGN ASSETS CONTROL The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. Prohibited transactions are trade or financial transactions and other dealings in which U.S. persons may not engage unless authorized by OFAC or expressly exempted by statute. OFAC administers a number of U.S. economic sanctions and embargoes that target geographic regions and governments. These include: Cuba Iran Iraq Libya North Korea Sudan Liberia Sierra Leone The UNITA faction in Angola, Syria, and Myanmar (Burma) OFAC also covers other programs that target individuals or entities that could be anywhere (such as narcotics traffickers, named terrorists, foreign terrorist organizations, designated foreign persons associated with Slobodan Milosevic or who threaten international stabilization efforts in the western Balkans, and designated foreign persons who have engaged in activities related to the proliferation of weapons of mass destruction).
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30.7 WHAT THIS MEANS TO ACCOUNTS PAYABLE All U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, and all U.S. incorporated entities and their foreign branches. In the cases of certain programs, such as those regarding Cuba and North Korea, all foreign subsidiaries owned or controlled by U.S. companies also must comply. The fines for violations can be substantial. Depending on the program, criminal penalties can include fines ranging from $50,000 to $10,000,000 and imprisonment ranging from 10 to 30 years for willful violations. Depending on the program, civil penalties range from $11,000 to $1,000,000 for each violation. (a) HOW CAN ACCOUNTS PAYABLE COMPLY? OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not countryspecific. Collectively, such individuals and companies are called “Specially Designated Nationals” (SDNs). Their assets are blocked, and U.S. persons are generally prohibited from dealing with them. There are more than 3,500 names on the list. A number of the named individuals and entities are known to move from country to country, and may end up in locations where they would be least expected. The best way to access the list, which is disseminated in a number of different formats, is from OFAC’s Web site at: ustreas.gov/offices/eotffc/ofac/sdn/index.html. (b) IF YOU FIND A NAME ON THE LIST. If you have checked a name and find a match, do not panic. Do a little more research. Is it an exact match, or just very close? Is your customer located in the same general area as the SDN? If not, it may be a “false hit.” Contact OFAC’s hotline at 1-800-540-6322 for verification if there are many similarities. If your match concerns an in-process wire transfer, you may prefer to e-mail your question to OFAC. The form for doing so can be found at www.ustreas.gov/offices/eotffc/ofac/hotline.html. A word of caution: Unless a transaction involves an exact match, it is recommended that you contact OFAC Compliance before actually blocking assets. By becoming familiar with the regulations pertaining to payments to SDNs, accounts payable professionals can protect their companies against stiff penalties.
CHAPTER
31
DISASTER RECOVERY
31.1 INTRODUCTION Companies that have disaster recovery plans tend to do so on a companywide basis, rather than having each department design its own. This does not mean that the accounts payable department, or any other department for that matter, should not make individual plans for coping with the small disasters that everyone encounters from time to time. That said, any departmental disaster plans should be coordinated with the overall corporate strategy. This chapter examines some of the areas that should be covered in an accounts payable department disaster recovery plan.
31.2 PERSONNEL TRAVEL POLICIES All companies should institute firm travel policies, as not doing so could result in serious problems. In some companies, travel policies even detail who can travel with whom, at least at the higher levels, to address the risk of losing several members from the same department should an accident occur—in particular, an airline accident. For example, it is acceptable when two or three people from the same department travel together to a conference, but it is probably not a good idea to send more than that on the same plane. Of course, the number that can travel together increases with the size of the department. Another personnel travel issue centers around the issue of how to contact staff when the inevitable interference from Mother Nature occurs in the form of major storms and more serious natural disasters. Though this type of disaster recovery program is more likely to be needed in certain 281
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parts of the country, from time to time all companies will find it necessary to get in touch with all its employees in a short period of time. 31.3 TELEPHONE TREES How a company contacts all its employees at home will depend both on the overall size of the company and, more specifically, the size of each department. When the number of employees is small, each manager can be responsible for calling all employees in his or her department. However, once the number starts to climb into the double digits, this task must be distributed. Smart managers rely on a telephone tree for this purpose. Usually, telephone trees mirror the company’s organization chart, and who calls whom is based on that hierarchy. Here is an example of how one might work. If, say, a major snowstorm forces the closing of the company, the president might call each of the company’s five top executives, say, the CFO, CIO, and the executive vice presidents responsible for human resources, legal, and sales. Those executives would then call the managers who report to them. The CFO might, for example, call the controller, the treasurer, and the finance manager. The controller would call the three assistant controllers who report to him or her; the assistant controller responsible for accounts payable would call the director of accounts payable. And, assuming this company has a large accounts payable department, the director would then call the three managers who report to him or her. Those managers would then call the three supervisors who report to them; and the supervisors would call all the associates for whom they were responsible. For a telephone tree system to be effective, you must: Update the phone numbers periodically. Update the tree itself periodically. • Instruct employees to take the phone tree home. • Instruct employees to keep the phone tree in a convenient and easyto-remember location. •
•
The system will work well, however, only when everyone does his or her part. Thus, it is necessary for each person to have the numbers for everyone who falls below him or her on the organizational chart. In theory, this means the company president will have the home phone numbers of everyone in the company.
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A word of warning: Telephone trees tend to fall apart when they are not needed for a while. The task of updating them and distributing the new versions to all employees to take home all too often gets put on the back burner. 31.4 COMPUTER BACKUPS Companies with networks, which today is most companies, regularly schedule computer backups to protect all company data that has been entered in the system. Thus, there is little for accounts payable to do in this area. However, it is imperative that the accounts payable department know precisely what the backup schedule is so appropriate action can be taken. For example, any computer user who has forgotten to click the Save button periodically (and who hasn’t?) is well aware of the problems of not backing up on a very regular basis when his or her computer crashes. If your company backs up nightly, this is probably not a major issue. If it does so less frequently, it may be time to look into ways to back up the interim information. 31.5 PROTECTING PAPER Protecting paper documents brings its own set of problems; and accounts payable departments with a paper backlog face a unique set of challenges. Should the department’s papers be lost, burned, or accidentally destroyed before their contents have been entered into the computer system, the information is unrecoverable. The most dramatic example of this came on September 11, 2001. A number of impacted companies had to recover as best they could unpaid invoices that were lost that day, then verify them. In short, paper backlogs cause numerous problems. Disaster recovery issues are just another good reason to: Image everything as soon as it comes in. • Back up on a regular basis.
•
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OUTSOURCING
32.1 INTRODUCTION One of the hot topics in corporate America today is outsourcing. The theory behind this practice is that companies should outsource processes that are not their core competencies, to free them to focus on the things that they do best. On the surface, this would seem to make sense, and would imply that in most companies accounts payable should be outsourced. Yet few companies outsource their entire accounts payable function today. Why not? 32.2 WHY COMPANIES DO NOT OUTSOURCE ACCOUNTS PAYABLE Companies that do not outsource their accounts payable function usually cite one or more of the following reasons: • • • • •
Fear of losing control Unwillingness to give others access to their information Dislike of the outsourcing concept Increase in vendor problems when outsourcing is used Satisfaction with the status quo
32.3 WHEN OUTSOURCING MAKES SENSE Outsourcing of the entire accounts payable function may not be desirable, but outsourcing of specialty functions may make good business sense, for example: Sales and use tax • Freight payments and audit
•
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32.4 Hiring an Outsourcer
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Check printing • VAT reclaim • Duplicate payment audit • Escheatment •
These processes often involve complex rules and regulations, and unless a company is very big, it probably is neither cost- nor time-efficient to hire all the staff expertise required to handle these processes. Outsourcing some of these functions, preferring to pay others to maintain the complex expertise required to complete these tasks efficiently and accurately, is sensible in these circumstances. 32.4 HIRING AN OUTSOURCER Once the decision is made to hire an outsourcer to handle one of your company’s specialty accounts payable functions, the next task at hand is to find a qualified provider. For certain functions, there will be one service provider that is known to be head and shoulders above the rest, making this task a no-brainer. In other cases, there will be numerous providers, in which case you will have to do your homework. To find qualified outsourcers to perform the service(s) you need: • • • •
•
Ask peers at other companies. Search the Internet for possible candidates. Go to an accounts payable conference and visit the exhibitors at the show. Check the latest copy of IOMA’s Accounts Payable Buyer’s Guide (a free resource that can be downloaded from www.ioma.com/mr/ deliver.php?fileid=67). In all cases, ask for, and check, references.
In regard to the last point in the list, be aware that the most reliable references will not come from the outsourcer, but from third-party sources— whether a peer, a colleague you meet at an accounts payable conference, or even as a result of a posting you put on an accounts payable discussion group (e.g., www.ioma.com/forums). Once you have checked out an outsourcer’s references, obtain all the appropriate pricing figures, as well as a list of the services that will be included in the service. And make sure you have a clear idea as to which parts of the function will still need to be performed by your accounts payable department.
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Finally, insist on including an out clause in the contract you sign with the outsourcer, to cover the possibility of things not working out the way you anticipated. Signing a long-term contract can be a beneficial for locking in price, but not if the service provider does not perform as promised, so cover your risk. 32.5 OUTSOURCING: A CASE STUDY Do many of the executives in your company think that the accounts payable function is a no-brainer and could be easily outsourced? If so, they might be interested in the experiences of another company that thought exactly the same way. Consultants often advise companies to outsource their “nonstrategic” or “noncore” functions, which to many includes accounts payable. Those who work in accounts payable can foresee the potential problems with this attitude, but too often management does not and so proceeds to outsource this work. Speaking at a recent accounts payable conference, Mary N. Birmingham shared the roller-coaster experiences her company, Equiva Services, had with outsourcing the accounts payable function. Equiva, which was formed through a joint venture between Shell and Texaco in 1998, was a quasishared services organization that handled a huge number of invoices. Consequently, invoice processing was decentralized. Companies that outsource typically do so to:
(a) BACKGROUND.
• • • • • •
Reduce operating costs. Utilize world-class processes. Free internal resources for other activities. Focus on core competencies. Allocate resources most efficiently. Share risks.
Equiva’s reasons were to: Get expertise from the outside for a commodity-type product. • Free resources from managing noncore skill set. • Take advantage of best practices in the activity. • Reduce costs. •
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More specifically, the company outsourced the portion of accounts payable that was centralized, which accounted for roughly 12 percent of the total activity. It also outsourced the reconciliation of bank accounts, of which there were a substantial number. The performance of the outsourcer Equiva hired, whose experience in the oil and gas industry was not extensive, fell short of expectations. This resulted in: (b) WHAT HAPPENED?
An invoice backlog • Delayed and late payments • Duplicate payments (the most serious consequence)
•
Moreover, the outsourcer could not drive process improvements, nor provide meaningful metrics. Another point of contention was that the outsource provider’s work processes were not compatible with the Equiva environment. Like so many others who undervalue the accounts payable function, the provider had underestimated the skill level required of the employees who would perform the work. The negative consequences were significant. Here’s what happened: • • • • •
Vendors became dissatisfied. The company’s image was tarnished. Accounts were not reconciled. Internal customers were extremely frustrated. Other work groups began processing their own invoices.
The company learned some hard lessons as a result of its outsourcing experience. First and foremost, clearly the corporate culture was not ready to outsource. Almost as apparent was that management did not recognize the work effort and complexity of the accounts payable function, something to which many readers no doubt can relate. Birmingham enumerated three other important lessons learned at Equiva: (c) LESSONS LEARNED.
A procedure or process was necessary for addressing failure to perform. • Compensation is a fixed price and cannot be incentive-driven. • Releasing experienced staff prior to the transition probably was unwise.
•
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Recognizing that the outsourcing arrangement was not working, Equiva developed a case for action. It canceled the agreement with the outsource provider and developed an organizational hierarchy of its own. Because it had released its experienced accounts payable staff, Equiva turned to outside temporary agencies for resources. Birmingham says she also documented policies and procedures, so that when a process did not work, it could be changed easily. And to measure the department’s progress and performance, metrics were developed and used. These numbers proved unequivocally that the accounts payable department handled the work more efficiently than the third party. The Equiva experience serves as a useful lesson not only for those considering outsourcing, but also those whose procedures have not been reviewed and updated for some time. The action steps Equiva took can serve as a road map for those in either circumstance.
(d) TAKING ACTION.
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33
MANAGEMENT TECHNIQUES
33.1 INTRODUCTION At any given time, a variety of management philosophies are employed in corporate America. And from time to time, new strategies gain public attention; some prove to be passing fads, while others take hold. This chapter examines two of the more popular approaches, Six Sigma and Balanced Scorecard, being employed across the corporate landscape today. As the accounts payable function becomes more analytical and elevated in the corporate structure, these approaches are being employed to reengineer the function. 33.2 SIX SIGMA Six Sigma is the structured application of tools and techniques applied on a project basis to achieve sustained strategic results. Most notably, it has been applied and proven in the manufacturing process, but it can work in any business process, including accounts payable. The Six Sigma project process is sometimes referred to as DMAIC, for: 1. 2. 3. 4. 5.
Define. Measure. Analyze. Improve. Control.
It is a data-driven approach that employs a methodology for eliminating defects (driving toward six standard deviations between the mean and the nearest specification limit) in any process, from manufacturing to transactional 289
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and from product to service. Fewer defects can mean lower costs and improved customer loyalty. To achieve Six Sigma, a process must not produce more than 3.4 defects per million opportunities. (A defect is defined as anything outside of customer specifications.) Each accounts payable department can set up its own definition of customer specifications. Interestingly, Six Sigma borrows some of its terminology from the martial arts world. It refers to its practitioners as “green belts” and “black belts,” who are supervised by “Six Sigma master black belts.” The Six Sigma process has been implemented at numerous companies, including General Electric, Motorola, and Allied Signal. 33.3 BALANCED SCORECARD If they haven’t already, accounts payable professionals everywhere will be hearing a lot about Balanced Scorecard. This approach to strategic management was developed in the early 1990s by Dr. Robert Kaplan, of Harvard Business School, and Dr. David Norton. Recognizing some of the weaknesses and vagueness of previous management approaches, the Balanced Scorecard approach provides a clear prescription as to what companies should measure in order to “balance” the financial perspective. It is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. The Balanced Scorecard philosopny suggests that businesspeople view their organizations from four perspectives, and to develop metrics, collect data, and analyze it relative to each of these perspectives, which are: Learning and growth • Business process • Customer • Financial •
Several companies have implemented both Six Sigma and the Balanced Scorecard, successfully marrying these two powerful concepts.
PART NINE
DEPARTMENT MANAGEMENT Eventually, most accounts payable professionals who do well will run a department or at least supervise part of one. Thus, it is important that before that happens, accounts payable professionals should learn something about managing a staff, motivating one as well as keeping up morale of a group. Along the same lines, managers and supervisors also need to work with other departments—even if the other departments can be difficult to get along with. Successful accounts payable professionals, even if they do not run a department, know how to work well with other departments. One of the biggest challenges some accounts payable professionals will run into is turning around a department whose image, deservedly or not, is in the gutter. It can be done, with a bit of time and effort. When an accounts payable manager takes over and turns the image of the department around, morale shoots through the roof.
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MAKING YOUR ACCOUNTS PAYABLE DEPARTMENT FIRST-RATE
34.1 INTRODUCTION Today’s accounts payable departments are a far cry from the preconceived notions held by most people, who, if they even give accounts payable a second thought, still probably envision one or more low-level clerks writing checks while surrounded by mounds of paper. Nowhere in this vision is there a computer, a fax machine, or anything else high-tech. Creative, educated, innovative employees are also not part of this picture. This stereotype is, of course, outmoded, outdated, and just plain wrong. Today’s typical accounts payable departments are staffed with intelligent enterprising people, knowledgeable about the latest technologies in use in their field—though they still may have to fight with upper management to get the funding to purchase those technologies. These individuals are responsible for one of their company’s most valuable assets—its money— and for the most part, they do a very good job taking care of it. 34.2 TYPICAL ACCOUNTS PAYABLE DEPARTMENT Of course, there is no such thing as a typical department. That said, a few statistics, from an IOMA benchmarking survey do give a rough idea of what an average accounts payable department looks like. The size of the department, obviously, depends on what and how much work is handled in the department. Certain functions, such as 1099s, petty cash, T&E, and payroll may or may not be handled within accounts payable. Similarly, coding, check printing, check signing, general ledger work, wire transfer activity, and other functions may also be done inside or outside the department. In fact, in a survey conducted at its accounts payable conference, 293
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RECAP Inc. discovered that the only function handled by 100 percent of the representative attendees was invoice paying. The IOMA statistics show: • • • • •
One-third of all companies have an accounts payable staff of two or fewer employees. Another 30 percent have between 3 and 5. Only 89 percent have more than 20. 10 percent have between 11 and 20. Just under 20 percent have between 6 and 10.
The large number of companies with small accounts payable staff sizes also implies that many of the functions discussed in this book are performed in other departments, most commonly by controllers or accounting and, in some cases, treasury, tax, or finance. 34.3 WHO RUNS THE DEPARTMENT? Much of the work in accounts payable is repetitive, yet if it is not done properly, there is a direct and immediate impact on the bottom line. The accounts payable manager must, therefore, be able to keep the staff motivated and errors to a minimum while simultaneously looking for ways to improve the productivity of the department. Additionally, accounts payable managers, through their efforts, often have the opportunity to save their company money or, in a few instances, make it a few dollars. So, who does corporate America entrust with these responsibilities? Here are some statistics, again from the IOMA survey, about these managers: Approximately two-thirds of all departments are run by women. • The average age of the manager is 39 for women and 40 for men. • Female managers average 16.9 years experience, with 7.2 of those years spent in accounts payable; their male counterparts have on average 17.4 years experience, with just 0.2 of a year less time spent in accounts payable than their female colleagues. •
34.4 HIRING PRACTICES Given the current job market, hiring competent entry-level staff is a major challenge for many accounts payable managers. Once hired, retaining competent staff requires ongoing effort. Underscoring this fact, at a recent accounts payable conference, Robert Half International’s Carrie Buchwald said that the most challenging position for her search firm to fill is that of
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the accounts payable professional. To help in this regard, she shared proven hiring and motivating strategies. (a) WHAT DOES NOT WORK. “Don’t use blind advertisements,” warns Buchwald. Candidates will not respond for fear that their résumés will end up on their bosses’ desks. Given the shift in the hiring climate, employers must now sell their companies to prospective employees. She recommends emphasizing all the positive aspects of the corporate culture of your company to entice candidates to work in your department.
Many accounts payable managers would like to hire college graduates to fill their entry-level accounts payable positions. Unfortunately, the salaries offered by most companies for these positions cannot compete with those given for other accounting positions. Thus, those doing the hiring have to be creative to find competent staff. Some techniques that work are:
(b) EFFECTIVE HIRING STRATEGIES.
Set up a training program for administrative staff. Many companies have very competent administrative assistants, who have no chance for upward mobility. Some of these employees would welcome the opportunity to work in accounts payable, but lack the basic skills needed. Give these hard workers the opportunity to learn and grow with your accounts payable department and you will have a loyal employee for a long time. • Begin recruiting at colleges for temporary positions. Doing so, especially during the holidays and summers, will give you some exposure to potential employees and give them a taste of the accounts payable profession. • Set up a formal mentoring program. Assign experienced staff to work with newcomers, perhaps in conjunction with the first recommendation. Not only does mentoring ensure that the new employee get off on the right foot, it serves as a positive motivational tool for the employee doing the mentoring. It shows they are trusted and valued. • Conduct ongoing training is important for both new and current employees. Technology will continue to play a key role in process improvements in accounts payable. By providing the necessary training to the staff, you will keep their motivation high, preventing them from leaving in order to keep their skills current. Excel, the Internet, and Word, along with basic accounting are a few of the areas where training can be offered to the entire staff relatively easily.
•
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•
Consider hiring graduates from two-year colleges. This approach works particularly well at those companies that offer tuition reimbursement to employees interested in continuing their education. By the time employees complete their four-year degrees, their salaries will have been raised to a point at which they are competitive with those in other departments.
(c) HIDDEN COSTS OF NEW HIRES. Employee turnover costs can be significant. In addition to the costs associated with the hiring process (advertisements, agency fees, temporary help, etc.), there are less obvious costs. For example, your company may have to pay overtime to train a new hire, as well as to complete the daily work while the new employee gets up to speed. Additionally, new employees and temporary workers are likely to make more mistakes during the training process, which take time to correct—and as everyone knows, time is money. Given the costs and aggravation of hiring, many seasoned executives recognize that a more cost-effective strategy is to better manage existing staff. Accounts payable professionals who do so using Buchwald’s advice are less likely to need her first-rate hiring strategies.
34.5 HOW TO ASSEMBLE AN ACCOUNTS PAYABLE DREAM TEAM Finding and maintaining the ideal mix of employees in any accounts payable department takes an incredible amount of hard work on the part of the accounts payable manager—with a dash of luck thrown in for good measure. Then, just when the ideal composition has been achieved, invariably a key employee is promoted to another department, or accepts a job at another company. This wreaks havoc with the hard-won departmental harmony. So finding and keeping the right people for the positions is critical to the ongoing success of the department. This effort, however, is compromised by the current wave of downsizing and reengineering taking place in many companies nationwide. Many professionals who know their company is reengineering, or may be having mandatory staff reductions in the near future, are reluctant to hire new people, especially those who already have a job. Qualified candidates, too, are leery of accepting a position that they suspect may be eliminated in a few months. In the face of all that, accounts payable professionals still have to
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get the work done. How to assemble the best staff in today’s tough job climate are discussed in the following subsections. First, AP professionals must know the number of invoices handled in their department, where they come from, what the terms are, how many come from each vendor group, and so on. Those who do not have a good grasp of what they are currently dealing with are in a very poor position to recommend change. (a) KNOW THE NUMBERS.
(b) MAINTAIN A MINIMAL OR NO BACKLOG. In order to move ahead, all processing backlogs must be eliminated. Otherwise, the entire focus of the department will be grinding out the work rather than spending time evaluating new and more efficient ways to do things. Backlogs tend to create additional work as staff members search through piles of unprocessed invoices for the one that must be paid now. This “fire-fighting” time would be better spent on more meaningful work.
Rather than have every employee distracted by handling vendor inquiries, assign this responsibility to one or more employees who do nothing but answer vendors’ inquiries. This will free the remainder of the staff to work without constant interruptions. An alternative to making vendor inquiries a specific assignment is to set aside a specific time of the day when vendor inquiries will be handled. However, institute this approach with great care, as it may offend certain of your larger customers on whose business your company’s livelihood depends.
(c) SET UP A VENDOR/CUSTOMER RELATIONS GROUP.
(d) DO NOT ACCEPT SHODDY PRACTICES. AP staffs spend a tremendous amount of time fixing mistakes made by others. By confronting the shoddy work practices of other departments that affect AP, it may be possible to improve workflow overall. To that end, promote a management initiative to tie the purchasing manager’s compensation to purchase order accuracy. In some organizations this is a major issue and offers the opportunity for big improvements. Pay on a PO only once. Thus, a supplier sending a partial shipment would get paid for that first shipment; theoretically, payment for the remainder of the shipment would not be made. It will not take long for suppliers to learn not to send partial orders. By identifying, and subsequently changing, the things done by others that create additional work for AP, the accounts payable manager will be better positioned to change that behavior to better meet the department’s needs.
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When looking to improve operations, many managers overlook their best resource: the staffers currently doing the job. Ask those employees for their suggestions. They will have many good ones.
(e) INVOLVE EMPLOYEES.
Track individual employee productivity, but be cautious about taking the results at face value. People will figure out how you are tracking them and then find ways to make their numbers look good. For example, if you track the number of invoices handled by each employee, there will always be those who go out of their way to get the easy invoices.
(f) TRACK PRODUCTIVITY.
(g) ALWAYS BE CREATIVE. Use technology wherever possible to improve productivity, being as creative as possible when looking for productivity gains. Do not add staff until you are sure it is absolutely necessary; you do not want to be in the position of having to let someone go. Use temporary staff until you complete a thorough evaluation that verifies there really is a need for an additional full-time employee.
Use the technology you have to its fullest capabilities. Many professionals have found ways to use simple programs they already have, such as word processing and spreadsheet analysis, to design forms, prepare reports, and even complete employees’ T&Es. The point is, before purchasing new technology, make sure that it will make the group as a whole more effective. Do not purchase a new “toy” simply because “everyone else is using it.” (h) TAKE FULL ADVANTAGE OF TECHNOLOGY.
(i) MAKE THE BEST USE OF EXISTING PERSONNEL. One of the most powerful weapons any accounts payable manager has is his or her existing staff, and whenever possible they should be used to take on extra work. This is an especially effective tactic when the manager can show doing so will prevent mandatory cutbacks. Ideally, of course, this strategy is more acceptable to the employees picking up the extra work when they are paid overtime. Other ways successful accounts payable managers address personnel issues are to:
Use temporary workers for long-term assignments when either downsizing or reengineering would otherwise require job cuts. • Use temporary workers to help during overload periods. • Cross-train personnel so they can pitch in when there are work crunches in other parts of the department. A side benefit to this action •
34.6 Procedures Manual
•
•
•
• •
•
•
299
is to improve employees’ chances of promotion and to make them more marketable should layoffs ultimately be necessary. Rewrite job descriptions to upgrade accounts payable positions so that current staff salaries are at market levels. This will go a long way to keep key employees who might otherwise be lured away by a competitor offering a more attractive compensation package. Retrain employees whose tasks have been automated. This will improve employee morale throughout the department, while making staff more marketable. Address unsatisfactory performers in a timely fashion. Put them on notice that their work has deteriorated, then offer to help them to improve. In this way, you may be able to change marginal employees into productive and valuable contributors. Should they still fail to perform up to standard, you will have given sufficient notice and have required documentation to take further action. (Or, if you’re lucky, they make take the hint and leave of their own accord, relieving you from this distasteful situation.) Add personnel as required to handle increased workloads and to provide existing personnel more time to improve current procedures. Stress the importance of teamwork, so that the accounts payable department staff realizes they are part of a larger team, and not a separate, discrete function. This will increase their esteem and confidence. Where appropriate, offer long-term, temporary personnel who have proven to be quality workers permanent positions. Often, temps turn out to be the best candidates for jobs. After all, you already know the person’s work ethic and capabilities, thereby saving a lot of time and effort training a new employee. Likewise, they will already be familiar with your company culture and know whether they believe it to be a good fit for them. Nip troublemakers in the bud.
34.6 PROCEDURES MANUAL Because many accounts payable departments have grown gradually or evolved as part of the accounting department, few have a written game plan. Instead, procedures are developed on an as-needed basis, in kind of a hodgepodge. Moreover, much of the knowledge about how things work and where information is located often resides with specific individuals. Should those individuals
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get sick or accept another job, the company is left in a lurch. The point is, every accounts payable department should have a procedures manual, to serve not only as a guide in case of emergency, but also to provide managers with the necessary documentation to demonstrate to management the professional capabilities of the staff and the work they are handling. Without such a document, few understand the scope of information that is needed to run a successful department. The procedures manual can also be used to determine whether any processes can be eliminated. We are not going to claim that this will be the most interesting book ever written, but it is essential that every department have one. As an added benefit, it will make the auditors happy. The following guidelines will help you prepare a usable manual: •
•
•
•
•
•
•
Make the preparation of the manual a group project, one in which the entire department participates. Ideally, this effort will be the first step in guiding everyone to work as a team. Prepare a detailed outline of all the topics that need to be included in the manual. Think of it as a detailed table of contents. With a little organization, it probably can be used for that purpose. Assign overall responsibility for the project to someone who is known to get things done on a timely basis. He or she should also be someone who gets along with the staff. Divide the topics, and assign each member of the staff to write one or more sections. Having the sections written by those intimately involved with the work will ensure that the information will be accurate. Have each section reviewed by another, objective, member of the department. Try not to have two people review each other’s work. Many people tend to be sensitive about their writing. Give credit where credit is due. Acknowledge the efforts of all who participate in the project. You may want to consider including a page in the front of the manual citing all the contributors. Once complete, do not leave the manual on a shelf gathering dust. Make plans to update it once a year, and whenever else necessary. If you do not, eventually, you will find yourself back at ground zero when the manual needs to be updated.
Without a procedures manual, accounts payable departments leave themselves open to criticism when duplicate payments or fraud are uncovered.
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34.7 THE IMPACT OF TECHNOLOGY ON ACCOUNTS PAYABLE DEPARTMENTS It is hard to believe that just 10 years ago computers in the accounts payable department were an exception rather than the norm. Now they are commonplace, and accounts payable managers are finding innovative ways to use them to improve departmental productivity while simultaneously tightening controls and reducing costs. The following sections explore how some are putting theirs to use in six AP areas. The biggest change brought about by the widespread use of computers in AP departments has been the shift from mainframe-printed checks to those output on laser printers via personal computers. In some cases, companies using this technology have even been able to completely eliminate handwritten rush checks, a ripple effect of which may be fewer duplicate payments. Why? Because many duplicate payments arise when a rush manual check is written but not entered into the accounting system. When a second request for payment is made, the invoice does not appear to have been paid. Check printing on laser printers also allows companies to eliminate their preprinted check stocks, because all the necessary bank information and company logo are included as part of the computer program. This is especially useful to companies that have many different bank accounts for different purposes. In addition, laser printers have many other control features built in, which when set up correctly, offer better fraud protection than multipart checks traditionally used by companies. Most of these printers also have the capability to have checks automatically signed—although not every company goes that route, or only for smaller checks (and, of course, each has its own definition of what a small check is). A final savings is that companies no longer need to purchase and house the check-bursting machines needed to handle traditional three-part computer checks. (a) CHECK PRINTING AND SIGNING.
As anyone who uses wire transfers will attest, they can be time-consuming and very expensive when done by phone. Nevertheless, because they are typically done for large-dollar payments or when it is imperative that the funds arrive by or at a precise time, many companies have to pay the price. Now there is an alternative: by initiating your transfers online through a computer, it is possible to cut these exorbitant fees. With
(b) ONLINE WIRE TRANSFERS.
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proper controls, the initiation of wire transfers online not only lowers fees but also saves a great deal of time. (Some companies are also using this online technology to issue and amend letters of credit.) Of course, before taking this option, it is imperative that proper controls be put in place. Another good reason to consider this option is that as banks become more cost-conscious, they focus on the true cost of taking a wire transfer request by phone. It is time consuming and therefore expensive for the bank. Increasingly, they are raising the cost of phone wires (to as much as $50 per wire), to encourage their customers to use online wire transmissions instead. Even if your bank has done this yet, do not be surprised if it does in the future. There are now a number of software programs on the market that allow the accounts payable department to automate the traditional three-way match (print order with invoice and receiving document). These programs only spit out the exception items, when the documents do not match. As you might imagine, this is not only a big timesaver, but also helps reduce errors.
(c) ONLINE THREE-WAY MATCHING.
Intercompany e-mail is a big help to the accounts payable manager. When accounts payable professionals need to notify people to come pick up their checks, for example, they can simply send an e-mail message. And, when appropriate, it can be broadcast to the entire company just by clicking on a few extra buttons. This technology can be used at companies of all sizes. Many companies successfully use e-mail for other intercompany communications and applications, including to: (d) E-MAIL.
• • • • •
Streamline and shorten the time span for T&E reports to be reimbursed. Open better communications between departments. Give quicker responses to AP problems or queries. Make notification of T&E electronic payments. Prod executives who are slow in getting invoice approvals back to AP.
Traditionally, much invoice data entry has been done in the accounts payable department. Today, with computers on
(e) DELEGATE DATA ENTRY TO USERS.
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most employees’ desks, this is no longer a necessity. In fact, in some organizations, this responsibility has been pushed back to the department approving the purchase. If your company decides to take this route, expect to meet some resistance from those departments that are overworked and/or are not willing to take on additional tasks. The amount of paper generated in an accounts payable department and sent to other departments can be enormous. Networks can alleviate this problem, as do AP Web sites. (f) USE NETWORKS TO REDUCE PAPER FLOW.
34.8 OUTSOURCING Business consultants are all touting the benefits of outsourcing. From the company’s perspective, at least initially, outsourcing may seem to make good business sense. The outsourcer takes a task that falls outside of the target company’s core competency and performs it at a lower cost. The target company can then focus on the tasks it does best. Sadly, however, the target company often then lays off the employees who performed the task now being outsourced. These employees may then be rehired by the outsourcer, usually at a lower salary and with fewer, if any, benefits, to handle the same work. It need not be said that employees that this happens to can hardly be expected to be committed. Even some consultants who vigorously recommend outsourcing will concede that this does happen, but it is not their jobs at stake. If it were, they might have a different perspective. Human concerns aside, looking at outsourcing from the business point of view, does it really make sense? The answer will vary from organization to organization, of course. In general, it might only for certain very limited technical tasks. The best example might be to handle value-added tax (VAT) refunds, as most companies do not have employees traveling internationally often enough to make it worthwhile to have one or more staff members become expert in this area. Aside from some extremely specialized applications, the main area where outsourcing appears to be making inroads in accounts payable departments is in check printing. A few, mostly large, companies are allowing their banks to handle their check printing. In general, though, most companies are extremely reluctant to have their accounts payable information leave their offices. Additionally, they prefer
(a) STATE OF OUTSOURCING IN ACCOUNTS PAYABLE TODAY.
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to remain in control over payment timing, especially when cashflow might be tight. The state of outsourcing in accounts payable today may be summarized best by a speaker at a recent conference who said, “Everybody is talking about it but no one is doing it.” (b) OUTSOURCING CASE STUDY. Several years ago, as part of a companywide headcount reduction, management of a large well-known technology company decided to outsource its accounts payable function. When the team responsible for evaluating the issue interviewed potential candidates to handle the work, they discovered what many other accounts payable professionals have found at both big and smaller companies alike: They could do the work better and cheaper in-house if they reengineered. This revelation was just the beginning, however. The accounts payable team then had to convince the managers, who seemed determined to reduce staff. Fortunately, management was open-minded enough to allow them to make an internal proposal, along with those from outsourcing organizations. The accounts payable manager for this company explained how the team succeeded both in winning the bid and lowering costs dramatically. (c) THE INVESTIGATION. Once the order was received to outsource the accounts payable function, a methodical approach was taken. The requirements for all five accounts payable locations (including one that was already outsourced) were summarized, and a request for proposal (RFP) was sent to seven companies. Four companies responded to the RFP, and two seemed to meet the company’s needs, including price requirements. Company representatives traveled to these two organizations and viewed their operations. At this point, the idea was beginning to emerge. Could the accounts payable department do it better and more cost-effectively? The team thought so and approached management about the possibility of the company making its own bid. Management agreed to look at an in-house proposal, along with the proposals from outside vendors and decided to give the existing department a chance to continue doing the job. (d) THE REENGINEERING PROCESS. When the process began, per-item handling costs were $10.05. Nine months later, this had been reduced to $6.37. These cost reductions resulted from several innovations:
Consolidating several field locations. • Doing accruals quarterly rather than monthly. • Implementing use of an approval stamp.
•
34.8 Outsourcing
• • • • • •
305
Making the audit process more sophisticated. Discontinuing the process of manually decrementing purchase orders. Reorganizing vendor files alphabetically. Converting check stock to a one-part form. Acknowledging decrease in volume due to companywide layoffs. Generally moving to more efficient systems.
But, reengineering is an ongoing effort, and the company did not stop here. A year later, the company had further reduced its per-item costs to $4.95, despite a 35 to 40 percent increase in volume. This was done by: • • • • • • •
• •
Using electronic approvals. Streamlining the accounts receivable refund process, thus eliminating paper. Converting all agency and contractors to an electronic data interchange (EDI) system. Arranging contractual payments. Eliminating hard copies of purchase orders. Streamlining American Express credit card processing. Negotiating an AMEX partnership pricing agreement to allow the company to pay a portion of an employee’s American Express bill directly to AMEX instead of to the employee, resulting in a decrease in the number of client held-days and a discount. Initiating use of auto accruals. Introducing a companywide newsletter about accounts payable. The newsletter was created in an attempt to reduce the number of phone calls coming into the department, along with other inconveniences caused when employees outside the accounts payable area mishandled accounts payable matters. The newsletter offers other departments tips for the proper handling of accounts payable-related matters. This innovative effort was taken on by one of the accounts payable staff members.
Still later, the company further reduced its costs to $3.65 per item, by continually reviewing its operations and implementing new technologies and procedures. For example, the company began using procurement cards, a change that makes the company optimistic about the possibility of still more cost reductions.
(e) MOVING FORWARD.
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The advantages to handling the accounts payable work in-house more than offset the few disadvantages: The accounts payable department did not reduce its headcount. • The work is not part of the company’s core competency. • The company is less flexible than an outside agency would be should it suddenly have to respond to a dramatic increase in volume. • The company still has the administrative support costs associated with keeping the function in-house. •
Nevertheless, the lower per-item costs, the absence of implementation fees, and the staff’s demonstrated ability to manage both costs and headcount far outweighed these and other minor disadvantages. And, of course, the existing staff is much more knowledgeable about the company’s ways than an outside party could ever be. It is also important to point out that this company measures its costs on a very regular basis and reports them to management, something not all organizations do. In conclusion, the company’s accounts payable manager points out that the staff would not have been competitive if they had not pushed hard to reengineer their processes.
CHAPTER
35
MANAGING THE STAFF
35.1 INTRODUCTION In many organizations working in accounts payable is often a thankless job. The people in the department are given little or no respect; compensation is poor; and potential for advancement is rare or nonexistent. Needless to say, this state of affairs makes it difficult for the accounts payable manager to motivate his or her staff to produce the quality, error-free, work. This is a shame not only from a personal point of view, but it’s also just poor business practice because the performance of the accounts payable department can, and does, have a direct impact, either positive or negative, on the company’s bottom line. The good news is that this starting to change in a growing number of organizations, as more senior managers begin to focus on AP functions and realize the profit potential of the department. This also means they are recognizing the efforts of the many highly qualified innovative professionals toiling away in those jobs. What is more, if these people are asked for suggestions, many have useful ideas that can ultimately save the company money, improve productivity, and reduce the number of duplicate and erroneous payments. Unless they are included in this way, staffers are less likely to look for ways to improve departmental productivity. (Chapter 36, “Staff Motivation and Morale,” contains an expanded discussion on ways to motivate the staff.) 35.2 TRAINING In addition to their own field, accounts payable professionals need to learn about a number of other areas, including accounting, technology, people and vendor management, and so on. But until a few years ago, very few 307
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companies offered any additional training to their accounts payable professionals—in part because very little was available. Today a number of organizations hold accounts payable conferences that run from one to five days (a list of these conferences is given in Chapter 41). As you might expect, the content and level of information addressed by these conferences varies. In addition to accounts payable issues, professionals need to learn about a variety of other topics including accounting, technology matters, people management, dealing with difficult vendors, and so on. Training can also be done more informally on an individual basis by encouraging staffers to read about these topics, whether the material is company-provided or from outside sources. There are several reasons to emphasize training. No one, for example, would expect an accounts payable clerk to do a three-way match if he or she had never been shown how to do it. Most accounts payable managers do make some attempt to train newcomers, but unfortunately, too often only if they are new to the field. When a professional is hired from another company, typically only minimal time is spent giving that employee on-the-job training. This is often a mistake, as companies have different procedures and guidelines. What is standard operating procedure in one organization may very well cause trouble at the next. A good example is rush checks: Whereas some companies are flexible about issuing rush checks, others are more strict. A person coming from a company whose policy is to grill someone asking for a rush check may be seen as stepping out of line in the new organization. Thus, accounts payable managers who take the time to ensure that new employees are given adequate training usually find it to be time well spent. Beyond teaching the basics, there are other reasons why training leads to a more productive team. Encouraging the accounts payable staff to obtain new skills will not only enable them to do a better job, but will put them in the position to make suggestions that will improve the way the department is run.
(a) WHO NEEDS TRAINING?
(b) EFFECTIVE TRAINING. In order to get the most out of company training periods, it is necessary to give a little thought to the entire process. Begin by identifying the information you want taught. You might do something as simple as make an outline to make sure that all the pertinent points are covered. You might also want to make copies of relevant handouts to give those attending your training sessions. These handouts could include worksheets, outlines, and related articles for your staff to read at a later time. If
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you find yourself using the same material periodically, make sure and review it before each session, as certain information may have changed and need updating; or perhaps you will need to add supplementary material. Once you have gathered all the material you need, and the presentation is ready, decide how and where to conduct the training. If a large group will be involved (e.g., to train the entire staff on a new system or procedure), probably you’ll need to reserve a conference room. In any case, reserving a room also sends the message to staff that they are special and that the topic to be covered is important. For some, it may be the first time they have been in the conference room. If the instruction is to be one-on-one, a private office might work. Or, depending on the situation, it might be appropriate to train at the staff member’s desk. This is more likely to be the case if the employee’s computer is involved. At all times, encourage staff members to ask questions. Remind them that there is no such thing as a stupid question; and then reinforce that concept with comments such as, “That is a good question,” or “I am sure others are wondering the same thing,” to make less confident staffers more comfortable asking questions. Go over each step in detail. A topic that appears simple to a manager with years of experience probably will not be as readily apparent to the staff or to someone hired from the outside. Keep in mind, these people will not be familiar with the intricacies of the company’s financial systems or its executives. The manager does not have to do all the training. If someone on staff is particularly good at a certain facet of the operation, let him or her do that part of the training. The manager will save his or her time by delegating, and the selected staffer will get a morale boost as well. Completing the training is only half the job. Just because questions were answered and everyone seemed to have a full understanding of what was being discussed does not mean all’s well that end’s well. Follow up by checking frequently on the work affected by the training. If, say, a new form was introduced for rush checks, check all those forms for the first week. If you find errors in the way the form is being used, to the individuals who made the mistakes. If a number of people seem to be making the same mistake, consider that the problem may have been with the instruction, and schedule a follow-up meeting. Review the mistakes in the second session and ask for more questions. If, however, the problems are
(c) FOLLOW-UP.
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minor, you may be able to address them in a memo, covering the problem in detail, rather than tying up everyone in a meeting. Some accounts payable managers report that they like to schedule followup meetings even when there are no major glitches resulting from the training session. They prefer to discuss with their staff how the new procedures are working, and nip in the bud any additional problems that may have surfaced since the training. Keep in mind that it is not always possible to anticipate the full extent of a problem until you are up to your knees in it. Often there are unanticipated consequences to even the simplest changes. Though training can take what seems an inordinate amount of time, you will find the time you invest in training your accounts payable staff to be well spent, earning many dividends in the form of higher-quality, error-free work and the ability of your staff to handle a larger, more complex workflow with less supervision. 35.3 FINDING CHALLENGING WORK FOR THE STAFF Motivating people beyond the nine-to-five mentality and making the routine seem more interesting are common challenges facing all managers today. Others find it difficult to stimulate a staff that resists making changes or taking on additional responsibilities. Suggestions for meeting these challenges include: Involve the staff in an improvement plan by making them “owners” of the procedures and policies that are being changed. When people have a say in how things work, they will find them more interesting. • Make several changes simultaneously. One change alone usually can’t lighten the load significantly, whereas several made at the same time will be more meaningful. • With a decentralized staff, use a custom training manual and arrange for special staff instruction. Assign an accounts payable staff member from the home office to visit each region for two weeks, to give comprehensive training sessions to those in the field. This will result in a more productive and satisfied staff and less complaining.
•
35.4 LISTENING SKILLS Accounts payable managers often complain that their bosses do not listen to their ideas, but do not realize that their own staffers and an occasional vendor might have the same complaints about them. Good listening skills do
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not come automatically. Of the four basic communication skills—reading, writing, speaking, and listening—the first two are widely taught, the third to some, and the fourth to very few. This is doubly unfortunate, because we listen more than we read, write, and speak. One study found that people typically spend 9 percent of their time writing, 16 percent reading, 30 percent talking, and 45 percent listening. The manager who listens will be much better at his or her job. But really listening is something few people do, because, often, instead of paying attention to what the speaker is saying, they are actually thinking about their responses. A few tips to help managers learn to listen better are: (a) HOW TO IMPROVE YOUR LISTENING SKILLS.
Resolve to improve. Admitting you have a problem in this area and committing to improving your listening skills is the first step in the right direction. Thereafter, doing something about it will be much easier. • Deemotionalize listening. Psychologist Carl Rogers pointed out that each person brings a unique point of view to communication. On hearing certain words, a set of emotions is activated. It is a good idea to sit down and list the words and ideas you feel most strongly about, whether positively or negatively. Tell yourself, for example: “Next time I hear the term ‘EDI,’ instead of turning off, I will deal with it in a positive way, which I am now going to predetermine.” Deemotionalizing dialogue is one of the hardest things for anyone to do, however. If a staff member (or boss) comes to your office, whether happy, upset, or angry, it will be difficult to respond in a noninvolved way. Everyone tends to pick up on the emotions of others, but by doing so we cease to listen attentively. Managers, therefore, need to learn to remain calm, in order to control the dialogue, to bring it from the realm of the emotional to the rational. • Position yourself carefully. Do not violate other people’s “personal space.” Getting too close to staff members physically can make them feel threatened or uncomfortable. Although the proper distance varies from person to person, two feet or so is a good rule of thumb. If the person you are speaking to seems uncomfortable when you are that close, step back a few inches. Conversely, if you are having trouble getting and keeping the person’s attention, you might try moving closer and then stepping back. Chances are, you will be able to start communicating. •
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•
•
•
•
•
•
Pay attention. Show interest in whoever is speaking and in what they have to say. Look the person in the eye. And ask questions that show you understand what they are talking about. Use body language. People communicate with body language as much as with words. Specifically, some 80 percent of the emotion in a speaker’s message is conveyed via body language. Feed back the speaker’s message. Repeat in your own words what you understand the speaker to have said. He or she will either correct you or confirm that you understand his or her intent. This is especially important when a vendor is issuing a complaint. You will have plenty of time to think while the other person is talking. The average speaker talks at 125 words a minute, but can think at 500 words a minute. That should allow plenty of time to listen to what is being said while composing an answer. Question the speaker. If you do not understand something the person has said, ask him or her to clarify, justify, or expand. Of course, if you are in what could be perceived as an inferior position (say the speaker is the hostile head of purchasing or an important, but belligerent, vendor), do so with caution. In general, however, most people do not mind questions—they are flattered by them, because your queries indicate you are interested. Repeat to yourself the speaker’s key points several times. Dale Carnegie suggested that if you repeat people’s names silently three times in the first two minutes after hearing them, you will remember them. This tactic also holds true for the points they are making. Learn the power of silence. This may be the most productive of all listening techniques. Remaining silent is a way of honoring another. This strategy is extremely useful if you have asked a difficult question of someone and the person does not answer right away. There is a natural tendency to speak to fill the void, but avoid it.
35.5 HIRING STAFF Many excellent books are available on the subject of hiring and interviewing practices, and it is beyond the scope of this book to discuss the subject in a comprehensive manner. There is, however, one topic it is essential to address here: filling a vacant position. Many managers overlook the obvious when there is a staff opening—that is, right under their noses—while
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others get hung up on the particular type of experience they would like the new hire to have. When these two criteria are focused on to the exclusion of all others, managers miss out on all the advantages of hiring someone already on board. These include: An existing employee knows how the company works—understands its corporate culture, knows the unwritten rules, and how to adjust to the quirks of the company’s executives and key managers. • Promoting from within generates goodwill and improves morale within the department, possibly opening up a vacancy for another promotion. • The internal candidate is a known quantity. With an outsider, no matter how good he or she “looks on paper,” or how much checking and interviewing you do, you never can know what you are getting until the person has been hired. • A qualified employee who was passed over for the position may become disgruntled and either turn into an unproductive employee or leave the company completely. •
Many who work in accounts payable are not comfortable speaking up for themselves, to ask for a promotion or the opportunity to fill an opening. Others may not even consider doing so because they are certain they will be denied. Therefore, the next time you have an opening, take advantage of the opportunity to improve morale and hire what just might be the best candidate for the job—a current employee. 35.6 OVERTIME: A SERIOUS ISSUE In companies whose workflow is uneven, the accounts payable staff may be required to work overtime whether they want to or not. Mandating overtime can raise serious morale and productivity issues. Many companies address this concern simply by hiring temporary workers when the need arises. They also do this to fill in for regular staffers who are on vacation or sick leave. This approach is most effective when a little thought and planning goes into the process. To make the most of temporary workers: Give the temp service as much notice as possible. • Inform the service if there is flexibility as to hours and skills. • Be firm about your requirements when there is no room for compromise.
•
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Get quotes from several different temp firms to make sure you are paying a market rate. • Give the temporary workers adequate training to do the tasks you hire them to do.
•
Handled correctly, temporary workers can provide a real boost to an accounts payable department’s productivity. Handled poorly, they can create more work than they complete. 35.7 MANAGING A UNIONIZED STAFF Working with a union staff in accounts payable can present unique challenges. It also draws attention to several crucial management issues that can benefit all AP managers: staff motivation, negotiation and compromise, and staff communications. “For us here at Southern California Gas Company,” says Tom Solum, accounts payable manager, “working with a union has been a positive experience.” Solum and Tom Nichols, a principal in an accounts payable consulting firm, shared their views about working with unions in general, as well as specifics regarding the use of technology, motivation, and special accommodations. While running AT&T’s accounts payable operations, Nichols managed two locations that consolidated the accounts payable operations for the company. Because Florida and Georgia, where the operations were located, were “right-to-work” states, union membership was not a condition of employment, he explained. Nevertheless, with union members making up an estimated one-third of the employees in his departments, he had to abide by union guidelines. So, like the many others who are constrained by union rules, he has found ways to turn working with unions to his advantage. Here’s what he had to say: Management/union rights, relationships, and responsibilities are spelled out in a negotiated agreement between the company and the union with respect to rates of pay and other conditions of employment. There are formal grievance procedures to follow if the parties cannot settle disputes at the local level. (a) COMPROMISE IS THE ANSWER. The relationship between management and employees, needless to say, is fragile. The work environment, as Solum explains, can run the gamut from terrific to one in which everyone is using his or her job as a stepping-stone to better opportunities. Establishing clear expectations and consistently treating employees with respect can go a long way toward creating a positive work environment. Drawing on his experience,
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Solum argues that proposed changes to work practices need to be discussed and agreed upon between management and employees. In that way, by the time the decision becomes final, most employees will have already “bought in” to the change. Nichols has mixed feelings on this point: In times of economic prosperity and stability when cost and competitive pressures are few, there are minimal problems in managing a unionized organization. In a tighter economy, it can be difficult to manage, given that both parties have their own agendas. The decision by management to play hardball, however, could result in arbitration and mediation becoming a way of life. Such an environment becomes costly, and people lose focus on their primary goal of satisfying customer needs. The only short-term approach is to recognize where differences exist and attempt to find a compromise.
There are some very real advantages associated with working with a union staff—benefits that are often overlooked. “The union leadership is uniquely positioned to provide information and perspectives about an organization’s systems and employee attitudes,” says Nichols. “They can challenge company policies that they believe are nonproductive, and provide support and encouragement to their members in an ever changing accounts payable environment.” And that’s not all. “We have a very low turnover,” notes Solum. “When we do have an opening,” he says, “the job is posted and filled by those qualified applicants with the most seniority. This means that most new employees to the group are already highly knowledgeable about the company. Rules for vacation scheduling, who gets overtime, work shortages, and layoffs are well defined and follow established procedures. Performance expectations are clearly defined, and this creates an opportunity to manage based on agreed expectations and standards.”
(b) BENEFITS.
“As you know,” says Nichols, “a major factor in the success of any organization is the extent of effective communication that exists between management and employees. This is no simple task, and must be conducted in an open and honest environment. The presence of a union complicates this situation, by introducing the need to communicate with a third party, which in many cases has divergent opinions on many management issues. In many cases, it becomes a “them or us” environment, which does not foster effective communications.” He offers a workable answer to this dilemma.
(c) COMMUNICATIONS SOLUTION.
The only effective way to solve this problem is to work with the union in forging a true partnership. Management cannot go to the union with only management issues. It must also work with the union on its interests and problems. The union, on the other
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hand, must recognize that effective management of an organization is a valuable and essential function, and have a clear understanding of the economic and other business realities that the organization is facing.
Solum sees the situation in the same light: Management and the union have agreed that it is in their mutual interest to work in an environment where there is labor/management peace and cooperation. This enables us to meet competitive challenges, secure economic security for the employees, and better serve our customers. Management and the union will attempt to settle matters of mutual interest such as environmental concerns, individual safety, and administrative matters in the spirit of the partnership.
Nichols concludes that, as a start, both parties should separately define their goals for the organization and then come together and compare the two objectives. “In most cases, you will be surprised to learn how similar the goals are. A longer-range objective in a true partnership is to involve the union in defining the strategic business plans for the organization.” “One of the challenges we’ve been trying to address,” says another innovative accounts payable manager, “is convincing the union and our HR department that there is a difference between typing and data entry. The clerks are given typing aptitude tests, but are not tested for data entry ability.” Part of that company’s solution is to work with a local community college in creating a half-day data entry course. That is not the only technology-related issue this professional faces. In addition there are all the usual issues of productivity, motivation, customer service, and so on, to deal with. “As we install new processes and systems (‘new’ meaning work traditionally not done by union clerks), reports this manager, “we staff the new roles with nonunion personnel. This is usually at a lower rate and can provide greater flexibility and control over the work. We have been able to steadily improve our services over the last few years this way (and often it is one of the union members who gets the job).”
(d) TECHNOLOGY ISSUE.
Money is a common motivational tool: Rewarding good performance with a salary increase is one way managers encourage good employees to continue to improve. Whether this actually works in general is a debate for another time. But when dealing with unions, where pay rates are negotiated collectively, the fact is, money can be less effective as a motivational tool. What do managers do in this case? Solum and Nichols explained their techniques for getting good performance when money is no longer the object.
(e) MOTIVATION ISSUES.
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“Pay is negotiated,” says Solum, “and there is no variable or incentive compensation plan for the work that is performed. In most cases, a union shop has a competitive pay rate. We established productivity and quality expectations that were negotiated and agreed to by the union. This provides each employee with a clear understanding of the company’s expectations.” He has hit the nail on the head. Many experts advise that setting clear expectations is a good way to motivate and communicate with employees. Nichols offers these additional thoughts. “While money is certainly important,” he says, “I have found four major motivational issues in my discussions with employees concerning the workplace of the future.” Good management/employee relationships require that a company: Aim for balance in work and personal life. • Respect employees for what they do and who they are. • Involve employees in the decisions that affect their work. • Empower employees to make the decisions that will get the job done. •
His advice would certainly work for all accounts payable staffers, be they union employees or not. Companies must run their operations a little differently when the accounts payable departments are staffed with union employees. Solum explains how Southern California Gas Company does it:
(f) SPECIAL ACCOMMODATIONS.
A shop committee has been established to deal with matters concerning the represented employees. In that context, union and management deal with matters that are strictly local to the department and that do not involve changes to the agreement or company policy. Issues that are not resolved may be transferred to the regular grievance procedure.
Nichols faced two additional challenges—training and performance documentation—that required special considerations. Here’s how he addressed the issues: Training . The introduction of new technology in the accounts payable operation was met with resistance by some employees. “Most of this resistance came from our longer-service employees, and it was difficult to differentiate those who were intimidated by the new technology from those who were simply resisting change. The union continuously questioned our generic training programs as new technology was being introduced, resulting in the need for extensive additional training costs before
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we could clearly identify those employees who were not in favor of change.” Performance documentation. The presence of a union required a more comprehensive and structured approach for documenting poor performance. Although productivity standards were in place, there was not automatic agreement between management and the union as to what constituted cause to terminate an employee. No accounts payable manager gets to choose between working in a union or a nonunion shop; it is or is not a fact of life. Thus, those faced with the challenge need to adapt, and adapt quickly. “Hang in there,” advises an accounts payable professional who effectively manages union staff. “Learn to deal with the situation and make it work. It can be done. Learn and understand the union contract and the various rules that apply. Find ways that you can recognize and reward the good workers without violating the contract. Your options may be limited, but among them you should be able to find the solution you’re looking for.” He also suggests that managers work with the union when appropriate or necessary, but work directly with the people whenever possible. “Most of the people really want to do a good job,” he points out, “and take pride in their work. While you’re focusing on the small percentage of the staff that doesn’t want to do the work, don’t lose sight of the majority who really are trying to contribute.”
(g) CONCLUDING THOUGHTS.
CHAPTER
36
STAFF MOTIVATION AND MORALE
36.1 INTRODUCTION Due to space limitations, this chapter can take only a quick look at a few techniques that work particularly well for motivating accounts payable professionals and for boosting their morale. Those managers whose goal is to become world-class managers are urged to study in detail some of the many books devoted to these issues, available on the market today. The importance of management skills to improving departmental productivity cannot be stressed strongly enough. Simply, the manager with these skills will inspire his or her staff to produce more and higher-quality work than one who has poor managerial skills. Sadly, this essential skill set is often overlooked when promoting someone to the position of accounts payable manager. Unfortunately, accounts payable managers cannot just take a pill to make them first-class motivators, and so inspiring a group of discouraged staffers remains one of their most challenging tasks—one that can seem insurmountable when even those companies reporting high corporate profitability insist on cutting staff and/or giving meager raises. 36.2 MOTIVATION TECHNIQUES Given this challenge, it is admirable that many accounts payable managers do succeed in motivating their staffs. For the most part, they achieve this not by taking one or two big steps, but with a series of smaller moves. In short, it is an ongoing process: A manager cannot give the staff a pep talk one day and expect it to spur them on for the next three months. In fact, such a move might backfire and do more harm than good. No, successful motivation comes from making it a part of daily management skills. 319
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The following are effective motivational guidelines managers are using today: •
•
•
•
•
•
Remember, actions speak louder than words. The staff will respond to what you do more than what you say. If you say one thing but act in a contrary manner, they will mimic your behavior not your words. Good work habits are contagious, but so are poor ones. Set high, but realistic, expectations. If you set your standards high, your staff will raise their effort to meet them. And when they do, they will feel proud because they have accomplished something. Don’t forget to let them know you appreciate their hard work; otherwise, they will get the message that you are never satisfied. Praise often and publicly. Conversely, criticize sparsely and always in private. The old adage about being able to catch more flies with honey than vinegar applies when it comes to motivating a staff. Let them know when they’ve done a good job, and make sure others, like the boss, hear about their outstanding accomplishments. Everyone likes to receive compliments. In direct contrast, no one likes to be criticized, though occasionally it must be done. When called for, be as gentle as possible. Let the person know it is the effort, not the individual, being criticized. Most important, never offer criticism within earshot of others. Doing so can seriously degrade the morale of the individual involved. Share credit. Too many managers forget to acknowledge their staff when an assignment has been successfully completed. This guideline is particularly critical when the project affects other company areas, whose staff may not recognize the teamwork behind your success. To be sure, if you forget to share credit, it might not have an immediately noticeable impact, but do not look for the same level of staff support the next time a big project is underway. Set up each person to succeed. Nothing motivates like success. You can ensure success by carefully evaluating each person’s capabilities and assigning work based on ability, thereby ensuring that individuals will be successful at what they do. This tactic will also gently put them on the path to accepting more difficult work in the future. Conversely, if you assign a staffer a task that is completely beyond his or her abilities, he or she may not even try. Include everyone whenever possible. It is easy to fall into the habit of relying on the “superstars” in the department, to the exclusion of the
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rest. When you give the special or choice assignments to the same few individuals, the rest will begin to feel that it does not matter what they do, and their productivity will plummet. There are a few lucky souls who motivate naturally; but for most, knowing how to motivate staff is not second nature. Thus, they have to work at improving these skills on an ongoing basis. To that end, try to implement a few of these guidelines on a day-to-day basis. The results may surprise you. 36.3 EVALUATING YOUR MOTIVATION SKILLS Looking at yourself objectively is difficult, no matter what your profession. This task of self-evaluation becomes all the more challenging when you are forced to assess your managerial skills. Most accounts payable managers like to think they are good motivators, but on close inspection this often turns out not to be the case. In particular, with accounts payable departments continually being pushed to do more work with smaller staffs, it is almost inevitable that both morale and motivation will suffer. That said, accounts payable managers who continue to find ways to motivate their staffs will discover that, almost miraculously, the morale problem evaporates. Essentially, they will kill the proverbial two birds with one stone. To determine whether you are a good motivator, answer the following questions. Then, if you have the courage, ask your staff to answer the questions—on a confidential basis, of course. By comparing the staff’s responses with your own, you should be able to easily identify. The results will also reveal whether you and your staff are on the same wavelength. •
Is success rewarded in your department? Much of the day-to-day work in accounts payable is routine, yet requires continual attention to detail. And too often it seems the only time many in the accounts payable department are noticed is when something goes wrong. Conversely, when they do an excellent job, it is taken for granted. Motivate the staff by frequently giving them praise and recognition for their first-rate work.
•
Do you reward hard work? When someone is out sick or on vacation, and other staff members pick up the extra workload, do you give them special recognition? Or do you simply expect it? By rewarding your hardest workers, they will come to regard extra work as an opportunity to “show their stuff,” and win recognition and respect. It
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is also a way to motivate the staff to help out when the chips are down. If, for example, your department experiences heavy workloads at month’s end, as in many accounts payable departments, when many of your staffers request vacation time, you could have a serious morale problem—with no one taking any ownership for the departmental work. • Do you set standards high? When you see the department’s error rates beginning to drift upward, do you just shrug your shoulders or do you try and figure out what the problem is? Accepting pedestrian results motivates no one and guarantees mediocrity. Let the staff know that you expect the very best from them—and they will give it. •
Does information flow upward? The very best ideas and suggestions for workflow improvement often come from the people who do the work. How many members of the accounts payable staff feel comfortable enough with your management style to offer suggestions for improvement? Staff motivation is highest in those departments where information and insight flow up. If the staff does not volunteer this type of input, ask for their thoughts on problem solving and improving procedures. If, say, you have a problem getting checks turned around quickly enough, ask the staffers who actually handle the checks to help identify the problems. They will be able to tell you which signers hold on to checks and which executives routinely submit incomplete check-request forms. They will also be able to identify who the worst offenders are when it comes to rush checks.
•
Do you discourage office politics? Organizations where office politics are given free run usually have lower productivity and more serious morale problems than those where people are rewarded for the work they do rather than the games they play. Read the riot act to staffers caught developing alliances at the cost of performance. The accounts payable clerk that rushes checks through for a few friends or political allies undermines the hard work done by the rest of the department to eliminate such checks. Similarly, cliques can undermine morale and should not be tolerated.
•
Do you use the power of persuasion, as opposed to ordering staffers to do what needs to be done? Taking ownership of a decision can mean the difference between a highly productive staff and a poorly motivated one. Explaining your reasoning behind a decision can make a big difference. This is especially important when implementing
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changes that require more work with no corresponding increase in productivity. In the last few years, as companies become more aware of the impact of check fraud, many accounts payable departments are being forced to implement checks and balances regarding check storage. On the face of it, these changes mean more work. If staff members understand the full implications of a stolen check, they are more apt to cooperate with the new time-consuming procedures. They may even offer a few additional suggestions of their own. •
Does the department work as a team? People work better when they feel that everyone is striving for the same goal, rather than proceeding separately. If the whole department tries to reduce the number of duplicate payments made, each person is apt to do what he or she can to make sure mistakes are minimized. Leaders rather than commanders, make an organization run smoothly, whether it be the military or an accounts payable department. Too commanding a managerial style can have a demotivating effect on the staff. It inhibits staff members from coming forward with both problems and solutions, and chokes creativity.
•
Does the work connect with the whole? Can the accounts payable staffers see where they fit into the big picture? Those who do are more apt to be productive. The staffer who understands the necessity of processing a certain number of checks per hour, for example, is more likely to try and meet that goal than one who feels as though whatever he or she does makes no difference in the overall wellbeing of the company.
•
Do you financially reward top performers adequately? Nothing can be more disheartening to good workers than to feel that their hard work is not appreciated. And not remunerating them adequately is the worst reason to lose good staff. Yet it happens more frequently than most accounts payable managers might want to acknowledge. Although you may not have a lot to say about setting the pay levels for your staff, you can stress to upper management the importance of keeping salaries and benefits in line with those of competing firms.
There are those accounts payable professionals who will not need to ask their staff to complete this quiz, for as they read through the questions, they will be able to readily identify their weaknesses when it comes to motivation. The point of the exercise, in any case, is to periodically brush up on
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your people skills, as it can be vital to your success, personally, and to the success of your department overall. 36.4 MOTIVATING THE SEEMINGLY UNMOTIVATABLE Everyone has run into the truly unmotivated employee—the one who couldn’t care less about his or her work, making mistakes, losing money for the company, or even the effect his or her actions have on others within the department. From the viewpoint of the accounts payable manager, too often this employee is one passed off to his or her department when the company will not or cannot, for one reason or another, terminate the person. Remarkably though, several innovative accounts payable managers have found ways to get this type of employee moving. Here are four “case studies”: Case 1: The Underachiever. For the underachiever, a good tactic is to try to find an interesting project, and assign to him or her total responsibility for it. Explain what is expected, but not how to meet those expectations. Let the person know that he or she is in total control of accomplishing the task, by whatever means necessary (within reason, of course). Do not forget to insist on regular progress updates. Entrusting responsibility in this way is often an effective way of motivating such workers, as it instills in them a sense of pride to realize that the end result will be a reflection of their capabilities alone. Under these circumstances, often they will try to do the best job they can, and if all goes well might even look forward to greater challenges. Case 2: The Dictator. The lead person is running the department like a dictator. To nip this behavior in the bud, immediately change this person’s responsibilities to preclude the supervision of others. By making this simple change, morale in the whole department should pick up, and unmotivated employees may no longer be an issue. Case 3: The Loner. When one or more individuals take a “mine versus theirs” attitude, it impacts the productivity of the entire department. Instruct the group to work as a team; reiterate that projects are group responsibilities. Eventually, attitudes will change. Case 4: The Follower. Every department has followers, which is as it should be; not everyone can be a leader. The problem comes when followers become a group of dissention. To counteract this, hire several new motivated staff members whose upbeat mood and attitude are contagious. The followers will begin to take their cue from the new employees. Also,
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read about team-building motivational techniques recommended in management books. And if there is a ringleader who tends to “lead” in the wrong direction, make every effort to move that employee into a less prominent position, or possibly out of the department. 36.5 USING THE STAFF KNOWLEDGE AS COMPANY RESOURCE This point has been made in earlier chapters, but it bears repeating: Accounts payable professionals too often overlook one of their most valuable resources for solving problems: their own staff. One good way to tap this resource is to gather together the staffers in a nonbusiness setting—say a pizza luncheon—and present the problem at hand. You will find the knowledgeable solutions that can emanate from such a meeting to be mindboggling—and all for the price of a simple luncheon. Or do it over coffee and donuts in the morning. The beauty of these inexpensive get-togethers is that not only will staffers come up with great solutions to everyday problems, but the extra attention you give them will pay off big-time in their improved morale—especially in those organizations where the accounts payable staff is typically disregarded. All that said, do not be surprised if the first time you hold such a meeting, few staff members make suggestions. Many will be so surprised that someone wants to hear what they have to say that they will be hesitant to offer suggestions at first. However, once they see a few of their recommendations put into practice, and implemented and the person on staff acknowledged, expect to be inundated with suggestions—most of them worthy of further investigation. (Of course, not all the suggestions you will hear will be of value. Take care never to ridicule the person making the point; simply say you will take it under consideration or think about it and thank the individual for his or her input.) 36.6 DEALING WITH POOR-ATTITUDE PROBLEMS Despite their best efforts, even the most skillful accounts payable managers will occasionally find themselves saddled with staffers who have serious attitude problems. In general, friction in accounts payable is due to one of three causes: •
The accounts payable staff is exposed to all the major work-related stress elements: high volume, demand for 100 percent accuracy, constant interruptions, demanding customers, and relatively little positive feedback.
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The doing-more-with-less perspective of certain management teams who think employees should be happy just to have a job—regardless of the number of hours they must work. • Personality conflicts that normally arise from time to time.
•
Of course, in a few unfortunate organizations, all three exist. These issues sometimes lead not only to the aforementioned attitude problems, but to low staff morale, as well. Solutions to this matter generally can be broken down into three main categories: Boosting Morale
Keep your door and ears open; listen and coach. Document and present staff requirements to upper-level management, and obtain the additional staff needed. Get the staff exactly what they need—be it a simple calculator or an up-to-date computer. Whenever division closings, corporatewide downsizing, or company acquisitions are announced, expect morale to decline significantly. To head this off, hold regular meetings with the department to promote the positive aspects of the situation. Identify the more mundane parts of the job, then hire temporary help to do it. This frees up the more experienced staff to work on the more complex tasks. When department members see that their work is valued, their spirits will rise. Periodically, treat the staff to lunch, coffee and donuts, or even an afternoon ice cream.
Implementing Effective Strategies
When dealing with a staffer who continually expresses his or her discontent with both the department and the supervisor, set a deadline by which time the malcontent is told he or she must have all work up to date. By laying the matter out in black and white, you give the employee the message to get back to work. Give notice in writing to those who continually denigrate the company and managers and do not complete their work on time that such behavior will not be tolerated. To avoid serious attitude problems within the department, be very clear, from day one, about the importance of accuracy, timeliness, and internal controls.
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Making the Work More Challenging On a regular basis, review the work to eliminate the most tedious, repetitive, nonvalue-added functions. Assign the tedious work to temporary workers whenever possible. Give all staffers the chance to work on fun projects from time to time—do not show favoritism. Ask for suggestions as to the type assignments each would like to do. If you’re lucky, one staffer might like doing what the others don’t. Rotate the most disliked tasks so that no one individual gets stuck with them constantly. 36.7 GETTING THE ACCOUNTS PAYABLE STAFF TO TAKE ON MORE WORK Doing more with less may become the mantra for the new century in the business world. In spite of the rising expectation that employees should be able handle an ever-increasing workload, little thought or guidance is generally given as to how they can accomplish this. Most accounts payable managers today report being asked to handle additional work but with no additional staff. Surprisingly, many are getting good at it. How? By educating themselves to make the best use of the technology available. By attending classes, conferences, and seminars, and reading widely on related topics, accounts payable managers learn how to get the most out of new software and hardware being implemented in their direction. Not only is it imperative that managers know how to use new technology effectively, so too must the staffers who will be using it every day. The accounts payable departments throughout corporate America are staffed by innovative, intelligent people who, given half a chance, will shine and have a very positive impact on the company’s bottom line. 36.8 A REALISTIC APPROACH TO MOTIVATING ACCOUNTS PAYABLE STAFF When BankBoston’s Steve Monaco began his talk at a recent accounts payable conference, he said that not everyone would agree with his approach. In fact, it is more likely that few would disagree with his reasonable approach.
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According to Monaco, most accounts payable managers want some recognition of the contributions they make to the company: a well-deserved pat on the back, a fatter paycheck, and upward mobility—although not necessarily in that order. He says that for managers to achieve these goals, they must motivate their employees. He said, simply: “Managers are nothing without their staff.” Most managers motivate in one of two ways. Some use the “touchy-feel” (to use Monaco’s words) approach, which is based on an extreme understanding of all employees’ shortcomings and mistakes, regardless of responsibility. At the other extreme are hard-line managers who demand unreasonable things from their employees and are never satisfied with the work produced. The trick, says Monaco, is to find a balance between the two extremes. To that end, he suggests breaking the basics of motivation into four categories: respect, communication, accountability, and leadership. (a) WHY MOTIVATE?.
(b) RESPECT. Monaco believes that respect is a balance between fear and love. While fear is a great motivator in the short term, it eventually erodes and undercuts respect and productivity. Likewise, love works well in the short term, but it, too, is shattered by the need to make hard decisions. Monaco believes that respect is best achieved through a balance of understanding and fairness. He recommends that accounts payable managers begin by realizing that employees are people first, and to make an effort to understand their employees’ personal circumstances, something too many managers forget to do. As an example, he cited the need of employees who are parents to leave early on Halloween to take their children trick-or-treating. By recognizing simple obligations such as this, and finding ways to help his or her employees meet them, the accounts payable manager will be a long way toward earning their respect. That is not to say, as Monaco was quick to point out, that every employee be given time off every time it is requested, because there is the little matter of fairness. He admits this is tricky, but reminds accounts payable managers that they must also measure the fairness of such decisions in terms of how other employees will be affected by them. It is important that the same employee not be given all the “best” days off. And he is against giving time off based on seniority, preferring instead a fair distribution of the preferred days. (c) COMMUNICATION. Probably no manager alive today has not heard complaints about “lack of communication.” Monaco says that although this
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is a battle most accounts payable managers will never win, they should never stop trying. He believes that ongoing, regular, and honest communication is important to staff motivation. Communication should be ongoing at all levels of the department, and that it should begin with managers learning the names of every single employee who reports to them—no matter how large or small the department. He is adamant that even those with large staffs do this. Monaco believes that employees are an accounts payable manager’s most valuable asset. Therefore, regular communication meetings should never be canceled. To make his regular communication meetings more valuable and interesting, from time to time, he invites guest speakers to help his staff grow and learn. The lecturer may be someone from another department or from outside the company who can teach the group a new skill. Typically, accounts payable managers find they can implement regular communications with little difficulty; more problematic is being honest, in particular when the news is not good. Delivering unpleasant or even bad news is never easy for anyone, and so managers tend to avoid the unavoidable. This, of course, never works, as not telling employees bad news is usually worse than telling them the truth on a timely basis. Better it should come from you than be overheard as gossip; that only makes matters worse, as it decimates morale in the process. Thus, best to live and work by the old adage “honesty is the best policy.” Accountability is probably the trickiest part of Monaco’s motivation theory to master. To begin with, he points out two factors often overlooked when running a department:
(d) ACCOUNTABILITY.
The company is in business to make money for its shareholders. • Employees have been hired and are paid to do a job. •
He believes in setting expectation standards for employees, that if an accounts payable manager is to be successful in helping the company meet its objectives, he or she must do the following: Set expectation standards. • Establish and use performance measures. • Give rewards when performance goals are achieved.
•
Monaco is talking about benchmarking operations, which he says is important so that maximum productivity can be attained, while ensuring fairness to all employees. He believes these standards should be realistic,
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but challenging, and that achievement targets should be set the same for all employees. Thus, when a target is set for, say, the number of invoices to be processed in a day, it should be the same for all employees. Of course, a company that processes invoices of different levels of complexity might choose to set the standard based on number of lines (on invoices) handled, as opposed to numbers of invoices. This would eliminate the possibility of having certain employees handling only “easier” invoices, leaving the more difficult ones to the more productive workers. Once departmental performance metrics have been established, it is then possible to measure each individual’s performance against this standard. Some accounts payable managers post individual results for everyone in the department to see. Monaco believes that an employee’s performance evaluation can then be used to reward him or her appropriately—simply, the hard workers are given raises, the slackers are not. Put another way, Monaco is against giving flat raises, contending doing so is bad for departmental morale and productivity. After all, if the poorest-performing employee is given the same salary increase as the one who goes above and beyond, what incentive is there for anyone to excel? The benchmarking results can also be used to identify those employees who need to take corrective action. If an ineffective employee does not take the recommended steps to improve his or her performance, the accounts payable manager then has the necessary support to begin termination proceedings—which, Monaco believes, is necessary in extreme cases. (e) LEADERSHIP. “Leadership,” says Monaco, “is a combination of respect, communication, and accountability.” All are aspects of leadership. He strongly believes in pay for performance, and says that it is possible to implement such a strategy in all organizations—even those with union shops. This is Monaco’s vision for the future.
36.9 IMPROVING THE IMAGE OF ACCOUNTS PAYABLE Encouraging, or even requiring, accounts payable associates to read general management books is one way to broaden staff knowledge. One savvy accounts payable supervisor not only requires her staff to read these books, but she’s also found an effective way to let management know about it. Diane Gee, accounts payable supervisor at Systems and Electronics Inc., bought the book Who Moved My Cheese, by Spencer Johnson and Ken Blanchard (Putnam Publishing Group, 1998), for the staff to read. When each person finishes the book (it’s fairly short), he or she signs the book,
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either on the inside of the front or back cover. Then Gee lends the book to various members of senior management, who, intrigued by all the signatures, look to see who has read it. While this one step alone won’t improve management’s perception of the staff, it is one of the many small things managers can do to gradually change management perception of the staff.
CHAPTER
37
WORKING WITH AND FOR PURCHASING AND OTHER DEPARTMENTS 37.1 INTRODUCTION Although few realize it, a good accounts payable manager needs to have diplomatic skills that rival those of Henry Kissinger. By the very nature of the job, the accounts payable department will be at odds with virtually every other department within the company, especially purchasing, its traditional adversary. Why? Because, for accounts payable to do its job well, everyone else in the company must do their jobs 100 percent correctly—something that rarely happens. Ideally, to improve this relationship: 1. Purchasing must completely and accurately fill out its purchase orders and forward them to accounts payable on a timely basis. 2. Everyone else must review and approve for payment all invoices as soon as they receive them. 3. Employees must submit their travel and entertainment expense reports for reimbursement on a timely basis. 4. Receiving must check all receiving documents against goods actually received—that is, not just sign automatically. In most organizations, this procedure is not followed, naturally causing friction between the two departments and setting the stage for the accounts payable department to be viewed as obstinate, uncooperative, and so on. Of course, this is an unjust assessment because of all the reasons just cited. This is made worse because accounts payable ends up fixing everyone else’s mistakes, which rarely makes them happy. 332
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37.2 WHY INTERDEPARTMENTAL COOPERATION IS IMPORTANT Cooperation between departments tends to dramatically lessen frustration and stress of staff across the board, plain and simple. And if that were the only reason to foster interdepartmental cooperation, it would be enough. But there are even more compelling reasons. First, by cooperating with other departments, accounts payable is much better positioned to solve the problems that are causing the tension. This directly improves departmental productivity. Another overwhelming reason is more practical in origin: A small, but significant, number of companies are merging their accounts payable and purchasing departments. When this happens, purchasing generally ends up “ruling the roost.” Trying to cooperate after such a merger has been announced, or is even rumored, is tantamount to closing the barn door after the horse has been let out. The damage may be irreparable, and the accounts payable professional who has previously had an adversarial relationship with those in purchasing may be skating on very thin career ice. Better to try and bridge the gap between the departments long before such a merger becomes a reality. In conclusion, building interdepartmental cooperation should be a top priority for today’s accounts payable professional—not just with purchasing but all other departments.
37.3 BASIC APPROACHES Accounts payable managers often find themselves at odds with employees in other departments largely due to the nature of the tasks they perform. Fortunately, the adversarial nature of these relationships can often be improved using some common-sense approaches. Those who succeed in strengthening their interactions with these other groups generally do so by focusing on education and communication. It is understandable when employees become annoyed with others in the company who make their work more difficult—especially when the same people seem to make the same mistakes over and over. What is often not considered is that perhaps these “offenders” just do not know the proper procedures. The point is, educating everyone in a company on the right way to handle their payables can make work easier
(a) EDUCATION.
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all around. And there are numerous innovative ways to accomplish this task, including: •
Compose an easy-to-use reference guide that lists all standard operating procedures. Make the guide user-friendly—that is, make procedures easy to locate and follow. Distribute the guide to all who are affected by the policies and who need to know the proper way to do things.
•
Hold intercompany seminars on the workings of the accounts payable department and how best to integrate its procedures with other departments.
•
Publish an accounts payable newsletter on a periodic basis. Address timely topics and repeat information on those procedures that cause people the most trouble.
•
If a certain department seems responsible for a greater percentage of the mistakes, develop a “cheat sheet” specifically for that group. Include on it the proper procedures as they relate to accounts payable.
•
Whenever a major new process is undertaken, retrain department heads. This is especially important when major new initiatives, such as Evaluated Receipt Settlement (ERS), are undertaken.
•
If a number of different departments seem to be having problems with the same area, review that area. Perhaps, in this case, it is accounts payable staffers who need some education. Is the process so convoluted or unworkable that it should be changed? Is there something that can be done to make it more user-friendly?
Hand-in-hand with education goes communication in making things work better for the often unappreciated accounts payable department. Here is how some have improved communications with their peers in other departments. “By taking the initiative to open up discussion on business needs, procedures, and system requirements,” explains the general accounting manager at a midsize oil and gas production firm, “several process opportunities emerged. Better information was received from vendors, the expectations of all parties became known, and business knowledge of AP staff was increased.” This undertaking has paid off nicely, the manager concludes: “Processing rates have shown a good increase, and savings from adjusted invoices are up $600,000 per year, or 70 percent during the first nine
(b) COMMUNICATION.
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months of the year.” Of course, not everyone has results that are easily quantifiable, nor are the resulting savings this large at many companies. “We had to explain to other departments how important they were to ensuring the accuracy of our payables,” explains the assistant controller of a Wisconsin company. “Once it was explained to the supervisors, they in turn discussed it with their employees.” By telling her counterparts how important they were to her success, this intuitive individual was able to win them over. They were then receptive to listening to her requests and willing to go back and communicate those requests to their staffs. “A vendor support team was formed with people from AP, purchasing, traffic, planning, and quality. Weekly meetings were held, and different topics discussed,” explains an accounts payable supervisor. A sampling of the topics covered included: when a PO is not needed, receiving processes, freight bill payments, purchasing cards, invoice/PO discrepancies, and ERS. The results from this weekly meeting are notable: “Talking about these processes encourages people to think about why they do certain things and who it affects,” continues the manager. “People are working smarter as a result,” she concludes. This meeting also gives the accounts payable manager an arena in which to bring up topics that otherwise might not be addressed. “Quarterly accounts payable/purchasing/receiving meetings have opened up the lines of communication between the departments,” relates a senior staff accountant. “Through these meetings we have worked through the frustrations of individuals, and improved processes.” It is not always possible, however, to schedule such meetings. For a variety of reasons, some companies are reluctant to have them. For those companies, there are less formal options available to the accounts payable professional who wants to improve things. Several examples of how this has worked follow. Often, it is necessary to improve strained relations with only one or two other departments. The accounts payable supervisor for a large lens manufacturer needed to mend fences with the buying staff. She explains, “We have a meeting with the buying staff about three times per year. We discuss problems and how to solve them.” The result? All concerned are working together and helping each other. Bottlenecks often occur when the accounts payable manager is directed to deal with only one or two individuals. The accounts payable coordinator at a hospital explains, “Most departments order through materials management and use wrong account numbers. I was instructed to deal with this problem
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through materials management, and told that they would deal with the department. This wasted time, and the problem was not solved,” laments this accounts payable professional. But a solution to the problem was found and implemented. “I requested that I be able to deal directly with departments and the employees responsible for the mistakes, instead of their supervisors or the initial contact.” This common-sense solution not only saved time but eliminated unneeded intervention in the loop. Not all solutions need be that complicated, as the AP bookkeeper for an education company explains: “I developed stronger relationships with other departments by letting them know that I’m always available to answer questions and deal directly with vendors/suppliers for them.” This has probably won her much appreciation from those whose messes she cleans up. The AP manager at an audio/video equipment company has let her peers in other departments know that she wants things to work well in her department. She explains, “Now that they know I work with ideas aimed at making the AP department a better division, things are running smoothly.” 37.4 HANDLING THE BIG ISSUES Getting cooperation from other departments can be a major challenge for accounts payable managers, especially when those in other departments do not even realize that what they are doing causes huge headaches for accounts payable professionals. The issues that rank among the biggest problems for accounts payable are: delays, missing information, getting appropriate information to accounts payable, and dealing with the purchasing department. (a) MISSING INFORMATION. When information provided to accounts payable is incomplete, “filling in the blanks” wastes huge amounts of time for the accounts payable staff, who must run around trying to obtain the missing data. Techniques that will help solve this problem include: •
Send out a weekly memo that lists the requisition number, PO number, vendor, and the date the invoice was received. Also send the senior manager, if responsible for that area, a copy. This helps give the issue high visibility and encourages those responsible to be a little quicker in supplying the necessary missing documentation. (No one wants to see his or her name in this memo, as no one wants to have to explain to his or her boss why the information was not supplied in the first place.) Be sure to include in the memo the date the invoice arrived, to
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make it apparent to everyone who receives it that if a deduction is lost, the responsibility lies not with the accounts payable department but with the individual who failed to supply the information. In most firms, this solution can be readily implemented. •
Insist on purchase orders at time of purchase. Purchase orders, or rather the lack thereof, can also cause nightmares for accounts payable professionals. An ongoing problem in many organizations is getting employees to write purchase orders at the time they make their purchases, and then to reference the PO on the invoices. Insisting that this be procedure be followed can save the accounts payable clerks hours of time otherwise spent tracking down who bought what.
Getting all data to flow to a central location, such as the finance department, is also a big problem in many organizations. The following solutions to this problem have been used in many organizations:
(b) GETTING THE INFORMATION TO ACCOUNTS PAYABLE.
Have all vendors change their billing contacts to the accounts payable department. Most are happy to do this if they are informed that it means they will be paid quicker. • Direct the mailroom to send anything relating to payments to the accounts payable department. • In those instances where regional locations are paying invoices locally, cut them off at the pass. Do this by restricting G/Ls, giving no option but to come to accounts payable.
•
(c) HANDLING DELAYS. Often, the delay in getting payment approvals from other departments can cause serious problems in the accounts payable department. Invoices received by other departments are not sent promptly to the accounts payable department; packing slips are not forwarded to receiving, which delays preparation of receiving reports. To avoid such holdups, try: •
Sending companywide memos to remind department heads of their responsibility for these documents. For specific trouble spots, conduct more frequent follow-ups. If a certain person or department always is late in providing necessary information or documents, be proactive: anticipate the trouble and head it off before it occurs.
•
Meeting with every department where problems are being experienced. Work with them to implement procedures to make the process
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run more smoothly. Again, by identifying the trouble spots and dealing with them on an individual basis, you can resolve many communication problems. As mentioned, somehow, it seems that the purchasing department and AP are always at odds. A few tips for alleviating some of that tension are to:
(d) DEALING WITH THE PURCHASING DEPARTMENT.
Set up monthly meetings between the departments to discuss emerging difficulties. By identifying these problems when they are small, big problems will not develop. • Walk in the other department’s shoes. Have the staff from accounts payable and purchasing work in each other’s departments for a short period of time. This is the best way to demonstrate to staff how what they do affects the other. Ultimately both departments come away with a better understanding of the other’s needs. • Supply special information/training on an as-needed basis. For example, in one instance, accounts payable had to find out whether a product was taxable. Unfortunately, purchasing never supplied this information to accounts payable. A lot of time was wasted tracking the information down. Following this incident, the controller scheduled a training session for all purchasing personnel to explain the problem and to discuss how to handle out-of-state vendors in this regard. •
37.5 GETTING A CUSTOMER SERVICE MENTALITY IN ACCOUNTS PAYABLE To improve departmental efficiency, accounts payable professionals need to develop a customer service mentality. The customers in this case are the company’s employees. Typically, this group includes those who submit T&E reports and check requests, purchasing managers who forward (and sometimes approve) POs and invoices for payment, and any other internal group that uses accounts payables’ services. Thomas F. Nichols, a consultant and president of Process Management Improvement, addressed this issue at a recent accounts payable conference. Based on his 30-plus years with AT&T, he demonstrated how accounts payable professionals could become more customer-service-driven and improve departmental productivity.
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When AT&T underwent a massive companywide reengineering project, the accounts payable department had to become more customer-service-driven or risk the business units taking their accounts payable business elsewhere. Nichols met with his people and explained why change was necessary and the importance of acting quickly. He felt that it was better to act before there was any pressure from internal customers. He also emphasized that what they had been doing was not wrong; it had simply outlived its usefulness. Nichols began by determining the customers’ level of satisfaction with the existing process, using a customer-driven organization self-assessment survey. From that he was able to assess which customer requirements were not being met. (Anyone concerned about customer satisfaction is recommended to complete a similar survey on a periodic basis, first to benchmark where they are, and then to measure improvements.) Nichols also established negotiating teams to handle the initial service agreements with each of the units. When both parties agree on the service parameters, dissatisfaction is less likely to arise. The business units were most concerned with these five issues: accuracy, cost, timeliness, service, and customer value-added services. (a) CASE STUDY.
Nichols was asking his staff to change a lot, so he thought it only fair to inquire as to what they wanted. Their responses suggest that most accounts payable staffers want:
(b) THE PEOPLE.
• • • • •
A balance between work and their personal life Respect for what they do and who they are Involvement in the decisions that affect their work Empowerment to make the decisions needed to get the job done Flexibility to change when circumstances are altered
Believing their requests to be reasonable, Nichols worked them into the organizational structure whenever and wherever possible. In order to measure whether a customer satisfaction program is working, Nichols says it is necessary to measure the results on a regular basis. To make sure his staff understood how important customer satisfaction was, he tied a portion of their bonuses to the results of a customer satisfaction survey. Companies that do not have bonus programs for their accounts payable staff can base portions of their annual raises on the results. He used a customer satisfaction “report card” to measure customer
(c) CUSTOMER SATISFACTION.
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satisfaction annually. He did not expect his group to score 100 percent; his goal was to see an improvement each year over the prior year. What Nichols did at AT&T can serve as an excellent road map for accounts payable professionals today, especially those under pressure to do more with less and to address the concerns of other departments. By becoming more customer-service-driven and by reviewing the suggestions on their report cards, accounts payable professionals will find they can more readily structure their workflow to address customer concerns, at the same time improving the department’s standing with upper management. (d) CUSTOMER SERVICE GUIDELINES. To see where an accounts payable department stands with regard to customer service, a number of factors should be analyzed. The following lists contain what Nichols finds particularly important:
Accuracy
Use purchasing summary reports to highlight differences between invoices and POs.
Put controls in place to handle problems when paying from a copy of the invoice. Change processes to enable a more timely update to the master vendor file. Conduct annual internal audit reviews. Utilize third-party audit firms.
Cost
Establish a task-oriented costing team to develop pricing strategies and to price all invoice rework. (One of the results of this effort at AT&T was to establish the cost for a manual check at $150.) Create a quality program using workflow diagrams and Pareto charts. Set up a benchmarking team.
Timeliness Set an internal goal of five days for processing a paper invoice. Implement a policy of taking discounts only if earned. Request justification in those cases where invoices were sent directly to the client, affecting your company’s ability to take discounts.
37.6 Quick Answers to Common Problems
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Service Put more highly qualified people in the inquiry lines. Implement an interactive voice response system. Align processing teams with the business units. Customer Value-Added Services Leverage non-PO procurements. Take an aggressive approach to reporting bypasses to both purchasing and the business units. Arrange for an analysis of telecommunications payments. Review lease management. 37.6 QUICK ANSWERS TO COMMON PROBLEMS A number of very simple issues often put accounts payable at odds with other departments. But simple though they may be, left unaddressed they result in much wasted time and effort and bad feelings. By solving these problems, the savings can be counted in time or money or both. Here are typical problems, along with potential solutions: Problem: Other departments do not cooperate in processing paperwork quickly and accurately. Solution: Make the new-employee orientation process educational, and stress the importance of paperwork. For existing employees who have developed bad habits, provide a set of instructions. Problem: The purchasing department refuses to take ownership of the information provided to AP. This results in many errors and causes additional work for AP. Solution: Hold a weekly meeting with purchasing to discuss the most recent discrepancies; point out what information is missing or was incorrect. Slowly but surely, the errors will decrease. Problem: The advertising department is continually late in sending approved invoices for payment. Additionally, advertising often forgets to write up purchase orders; and when it does, the project is rarely identified. Solution: Give advertising its own purchase order system. This makes the tracking of invoices for that department easier to handle.
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Problem: Communication and paper flow between purchasing and AP is poor. Solution: Open lines of communication and let purchasing know what your goals are. Take the time to understand its goals as well. When a vendor problem arises because adequate information was not received from purchasing, forward that call to the recalcitrant party in purchasing. Problem: AP lacks credibility within the company. This frequent problem can be the result of the action by others or due to poor management support. Solution: Discuss the matter with your supervisor and get his or her backing for new projects. Problem: New people do not understand accounts payable procedures and requirements. Solution: Issue, or if appropriate, reissue, an administrative expense manual that contains all company policies as they pertain to AP. Problem: Poor relations often exist between the individuals who work in purchasing and those in AP. Solution: Work closely with the head of the purchasing department to try to defuse the issue. Set up monthly meetings and produce reports. This problem will not go away overnight, but over time it can be ameliorated. Problem: Other departments, not understanding AP’s requirements, sometimes feel that the AP professionals are too critical and demanding. They are often unaware of all that must be done to avoid duplicate payments and to meet audit standards. Solution: Work with these other departments and explain the need underlying each of your requirements. By educating them on the entire procurement/payables process, many of these issues fall to the wayside. Problem: Adequate backup for payments is often not provided by the person requesting a payment. It then becomes necessary for AP to check back with the person requesting the payment to get the necessary documentation. Time is wasted and discounts are often lost. Solution: Show the offending parties exactly how much money is lost each time a delay causes the company to miss a discount.
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Problem: The receiving department forgets to submit packing slips to AP. Some who do remember forget to mark the date the goods were received. This often results in past-due payments, and definitely results in early discounts being lost. Solution: Set up a meeting with the receiving department and explain why these documents are needed and the financial impact of not having them. Problem: Many discrepancies are uncovered when AP does its threeway match. Some of these problems are caused by purchasing and/or receiving. Solution: Set up a weekly meeting to discuss discrepancies. If these issues typically revolve around price and/or quantity, it may be time for purchasing to take a look at its own internal procedures. Accounts payable may be able to identify weaknesses in other departments. Of course, great care and tact should be used when relaying this information. Problem: Other departments expect more from the AP department than it can deliver. This often causes friction within the company and poor relations with other departments. Solution: Put together an intensive realization program so that others have a clear picture of what AP does; and compile a list of what it does not do. This might even include sharing some volume numbers. Problem: Other departments are consistently late sending work to AP. Solution: Create a log for each offending department and track its problems. Review the log weekly with the department head of each unit under scrutiny. Also, offer training to staff members from other departments. Let them see what you do with the information they provide. Also focus on the problems AP encounters with late or incorrect information. Problem: When things do not go smoothly (and when do they ever?), the AP manager must often deal with angry employees in other departments. Solution: Gather as much information as possible about the issue that has made the colleague so furious. Contact the appropriate party and sit down to discuss the matter. Listen to what he or she has to say. Apologize for any errors or miscommunications AP caused. Stay calm throughout the discussion. Discuss with the other party ways that the problem may be resolved and avoided completely in the future. End each conversation, no matter how difficult, on a positive note.
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Problem: Many accounts payable departments waste much time trying to track down receivers to match up with their purchase orders and invoices. Solution: Put the responsibility back on the shoulders of the purchasing department. Of course, getting purchasing to go along with this plan will take more than a little cajoling in most organizations. Still, it is worth a try.
PART TEN
FRAUD When most people think about accounts payable, fraud rarely comes to mind. Yet, it can be relevant since accounts payable is the department overseeing the release of a company’s money. And, that is precisely what most crooks are interested in. The topic has been broken into three separate segments: Check fraud. • Employee fraud. • Vendor fraud.
•
However, there is much overlap between the three chapters. While most check fraud does not involve employees, it occasionally does. After all, these are the people with the most intimate knowledge of a company’s procedures regarding the release of its money. However, frequently, but not always, there will be some employee interaction when vendor fraud of any sizeable magnitude takes place. Typically, but not always, vendor fraud for small-dollar amounts will not require the collusion of an employee. The information contained in these pages is not meant to frighten readers but rather open their eyes to the very real risks most companies face with regard to both internal and external fraud.
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CHECK FRAUD
38.1 INTRODUCTION According to BusinessWeek, check fraud carries a $10 billion price tag for businesses. These numbers are not cited here to frighten the reader, but rather to draw attention to the seriousness of the problem. To put this issue in perspective, consider that while total check fraud losses are estimated at $10 billion (arising from 1.3 million cases), bank losses in 1993 were estimated to be far smaller, at $813 million. Yet many companies do not take this issue seriously—that is, until it happens to them. Until then, they continue to stick their head in the sand. But, now, with banks understandably fed up with covering huge losses, businesses are being forced to address their check-handling processes with more care. In the past, banks or retailers that accepted a fraudulent check generally had to “eat” the loss, regardless of how careless the firm issuing the check was. Those days are over. 38.2 CHECK FRAUD AS GROWTH INDUSTRY In jest, some call check fraud the growth industry of the 1990s. Sadly, though, it is no joke. With the price of technology plummeting, check fraud has become an inexpensive “career path” for more and more criminals. Color copiers and laser printers are now within the financial reach of the “common” crooks, and enable them to produce such high-quality forgeries that they can fool all but the most seasoned experts. And forgers have little to fear, for when they are caught, the likelihood of prosecution is small; and if they are, the chances they will serve time are equally small. With limited law enforcement dollars available, most communities prefer to use their resources to prosecute criminals who commit major crimes—murder, armed robbery, and others where physical violence is involved. 347
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Thus, from the criminal’s perspective, check fraud is a crime of choice: it presents little risk, chance of detection, prosecution, or conviction. Why get involved with a dangerous act like robbing a bank when you can forge a few checks in the comfort of your own home and come away with a lot more money? 38.3 LEGAL ISSUE OF REASONABLE CARE Recent changes in the Uniform Commercial Code (UCC) have introduced the concept of comparative culpability into the matter. Check issuers now must exercise “ordinary care” in the handling of their checks. These changes have been enacted in virtually every state and allocate responsibility for check losses back to the company should it fail to exercise “reasonable care.” The American Bankers Association defines check fraud as “the intentional negotiation of a check without the account holder’s full authorization and approval. [This] includes altering an authorized check, forging the maker’s signature, forging the payee’s endorsement, creating unauthorized check stock, drawing a draft on an account but not delivering the goods or checks, and check kiting.” 38.4 CORPORATE RESPONSIBILITY Because companies will no longer be able to rely on others, namely their banks to protect them against fraud, they will have to initiate certain practices to guard against big check losses. Companies wishing to avoid responsibility for check losses can do this by following a multipronged approach: 1. Exercise ordinary care in managing check stock. This includes incorporating certain safety features into checks. 2. Take precautions, such as performing employee background checks, securing check stock, and reconciling monthly bank statements promptly. 3. Most important, report any check fraud to their banks as soon as it is uncovered. 4. Document company procedures and controls. 38.5 CONTROLS Installing strong controls will make it even harder for the perpetrators of fraud to take advantage of the company. By making checks harder to duplicate, for
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example, the likelihood of the company’s checks being forged diminishes. This and other controls can be incorporated both into the checks themselves and in the form of bank services. Banks are continually on the lookout for new ways to prevent fraud; therefore, accounts payable professionals are well advised to stay up to date on these new products and technologies. Doing so puts them in the best position to minimize the chances of check fraud at their companies. 38.6 IF PREPRINTED CHECK STOCK IS USED In an attempt to reduce the threat of blank checks being stolen, and to lower costs as well, many companies are doing away with their preprinted check stock. But those that continue to use preprinted check stock should implement the following security measures: • • • • • •
Store the check stock itself in a secure location, under lock and key. Assign responsibility for control of the check stock with an individual who is not an authorized signer. If mechanical check signers are used, store them physically in a secure location, separate from the check stock. If a signing machine is used, store the signature plate in a separate, secure location. Always remove the plate after use. Rubber signing stamps should never be used. Install adequate controls to monitor the check stock and the number of times the check-signing machine is used.
38.7 CHECK SECURITY FEATURES As just stated in the previous section, many companies are coming to the realization that use of preprinted check stock is not the way to go. Instead, they are choosing to use new technology—specifically, reasonably priced laser printers equipped with magnetic ink character recognition (MICR) capabilities. These printers are used together with “secure” paper to produce their checks. (Note: Ordinary blank paper can be used in these printers, but it is not recommended.) Those companies that use preprinted check stock should include a number of the following security features in their checks: Watermarks • Ultrasensitive watermarks •
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• • • • • • •
Holograms Foil strips Microprint lines Complex background Void pantograph Laid lines on back Warning banner
Chances are, your own personal checks contain some of these items. Most of these features cost very little to incorporate into the check production cycle. Their purpose is simply to make it harder for a thief to copy, scan, or alter a check. Any company that fails to include at least some of these features in its checks will be seen as not exercising reasonable care, hence will be liable for any losses associated with a copied or altered check. Given the rapidly changing business environment, those who do not review their check production cycle, including the physical check itself, may find their companies exposed to a liability that did not exist just a few years ago. Consequently, it is the obligation of accounts payable managers to bring these issues to the attention of senior management, to ensure they are properly informed about these important changes. 38.8 SHORT-CIRCUITING THE FORGER Unwittingly, corporations sometimes give forgers just the information they need to copy their checks. Here are two examples: Putting a statement on checks that reads “Not valid for amounts over” a given amount. Fraud experts urge against this practice. Why? Though this statement gives information to the teller who is cashing the check at the bank, it also gives the same information to the forger. A better approach is to put written restriction in the deposit agreement with the bank. The check will still kick out of the system if it has been altered for too large an amount, but the forger will not know this. Without this helpful information, it is unlikely that the crook will make a check for too small an amount. • Putting a statement on the check that says two signatures are required for checks over a certain amount also ultimately helps the thief. Never put two signature lines on a check, especially if two signatures are required. This will only alert the swindler to that fact.
•
38.9 Taking Reasonable Care
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Again, if the deposit agreement stipulates two signatures and only one appears on the check, the bank should reject it. And, if it does not, it is the bank’s problem, not your company’s. 38.9 TAKING REASONABLE CARE Recent changes in the UCC make sloppy check practices costly to the negligent party. Those contributing to the fraud through negligence are now liable for losses to the degree that it is determined the company’s lack of controls contributed to the commission of the crime. The revised code specifically refers to the use of checks that do not contain safety features. One of the easiest things a corporation can do to guard against check fraud is to make it difficult for potential thieves to duplicate or alter their checks. This is done through a variety of means. (a) COPY PROTECTION. The development of sophisticated and relatively cheap duplicating machines and scanners has made counterfeiting relatively easy. To thwart such efforts, it is necessary to integrate features in your check that cannot be reproduced: The most common approach is to incorporate an artificial watermark into the design of the check. These emblems can be viewed only when the original check is held at an angle. Thus they will not show up on a copy of a check made on a duplicating machine or on one that is scanned into a computer for alteration purposes. To make watermarking effective, the check should also contain a not-too-small statement that reads, “Do not accept this check unless you can see an artificial watermark when held at an angle.” Along the same lines, a microprinting border can be used. To the naked eye, this effect will appear as though the check merely has a decorative border, but under a magnifying glass, there is some lettering in the line. When copied or scanned, the microprinting will appear as a line. Another design element being incorporated into checks prevents the checks from being copied. When a reproduction is made, the word “void” automatically appears on the copy, rendering it useless.
Corporate America now has at its disposal numerous approaches to make it more difficult for criminals to alter company checks. Here is a look at some of them: (b) PROTECTION AGAINST ALTERATIONS.
•
Copying checks is not the only method thieves use to defraud companies with checks. Some take checks written for small amounts and
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alter them. A favorite strategy against this type of thievery is the use of a chemical void. The beauty of this technique is that the thief does not know it has been incorporated into the check until he or she attempts to alter some aspect of the check using a chemical treatment. This causes the word “void” to appear. For added protection the word may appear in more than one language. •
A favorite technique of certain counterfeiters is to take a laser check, remove the pertinent features, usually the dollar amount and/or payee, and replace them with their own information. They do this easily in a variety of ways, including the use of a very sophisticated tool transparent tape. Coating checks produced on a laser printer with laser lock makes it impossible for the information to be removed or altered.
•
Another common feature employed to prevent the alteration of checks is a security feature called laid lines. These prevent thieves from cutting out vital information and replacing it with their own new and improved version. The swindler may still be able to alter the front of the check with new information, but will find it difficult to match the wavy lines on the back of the check. Similarly, prismatic printing, that is, the use of continuous tone of different ink colors for the dollar amount, makes it very difficult for a larcenist to change a check.
•
Some have also found that the space for the dollar amount printed in a different background from the rest of the check helps.
One of the best ways to prevent fraud is simply to have someone examine the check when it is presented for deposit. This is easier said than done, of course; but once crooks know that a bank manually inspects its checks, they are likely to cast their sights elsewhere. The warning banner discussed above, instructing tellers to look for a watermark, is one way to make this policy easier to institute. Another is to have certain accounts, or perhaps just certain check stock, for smallerdollar items. These are just a sampler of the techniques you can use to help ensure that your checks will not be tampered with. They are generally inexpensive; and, for the most part, check stock that has these and other safety features incorporated is available through your bank. Astute accounts payable professionals will recommend that some or all of these features be incorporated in their checks when ordering new check stock.
(c) MANUAL INSPECTION.
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38.10 POSITIVE PAY Virtually every check fraud expert promotes positive pay as one of the easiest ways to reduce check fraud. Yet surprisingly few companies use it. A side benefit of positive pay is that the daily reconciliation process associated with it leads to early identification and resolution of problems. Companies that use it find that activities associated with the month-end close usually go more quickly and smoothly. In its most basic form, a company transmits to its bank its check-issued file each time there is a check run. This file contains a list of all check numbers and the dollar amounts associated with each one. Any manually written checks must be added to this file. Each morning the company’s bank matches all checks presented for payment against the company’s outstanding-check file. If there is a match, the check is honored and the check number is removed from the outstanding file. Thus, if a check is duplicated many times, it will be paid only once. If the dollar amount of the check is altered, it will kick out of the system. This review also gives the bank an opportunity to fix any encoding errors it may have made. (a) HOW IT WORKS.
38.11 REVERSE POSITIVE PAY Positive pay is ideal for those companies that have the capability to produce the tape in the format required by the banks. But for those that don’t, or those that don’t write enough checks to warrant such a tape, or those uncomfortable giving their banks a list of all their issued checks, they can use a simpler version of positive pay called reverse positive pay. For many companies in this category, one big loss due to fraud could mean the difference between overall profit and loss. Reverse positive pay works like this: The bank faxes the customer a list of all check numbers and the associated dollar amounts of the items presented for payment that day. This list is typically faxed by 2:00 P.M. The customer then reviews the list and lets the bank know by 5:00 P.M. if any of the checks should not be honored. 38.12 ONGOING FRAUD PROBLEMS What positive pay and reverse positive pay do not address, however, is the problem of an altered payee. Under current law, companies have 21 days to
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catch an altered payee and return the check to the bank of first deposit. This period is not long enough for many companies, especially those whose reconciliations cannot be completed within that time. And even if the reconciliation can be completed within this time frame, the altered payee may not be discovered, because the dollar amount and check numbers will match. Most companies discover that the payee has been altered only when the original payee comes looking for their money. But never fear, your friendly bankers are developing a product to address this issue as well. A product called Image Positive Pay has been introduced by several banks, with others making ready to do the same. With this product, the bank downloads images of your checks onto your PC; if you want you can even view the back of the check. This product can be used to view questionable items, large-dollar items, or all checks, depending on your requirements. 38.13 A TOTAL FRAUD PROTECTION PROGRAM Adopting positive pay does not mean that you can ignore other fraud protection strategies. While it is true that checks that are not on the outstanding check file can be bounced back, there are too many other ways around this safeguard to count on it as your only fraud protection technique. Continue using all other safeguard programs, including controlling check stock, segregating duties, and incorporating document controls in your checks. Accounts payables managers working to ensure that their companies do not become the victim of check fraud should incorporate one of the positive pay programs currently available from most banks. At a minimum, give reverse positive pay a try; and verify all large-dollar amount checks. Ask your banker for more details. These simple programs can save your company thousands of dollars, even if only one fraudulent check is caught. Remember, recent changes in UCC codes no longer hold a bank totally responsible for forged checks. 38.14 IDENTIFYING FRAUDULENT CHECKS QUICKLY As most accounts payable professionals know only too well, recent changes in the UCC require prompt bank-statement reconciliation in order to avoid responsibility for fraudulent checks. However, there are times when other work requirements make it difficult to get these reconciliations done. The following two techniques will not identify all fraudulent checks but will help uncover the obvious frauds.
38.16 Account Reconciliation
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Fan through a group of returned checks. A counterfeit may stand out as having a slightly different color from the rest of the checks in the batch. • Examine the perforations, or lack thereof, on checks. This feature may also give a counterfeit note away. Most checks produced by legitimate printers are perforated and have at least one rough edge, whereas those created by fraudsters generally do not have such imperfections. This once hard-and-fast rule must be used with some care today, however, as the checks generated by in-house laser printers, for example, tend to have microperforations that are more difficult to detect. •
38.15 SEGREGATION OF DUTIES Check fraud often takes the cooperation of two or more people. Thus, while often difficult or time-consuming to implement on a day-to-day basis, segregation of duties is one of the best ways to inhibit internal fraud. When related duties are handled by different individuals, collusion becomes necessary in order for a theft to occur. Of course, this is no fail-safe, but it does serve to make internal fraud more difficult to carry out. Different individuals, independent of each other, should be assigned to the following duties: custody of check stock, check production and signing, bank statement reconciliation, and payment processing. By incorporating as many checks and balances into procedures, it is possible to further reduce the risk of internal fraud. For example, have one person enter figures into a check log and a second verify and sign off on them. It also helps to involve individuals from other departments as well. That is why some companies will have the treasury department obtain signatures and mail checks. Many also recommend never returning checks to the person who submitted the invoice for payment. Rather, it is recommended that the check be mailed directly to the vendor, to at least in part prevent employees from submitting phony invoices for payment. Segregation of duties will not make it impossible for employees to commit check fraud; it will just make it more difficult. For more information on employee fraud, see Chapter 39, “Employee Fraud.” 38.16 ACCOUNT RECONCILIATION Bank account reconciliations are often the point at which check fraud is discovered. Now, more than ever, given the changes to the UCC, the key, is
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to perform those reconciliations as quickly as possible. They should also be reviewed and any discrepancies investigated immediately. If the reconciliations are not done on a timely basis—and most take this to mean within 30 days of receipt—the bank may not be liable for any forged checks discovered later. 38.17 ACCOUNTS PAYABLE CONTROLS Whereas a company today still stands a good chance of its bank covering its losses due to a forged check, there is no such safety net for checks written to phantom vendors. Unless the company has insurance coverage for this type of fraud, it will be totally liable for such losses. Thus, it is vital that good controls be put in place regarding vendor files. This includes not only how a new vendor file is created but also how it is updated. (Unscrupulous employees have been known to go into a vendor file to temporarily change an address in order to divert a large payment.) Some companies produce reports showing all changes to the vendor file and who made the changes. One savvy manager uncovered an employee changing overtime and vacation records through use of such a report. Strong controls also need to be implemented in conjunction with invoice procedures. Once an invoice, not matter how small, has been paid, it should be canceled or marked paid. One iniquitous clerk squirreled away a small fortune by taking one or two small invoices from big batches and then resubmitting the “new” batch for payment. And it was not brilliant detective work that finally uncovered his deception, which had gone on for years. He was discovered only because he bragged about his escapades one night after having a bit too much to drink. The company immediately started canceling all paid invoices. Any accounts payable professional who has the opportunity to hear a fraud expert talk about check fraud should take the time to do so. As fast as banks and reputable companies devise solutions to known fraud techniques, the thieves stand ready to counteract with new ones. The education process must, therefore, be ongoing. 38.18 PAYMENT PITFALLS: WHAT YOUR BANKS MAY NOT TELL YOU All accounts payable professionals are aware of the need to protect their company against check fraud. Speaking at a conference, AT&T’s Maureen E. McMahon, and Bank of America’s Nicholas F. Alex revealed that even
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those who think they have closed all the loopholes might not be as safe as they think. McMahon and Alex are members of the Association for Financial Professionals (AFP) Payment Advisory Group (PAG), whose mission is to monitor, interpret, and report on changes to payment systems, and the effects of those changes. In addition, the group promotes best practices in payments. The vulnerabilities uncovered were as a result of the work of the PAG. (a) LIABILITY-SHIFTING CONTRACT PROVISIONS. The bank is liable for check fraud unless: • The customer has not exercised “ordinary care.” • The customer has not reported the fraud in a timely manner. • The customer’s employee fraudulently endorsed the check.
Banks have found a way to shift this liability, however, and customers accept it, often unintentionally. Banks often give their customers bank contracts that contain a clause that reads something like: “The bank shall have no liability for its actions under this agreement unless the bank’s conduct shall have constituted willful misconduct or gross negligence.” On the face of it, this clause may seem reasonable, but anyone who knows anything about check fraud will see the problem. Ironically, according to the speakers, in some cases companies might have more rights without a bank contract. To protect their companies, they recommend, first, that a corporate attorney review all bank agreements, paying special attention to liability provisions; and second, that the attorney research whether liability has been shifted from the bank back to the company. The way most companies uncover check fraud is through the bank account reconciliation. Therefore, McMahon and Alex recommend daily reconciliation of accounts. This uncovers questionable transactions such as money-laundering activity and expired stops. Not everyone realizes that stop payments expire after six months, and unscrupulous individuals will try to cash a stopped check after the six-month window. Thus, it is important not only to stop a check but also to remove it from the positive pay file. Then, even if the crook tries to cash the check, it will not match and the bank will bounce it. Another reason for daily reconciliation, say McMahon and Alex, is that when check fraud occurs, it tends to happen repeatedly in a short period of time. Daily reconciliation allows the company to nip this activity in the bud.
(b) ACCOUNT RECONCILIATION RESPONSIBILITY.
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“HOLDER IN DUE COURSE” LOOPHOLE. Many people do not realize that a stop payment does not protect a company 100 percent of the time. The exception is when a person who is a holder in due course presents a stopped check. Despite losses suffered by companies as a result, the rights of a holder in due course have a long legal history and are upheld by UCC Article 3. The most common example of this is a check-cashing service that accepts a check not knowing that it was dishonored or fraudulent. Because the check-cashing company is a holder in due course, it can recover the amount of the check from the issuing company. The payee is liable—if he or she can be found and has sufficient assets—but at this point there is no protection for the company. The process of revising UCC Article 3 began in April 2000, however, and the AFP will recommend that changes be made to close this check fraud loophole. (c)
Stop payment orders do not last forever, a fact that surprises many. Legally, an oral stop payment lasts 14 days (though bankers have been reported as willing to extend this); one given in writing lasts six months, which can be extended. McMahon and Alex recommend that:
(d) DURATION OF STOP PAYMENTS.
Give written authorizations to back up any and all oral stops. • Remove stopped checks from the paid issuance file used for positive pay. • Use electronic systems for issuing stops if banks offer the service.
•
Some professionals thought that their stop payments protected their companies because banks did not cash stale-dated checks (those over 180 days). According to the UCC, however, a bank can pay a check after a stop payment order expires in six months, just as it may pay a stale-dated check, if it acts “in good faith.” Thus, the recommendation is that stop payments be extended in writing after the expiration of the six-month period. McMahon and Alex also noted that a bank will always cash certified checks.
(e) STALE-DATED CHECKS.
38.19 LAWS COVERING CHECK FRAUD In the past, as noted in the beginning of the chapter, companies often did not worry too much about check fraud, as their banks typically took care of the losses. But with the exponential growth of check fraud, it no longer was feasible for banks to cover these losses as an ongoing cost of doing business.
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Laws have been changed, and companies are now liable if it can be determined that they did not exercise ordinary care. The regulations that cover these issues are: • • • • •
UCC 3, for ordinary care UCC 4, for reasonable notification UCC 4A, for acceptable security procedures Reg CC, for shortened return/hold times NACHA, for unauthorized entries return
38.20 POSITIVE PAY: THE NEXT GENERATION The incidence of check fraud has not abated in recent years, though fortunately banks have developed a number of products to help limit the opportunities for check fraud. Here is a look at some of the leading-edge techniques that banks are already available or will be in the near future: Online imaging. This gives the company the opportunity to view the check presented for payment before making the pay or return decision. Both the front and the back of the check can be viewed. Payee name verification. This is the most exciting new development on the horizon, one that promises to make a serious dent in the incidence of check fraud. With this product, still in development, the payees’ names are included with the data sent to the bank. Altering the payee’s name will cause the check to reject. The product still has a few kinks that must be worked out, namely certain font restrictions and the fact that it will not work with manually written checks. Teller line payee name verification. This product incorporates the very best features of all the positive-pay products into one hard-to-beat product. As with payee name verification, this technology still some issues to be finalized. Real-time updates to teller lines. With this product, there are no delays. The moment a bank receives its download from a customer with the latest check issuance data, the information is available to tellers.
CHAPTER
39
EMPLOYEE FRAUD
39.1 INTRODUCTION Corporate America does not like to admit it, and in fact, rarely prosecutes, but employee fraud is an issue that many large and not-so-large companies have had to address. Unfortunately when it happens, the companies are usually so embarrassed, they simply fire the employee and try and hush the whole matter up. The reason for this is actually quite simple. It does not make the company look too good and usually indicates weak controls of some sort. When companies do nothing, the offending employee is then given the opportunity to repeat the fraud, eventually at another unsuspecting company. Unfortunately, this is what happens all too often. 39.2 BE AWARE OF TYPICAL CANDIDATES The typical perpetrator is male, white, 45 years old, and good at what he does. However, as women enter the workplace in greater numbers, this is changing and we are starting to see women committing fraud. 39.3 WHAT CAN GO WRONG There are a number of ways that an enterprising employee can confiscate some of his or her employer’s money while working in the accounts payable department. Several examples are: A company pays for goods or services received by employees or outsiders. • A company pays invoices a second time, under a kickback arrangement. • Vendor invoices are altered and photocopied to conceal alterations. The payment benefits the employee or a third party.
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• • •
• • •
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Check signatures are forged. Improper check requests are submitted and the funds appropriated. A check is issued for the benefit of an employee or third party and changing the payee in the disbursement journal conceals the misappropriation. Bank reconciliations are changed or concealed. “VOID” notation eradicated from signed check and the check is then cashed by an employee. Kiting to conceal the shortage of funds in a bank account.
39.4 STEPS TO PREVENT CASH FRAUD Checks and balances are key to preventing cash fraud. By making it more difficult for one employee to divert cash and cover it up, a company reduces its chances of being hit by an employee intent on committing fraud. The separation of duties makes collusion necessary to commit the fraud. While this does happen, it occurs in a significantly lower number of cases than where weak controls make it possible for one person to succumb to the temptation. One person acting alone commits most of all cases of cash fraud. Besides the losses your company may suffer should cash fraud occur, you have one other strong reason to make sure it does not happen on your watch—it makes you look bad. An accounts payable manager who runs a department with weak policies and controls should not be surprised to be blamed should cash fraud occur in the group. When the money is gone, especially in cases of cash fraud, it is nearly impossible to get it back before management starts looking for a culprit to blame. What better candidate is there than the manager responsible for the department? Additionally, there is the risk of guilt by association. To avoid the embarrassment and even worse of having cash fraud occur in your department, institute all appropriate controls, segregate duties wherever possible, and follow the steps listed below. This will minimize the chances of one of your staff members defrauding the company. 1. Checks should be prepared only when receipt and approval is documented, that is, the three-way match has been successfully completed. 2. Supporting documents cancelled to prevent resubmission should reference check number. 3. Insist that check signers review all accompanying documentation before signing checks.
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4. Check signers should not maintain accounting or cash records. 5. Signed checks should not be returned to the preparer or requester. They should be mailed to the payee. 6. Voided checks should be cancelled and retained in a separate file. 7. Checks should be issued and recorded in the pre-numbered order. The sequence should also be accounted for when doing the bank reconciliation. 8. Unused checks should be kept under lock and key and accounted for in a log. Access to the locked checks should be restricted to authorized personnel. 9. Bank statements and cancelled checks should be received and reconciled separately from the check writing and recording function. 10. The check signer should review account distribution. 39.5 EXERCISE PATIENCE It is a company’s worst nightmare. A trusted employee is committing fraud of some sort against the company. At least, the company suspects the employee of a fraudulent act. When this happens, do nothing at first. Experts recommend: Never approaching and questioning the suspect directly. It can be quite difficult to resist the impulse, but many supervisors try and they ruin the case. They simply do not know the right way to question a suspect. Patience is a virtue that will be rewarded in this case. • Not firing the individual immediately, either. If no proof of the crime exists, the chances of getting it will vanish with the employee. •
39.6 CALL IN THE PROFESSIONALS Whether the individual in question has stolen blank checks or checks meant for another person, submitted phony invoices for payment, or committed some other type of fraud, is irrelevant to this discussion. For the purposes of this discussion, just assume that an individual in your department is suspected of defrauding the company in some manner. Then take the following steps: 1. Alert management. 2. Confer with the company’s legal counsel.
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Any decisions on fraud issues are usually made at the management level. This is especially true at those firms that do not have their own in-house counsel. In those instances most will bring in a professional trained to handle those situations. A few attorneys may try to handle this themselves, but most will not. They will bring in a private investigator trained to handle such matters. Some believe that this is covered by attorney/client privilege. Should the matter ever go to trial, the private investigator then cannot be compelled to testify about matters the client might like to keep private. Once professionals are hired, they usually do one of two things. They either help devise a situation where the individual can be caught in the act of committing the crime, or they will interview those involved to determine if a crime has been committed and, if so, who did it. Remember, until proof exists, extreme care should be taken. It may not be the person originally suspected. There have been many instances where the person first suspected by the company did not commit the crime. Now, some readers may be thinking they are quite capable of handling the questioning themselves. But this is not true. For starters, those involved are not impartial, especially if they feel they have been duped along with the company. Private investigators are trained in interviewing techniques and can read body language. They will pick up clues novices miss. 39.7 WHEN FRAUD HAS BEEN IDENTIFIED Whether the proof exists or the individual under suspicion confessed because he was caught in the act, the two scenarios will proceed identically. Bring the person into an office and present them with the facts. Again, it will be helpful to have a private investigator lead the discussion and ask the questions as this is something they are trained to do. Once a verbal confession has been obtained, the private investigator can get the individual to write it out. Even if unsuccessful in obtaining a written confession, a private investigator can surreptitiously tape the conversation in most states. It can then be used should the matter ever go to trial. Check individual state rulings on this matter. A lawyer cannot do this or obtain a written confession. In most states, either of these would be considered coercion if done by an attorney. Bringing in an outside professional will also help in another area. They will be able to advise the company if the matter has to be reported to authorities. Most of the types of fraud committed by someone in accounts payable would probably not have to be reported. But there are exceptions, such as cases involving money laundering, which might have to be reported.
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39.8 DEALING WITH THE AFTERMATH The reporting issue can become very important in deciding how the matter will be handled both internally and externally. The company will have to make some hard decisions. The severity of the crime and possibly extenuating circumstances might lead a company to show clemency. But, if this is done, verify every last detail of the story presented by the thief. A company’s actions will also depend on the public embarrassment a company is willing to expose itself to, the proof it has, the magnitude of the crime, and the amount of compassion it is willing to extend. Usually, a company will fire the employee and try to get the individual to repay whatever was taken. Of course, without a job, it is difficult for anyone to make restitution. In one instance, the only way the individual was able to make restitution was to steal from the new company. Whether a company decides to press charges will also depend on the amount of public humiliation it is willing to experience and the amount taken. It is often difficult to get law enforcement to prosecute these cases, especially if the amount taken is not large. This can be infuriating to those who want to do the right thing. Some counties have threshold limits setting what they will prosecute. Before making any decision, find out what the limits are in your locale. This might dictate your actions. Remember, if the issue is prosecuted, the matter will become public and in all likelihood the press will pick it up. For many this is enough to keep them from prosecuting. Inevitably, the fact that fraud occurred reflects poorly on the company and its management. If proper controls had been in place, the crime could have been prevented. Management at many companies prefer to keep this from their shareholders and boards of directors. For others, the compassion factor kicks in and they cannot bear to prosecute the person involved. Should you decide that restitution is the way to go, consult again with your attorney. In some locales, once you make such an agreement, and the employee makes one payment, you forfeit your right to prosecute, even if the individual never makes another payment. 39.9 PREVENTING FRAUD IN THE FUTURE The old adage about an ounce of prevention is certainly appropriate. There are some actions that can be taken to reduce the chance of having employee fraud committed at your organization. Start by checking out those you hire. In the end, money will be saved. Anyone who handles money should be
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checked out before they are hired. Thorough background checks are appropriate but rarely done. Since white collar crime of this sort is rarely reported and almost never prosecuted, many of these crooks simply move to another company. Some learn their lesson but others inevitably return to their old ways. They lay low for a while but eventually are lured in again. Once fraud has happened, focus on putting controls in place so it can not happen again. The last thing you need, or want, is to have a repetition of the crime. While no one likes to think they have an employee who would steal from them, it does happen from time to time. By knowing the proper way to handle the matter should it occur, accounts payable professionals can provide a valuable service to their firms. Check the phone book for private investigators in your locale.
CHAPTER
40
VENDOR FRAUD
40.1 INTRODUCTION Vendor fraud comes in a variety of flavors and ranges from the penny-ante stuff, discussed in more detail at the end of this chapter, to the serious bigdollar issues. Moreover, it includes a very gray area when it comes to duplicate payments. When a company pays a bill twice, it may or may not get its money back. If the duplicate payment is made to a utility of some sort, the payment is typically credited to the account and then applied to the following month’s bill. While this is not the optimum use of cash, at least the company has not lost its money. However, if a duplicate payment is made to a vendor, many simply issue a credit and then never let the payee know about it. Even if statements are sent, many companies omit credits from such statements. If statements are requested from vendors, it is imperative that the vendor understand it is to include all balances, both credit and debit. Unless this is spelled out to the vendor in no uncertain terms, the vendor may forget to tell the customer. This assumes that the vendor has been able to identify the correct account. When the vendor is not able to identify the account, the money is put into a suspense account, and the cash is applied whenever the vendor gets around to it. This tends to be a very low priority at many companies and, ultimately, if the amount stays in the suspense account for 6 or more months, it may be written off—yes, the vendor will simply keep the money. Does this really constitute fraud? Probably not, under the strictest definition of fraud, but it still represents lost money. 40.2 MASTER VENDOR FILE The master vendor file is a treasure trove to the fraudster intent on separating your company from some of its money. Yet many firms do nothing to 366
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either guard this valuable asset or to make sure that phantom vendors cannot creep in without proper authorization. Access to the master vendor file is often where corporate fraud begins. The criminal simply adds a phony vendor or alters the information on an existing entry that is already included in the master file. Consider the following scenarios. Would any of them cause you to think twice? Employee John Doe has the exact same address as vendor JDL Services, Inc. • All the invoices from Vendor A are sequential. • You can never find all the paperwork for Vendor B’s purchases.
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Remember, the most likely perpetrator of corporate fraud is the long-term, trusted employee. And for most companies today, the probable existence of a “phantom” vendor looms large. Those interested in preventing vendor fraud can set up proactive frauddetection systems that combine the data in their internal database with information derived from searches of external databases and directories in order to pinpoint possible fraud. These tools can assist accounts payable professionals in uncovering the real identity of suspicious vendors.
(a) BEWARE OF THE PHANTOM VENDOR.
Sometimes, the information that can identify a phantom vendor is sometimes readily available to the accounts payable professional. If the company database is complete, the information needed to verify the existence of the vendor’s company is there. From these files, it will be possible to:
(b) GIVEAWAYS IN COMPANY RECORDS.
Compare vendors against approved vendor lists. • Cross-check each vendor’s address, phone number, and zip code against those of employees. • Check the invoice sequences of each vendor. • Identify payments made without purchase orders or receiving documents.
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Software is available to make quick work of these tasks. Two such packages are: ACL software (604-669-4225), which facilitates internal data acquisition and analysis by auditors. • IDEA (Audimation Services, Inc., 713-623-0008), which aids in fraud investigations and data transfer, among other features. IDEA was created by the Canadian Institute of Chartered Accountants. •
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Legitimate vendors can be found in standard business directories. Again, software is available to help. Three useful programs are:
(c) USE STANDARD BUSINESS DIRECTORIES.
American Business Information (800-555-5666), which offers a treasure chest of data on vendors, by both industry and owner. Its CDROM directories can be accessed by name, address, phone number, or SIC code. Use this directory to determine whether a vendor exists, to match vendor phone numbers or addresses to those of employees, and to generate a list of mail-drop addresses. • Security Software Solutions (800-681-8933), which allows the verification of Social Security numbers (often used as employer ID numbers by small vendors) and to identify vendors at mail drops. • BRB Publications (800-929-3811), publisher of The Public Record Research Library, offers various directories of online resources. The Sourcebook of Online Public Records Experts features proprietary databases, gateway vendors, CD-ROM providers, national and regional public records search firms, and other resources. Verify Those Credentials is designed to provide the necessary tools to check on the representations people make in business. And The Sourcebook of State Public Records is a guide to searching for public record information at the state level. •
(d) ONLINE INVESTIGATIVE DATABASES. Information obtained via these resources is valuable in assessing whether people are living beyond their means or have undisclosed outside businesses or whether a vendor even exists. Two such software programs are:
CDB Infotek (800-427-3747), which is one of the most complete online investigative databases. • IRSC (800-604-4772), which provides similar services to Infotek. For example, IRSC’s Business Locate search returns information compiled from the Yellow Pages and business white pages, and is verified by phone before being added to the database. •
Public records available through both Infotek’s and IRSC’s online databases include business filings, liens, judgments, bankruptcies, and other information. Both CDB Infotek and IRSC charge monthly service fees and have a menu of fees for specific inquiries and searches. For example, Infotek
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offers a single search of corporate records in 44 states (which also includes an identification of business affiliations for the principal officers). (e) GET A COMPLETE FINANCIAL PICTURE. Several services can be used to gather financial information, locate bank and brokerage accounts and safe deposit boxes, or conduct asset checks. Three to start with are:
Online Search (800-858-5294) US DataLink (800-527-7930) Lexis-Nexis (800-58-5294) One of the best ways to guard against phantom vendors is to institute strong controls over the master vendor file. Limit access to the file and have periodic reports printed and reviewed of all changes made to the file. These reports should be reviewed by some high-level manager and should show who made the various changes. Even seemingly innocuous changes such as change of address and contact should be included on the report. For more information about master vendor files and the proper way to maintain and control them, see Chapter 9, “Master Vendor Files.” (f) PROPER CONTROLS.
40.3 CON ARTIST VENDORS There are a number of small scams that appear to continually attempt to extract on a regular basis a few dollars from legitimate businesses. Most, but not all, of these scams involve relatively small amounts of money. The thieves who favor these cons are counting on the fact that companies typically find it to be too much trouble to verify and fight small invoices that appear to be inaccurate or even fraudulent. Rather than waste a lot of time in this effort, many companies simply pay the small bills, the reasoning being: Does it make sense for an accounts payable professional to spend two hours, plus involve someone in purchasing and maybe the controller, simply to decide that the company should not pay a $25 bill? This is precisely what these con artists count on. The following subsections address three of these scams currently being used: Sending low-quality, high-priced goods • Advertising/phone book scam • Pay for life • Solutions
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This scam is simple. The company receives some very low-quality goods, priced outrageously, which it never ordered. Nevertheless, the bills begin to arrive, along with threatening and harassing phone calls. The most common goods sent as part of this con are paper and toner for the copier machine. Here’s how it works: A representative from the fraudster will call the company and ask the receptionist for the brand and/or model number of the copy machine. Then, paper or toner “designed” for that machine will arrive. At first glance, it will appear to be a legitimate order since it is the right products for the company’s machine. Occasionally, the phony vendor will even demand the goods back—which most companies would happily return, if they had any clue as to where the goods were. Frequently, they have been used, as no one realized they had never been ordered by anyone in the company. (a) SENDING LOW-QUALITY, HIGH-PRICED GOODS.
When a company places a classified add, whether in a newspaper or the yellow pages type of a phone book, it will learn that an exact duplicate of that advertisement has also been running in another, more obscure publication. How does it find this out? A duplicate copy of the second ad will be attached to an invoice for payment sent to the company. Clearly, the ad “belongs” to the company, so the company’s AP department will pay it, not realizing the ad was never authorized. The fraudsters in this scam simply make copies of legitimate advertisements and then bill the companies. They must get paid often enough to make it worthwhile because the scam persists.
(b) ADVERTISING/PHONE BOOK SCAM.
The pay-for-life scam is ingeniously simple. A check shows up for, say, $3.50 at an AP department, which, like most, does not have the time to research such a small check and so simply deposits it in a suspense account to be applied at a later date. That later date rarely ever comes, and eventually the amount is written off to miscellaneous income. However, the very small print on the back of the check—which typically also appears illegibly in light gray ink—indicates that by cashing the check you are agreeing to pay the payor of the check $29.95 per month—forever. Of course the reason this scam is so successful is that few take the time to read the fine print on the back of such checks. Complicating the matter is the fact that the check might show up in a department other than accounts payable, where it is deposited; and the later invoices show up elsewhere—usually accounts payable. Worse still, some companies will pay small-dollar invoices rather than take the time to verify each one
(c) PAY FOR LIFE.
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because it is not cost-effective to do this. Thus, companies may be paying these crooks without even realizing it. Should you find yourself in such a position, having cashed one of these checks, all is not lost. One company refused to pay, and when the crook started squawking, company reps simply suggested that the matter be discussed with the attorney general or the Better Business Bureau. That put an end to the matter. 40.4 SCAM SOLUTIONS The law says that anything that arrives in the mail unordered can be considered a gift; it is not the responsibility of the receiver to return anything. Keep this in mind and point it out vehemently to those making threats regarding payment for goods not ordered. Other workable solutions to help get rid of these pests are to: •
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•
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Make the sender prove the goods were ordered. The sending company should have a purchase order or an order blank with a signature from someone at the company. If it cannot produce that, do not pay it. Return the product. Some companies, preferring not to be involved with such vendors, take a more conservative approach. As soon as unordered goods are received and cannot be matched to a purchase order, they call the vendor and tell it the goods were not ordered, then return the product. When an invoice is first received, check for a valid PO number. If missing, incomplete, or inaccurate, return the invoice unpaid to the vendor. Companies that follow this procedure report how quickly all legitimate vendors clean up their invoices. List all suspect vendors’ names on the company intranet. Flag these names in the company’s system to prevent payments. That said, be aware that some of these companies change names frequently. If all else fails, threaten to report the vendor to the attorney general or a business watchdog group. Fraudulent vendors will not go away; pay them once and they will continue to ship the company more low-quality goods it didn’t order. Thus, it is not simply a matter of paying $25 and forgetting about it. Pay the $25, and it will be followed by a $50 or $100 dubious invoice, and more.
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40.5 VENDOR PROFILE FORMS A growing number of leading-edge companies have begun setting up vendor verification programs. Such initiatives serve to discourage fraud and, according to James B. Arnold, APEX Analytix’s chief executive officer, to minimize the number of relationship vendors. Arnold explained how to set up a vendor verification program. (a) CREATING A VENDOR VERIFICATION PROGRAM. “As the custodian of the disbursement process,” says Arnold, “accounts payable is in the best position to screen vendors, either prior to entry in the vendor master file or once they have reached a given spending level.” Thus, it is imperative that accounts payable professionals be actively involved in the establishment of a vendor verification program. They can serve as the missionaries of such programs, in conjunction with management, internal audit, and purchasing. A vendor verification program permits the company to:
Ascertain that vendors represent bona fide business entities. • Make sure that vendor selection is based on obtaining the best value consistent with specifications for quality and services. • Minimize risks from defective goods and services, company reputation, and financial loss. • Receive appropriate value for purchased goods and services. •
Arnold recommends using a vendor profile form to authenticate vendors. While, the form is designed to elicit information, it actually discloses telltale signs of the vendor’s legitimacy as an ongoing reputable concern. The form should elicit the following information:
(b) WHAT IS A VENDOR PROFILE FORM?
• • • • • • • •
Business name Federal employer identification number (FEIN) Business type Whether the company is Small Business Administration (SBA)certified Contact name for negotiation and billing inquiries Phone number and e-mail address Remittance address Physical business address
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Arnold recommends that companies include a request for “proof of existence,” that vendors be asked to submit two documents from a list of credible documents. Acceptable proof might come from a Dun & Bradstreet report, city/county business license, or stock certificates. Arnold advocates that the vendor profile form be sent and returned completed by all vendors before they are added to the master vendor file. Though many companies will not find it feasible to send vendor profile forms to all existing vendors, he strongly advises insisting that new vendors complete the form. If they do not, he says, cease cutting checks to them. (c) COMPUTERIZED TECHNIQUES. In the absence of a formal vendor verification program, accounts payable professionals can use online services to confirm the authenticity of new (and suspect) vendors. By matching the information provided by the vendor against reliable external sources such as Dun & Bradstreet, the accounts payable professional can determine whether the vendor is a legitimate business. “At a minimum,” says Arnold, “you will learn if you need to do further background checks.” As one last check, accounts payable professionals can take the phone number provided by the vendor and look it up in one of the numerous reverse phone book sites on the Internet. Note, however, that this is a less trustworthy means of verification, because many of these sites are not updated on a regular basis so legitimate new businesses will not show up.
PART ELEVEN
ACCOUNTS PAYABLE TODAY AND IN THE FUTURE A decade ago the professionals who populated accounts payable spent most of their time processing invoices for payment. Technology wasn’t what it is today and consequently, in order to get invoices paid, lots of clerical help was required. Since you’ve gotten this far in the book, you undoubtedly realize that is no longer the case. Technology has freed the professional to spend a greater part of his or her time focusing on analytical rather than transactional processes. As a result the professionals in accounts payable need to take a more active role in managing their own careers and keeping on top of the latest advances, not only in AP, but in all the other facets that affect their responsibilities. This includes steering their staff, working to get management’s attention and approval and communicating effectively. Sometimes the hardest part for any professional is to understand not only what they must know but also what salary they can command in a competitive environment. Almost as important they need intelligence about what they should be paying their staff in order to hold on to their star performers. We provide some of that information at the end of the section.
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41
PROFESSIONALISM IN THE FIELD
41.1 INTRODUCTION This is a great time to be an accounts payable professional. The field is finally starting to get the recognition it deserves, which means that AP professionals, too, are being acknowledged for the hard work they do. At larger companies, the AP departments are sometimes headed by individuals with master’s degrees, principally MBAs, and it is not unusual to hear of someone being paid more than $100,000 to run one of these departments. Some of these pros make accounts payable their lifelong career, while others use it as a stepping-stone to more responsible positions within the organization. Both of these options are attractive, depending on the long-term goals of the employee. No longer is accounts payable viewed as a place to dump the unproductive employee that no other department wants but the company is reluctant to let go. Companies are beginning to realize that it is important to put good, productive, innovative people in accounts payable to protect the company’s bottom line. Now that companies are starting to recognize the value of AP professionals, it is imperative that the professionals themselves do everything in their power to avail themselves of the opportunities they are being offered. 41.2 EVALUATING THE BIG PICTURE It is easy to get wrapped up in the day-to-day responsibilities of one’s job and lose track of more far-reaching issues, whether in terms of the accounts payable department or an individual’s career. Therefore, both businesses and individuals need to figure out what their goals are and then act accordingly. 377
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And because the situation will change periodically, it is important that accounts payable professionals step back and reevaluate on a regular basis, to ensure they are still on target for meeting those goals. To that end, it’s important to coordinate and work with peer organizations within the company. In the case of accounts payable professionals, this will probably mean working more closely with purchasing and receiving. This is particularly relevant today, as the number of companies that have begun to merge these functions continues to increase—a move not all accounts payable professionals agree with, by the way. However, it is necessary to face reality and this is a trend (albeit, not a huge one). By working with purchasing long before anyone raises the issue of merging, the accounts payable professional will be well situated in any case, whether or not the accounts payable and purchasing departments end up reporting to purchasing. Another reason it is advisable to partner with other departments is that many of the productivity-improving procedures your department may want to implement over time will typically require buy-in from, and cooperation of, some of these other departments. Examples include purchasing cards (p-cards) and Evaluated Receipt Settlement (ERS). It would be next to impossible to run a successful purchasing card program if purchasing refused to cooperate. 41.3 LEADERSHIP AND PREPARATION Leadership will always be the single most important skill needed by the accounts payable manager; fortunately, it is a skill that can be learned, if it doesn’t come naturally. Two guidelines to follow in this effort are: Always be open to new ideas; regard technology as a tool, not a replacement, for human capabilities; and, most important, maintain an inquisitive mind. The successful accounts payable manager of the twenty-first century will be one who recognizes the importance of dealing fairly and honestly with people and who knows how to handle day-to-day problems with confidence, by looking for solutions, not pointing fingers. 41.4 TECHNOLOGY Identifying the right technologies for accounts payable is today a necessary part of a manager’s leadership skill set. The Internet and intranet, technology will be ideal tools that can be indispensable helpmates to those in an accounts payable department, freeing up the time formerly spent researching problems
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offline. Technology, too, can help ease the always-difficult task of dealing with difficult vendors. The point is, the successful AP professional will need to be able to identify the emerging technologies of relevance and learn all there is to know about them. 41.5 COMMUNICATION Good communication skills are essential to anyone who wants to succeed, not matter what the field of endeavor. Specifically, the accounts payable professional must be able to communicate with vendors, the accounts payable staff, and employees of other departments. Communication skills in the areas listed here will go a long way toward smoothing an often rocky road, inevitably caused by disagreements between AP staff and vendors or company peers. • • • • • • • •
Logic and reasoning Computer and technology (some of which indirectly affects accounts payable through other departments) Information processing Research (e.g., the ability to interpret and apply data) Self-discipline and responsibility Adaptability and flexibility Conflict resolution and negotiation Teamwork
In short, the AP professional must be able to communicate effectively in order to function in a diverse and multicultural work environment. (a) THE NECESSITY OF KEEPING SKILLS UP TO DATE. Simply put, accounts payable professionals who do not upgrade their skills on a regular basis are like dinosaurs trying to compete in the modern world. In order to remain valuable, both to his or her present employer and future ones, the professional must continue to learn new strategies and techniques. Digging in one’s heals—that is, insisting on doing the job the way it has always been done—will be the kiss of death in the job market today. AP professionals tempted to do this should compare the risks associated with change against those of not moving forward. It will not take much introspection to identify the actual risk. Clearly, it pays to advance yourself both personally and professionally. The business community is changing on many fronts. Companies institute
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cultural changes as they merge with, or acquire or are acquired by, other companies. The result of all this turmoil is a tremendous amount of uncertainty and pressure—both for businesses and for individuals. Companies respond in ways never anticipated by most accounts payable professionals; for example, by:
(b) HOW BUSINESSES ARE RESPONDING.
Mergers, acquisitions, and spin-offs at levels previously unimagined. Evaluating and reevaluating the bottom line, or value-added contributions of whole departments. • Replacing people with technology. • Downsizing via benchmarking. • Becoming more customer-focused. •
By identifying the specific pressures their business is experiencing, accounts payable managers can understand why and how they must change. 41.6 RELEVANT TRENDS The constraints experienced by businesses have a way of filtering down to its operations. In this case, payables departments have begun to feel the brunt as companies react to competitive pressures. The pertinent trends are in the form of these changes: Merging of customer service and payables functions, or purchasing and payables • Reduction of staff through automation • Retention and training of personnel to be customer-oriented • Creation of internal partnerships, breaking down existing barriers •
By acknowledging and accepting these innovations in the workplace, accounts payables professional can begin to adapt more readily. 41.7 GAINING THE ATTENTION OF MANAGEMENT It is the rare company whose upper managers fully appreciate the contribution their accounts payable professionals make to the company’s bottom line. Too often, this contribution is overlooked or taken for granted. But AP pros can have an influence in this regard. Here is the approach used by one professional to win management attention to the fine work the department was doing. Notably, communication and information sharing are at the root of these strategies.
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“In the past,” explains the manager of cost and budgets at a large southern insurance company, “senior management expected accounts payable to ‘do everything,’ without regard to the additional time required to complete the process.” This could include manual checks, special handling, and checking for a dozen different things before processing. This department’s experience is all too familiar to a large percentage of accounts payable professionals. By communicating to management the time needed to complete each of these “special” requests, this shrewd professional was able to help them appreciate what was involved. This effort resulted in a reduced number of special requests made to the department.
(a) COMMUNICATION.
Accounts payable professionals have a resource that can greatly improve their standing within their companies. Unfortunately, few fully exploit this valuable resource. The wide array of information at the fingertips of those who run accounts payable departments puts them in a unique position. (See Chapter 26, “Benchmarking,” for more information on this topic.) Make sure the information is current. Otherwise the statistics are meaningless.
(b) INFORMATION.
41.8 HOW TO WIN APPROVALS ON ACCOUNTS PAYABLE PROPOSALS Why do some accounts payable professionals have a much greater success rate than others when it comes to getting approval for projects? “Because,” says Frank Sundstrum, Mobil Chemical’s assistant controller, “they understand the game plan and know how to influence their boss.” To improve your batting average in this area, Sundstrum recommends following these guidelines: Present your proposal in the language of business-money. Do not focus on improved efficiency, morale enhancement, error reduction, or any of the issues that are important to you. Mention these items, but translate them into cost savings. That is what management wants to hear. • Make management take notice. If your AP projects have not resulted in bottom-line savings, include purchasing in your proposal. This will give you the volume you need to get recognized. • Know your corporate environment. According to Sundstrum, there are six or seven different types of environments within two broad •
382
Ch. 41 Professionalism in the Field
distinctions: glitz and glamour and a shoestring operation. No doubt you know into which group your company belongs. Keep this in mind when making your proposal. Sundstrum gives the example of making a proposal for a spiffy new reception area. Glitz and glamour companies would readily consider such a proposal, whereas shoestring operations would not—unless it resulted in a financial saving. • Take your time. To explain this guideline, Sundstrum gave the example of his efforts to win a raise for one of his staff, Amy. Sundstrum knew his boss would not go for it, so he had to plan carefully. He bided his time; then, when Amy helped him complete a successful project that was important to his boss, Sundstrum mentioned that she had done a great job. That’s all he said at that time. Plant the seed. The next time Amy helped him, Sundstrum mentioned to his boss that he did not know what he would do without her, and left it at that. Water the seed. On a third occasion, he mentioned in passing that Amy had done something outstanding to help the department. By the time Sundstrum actually asked for a raise for Amy, he got no argument. It was approved without discussion. • Use vignettes to sell your ideas. Let’s say you want an Internet site for your accounts payable department. You go to a conference and meet a speaker from another company who has installed one. When you come back, share the story with your boss, of course highlighting the cost savings involved. If you work at a glitz and glamour company, you might throw in something about the prestige the site gives the other company. • Plan, plan, plan. “Even if you can’t do long-range planning,” says Sundstrum, “at least take five minutes before you go into your boss’s office to strategize.” Sundstrum’s final message was to focus on the boss’s needs rather than your own. For example, he said, a boss in his company seemed to be averse to promoting from within. But after analyzing the situation, Sundstrum realized that this person was concerned about having vacancies within the department. Once Sundstrum realized the problem, he became more creative when recommending in-house promotions. By filling the vacancies created from within the company, he was able to get several people promoted; he then filled the last slot with a temporary worker he had long wanted to make permanent. When presented with a plan that did not disrupt the department, the boss gave immediate approval for all the promotions.
41.11 Conferences
383
41.9 TAKING CONTROL OF YOUR OWN DESTINY Sometimes accounts payable managers feel as if they are operating in a vacuum. If this describes you, it’s a good idea to tap into one of more of the professional resources available today to help you stay updated on the latest developments in the field. Specifically, a number of professional organizations address the needs of the accounts payable professional, each with a slightly different focus. You also will want to attend some of the conferences run by these groups. Just keep in mind that you do have options. Your biggest problem should be which to choose. Some of these options are described in the following sections. 41.10 CERTIFICATION In order to establish standards for the accounts payable profession, IOMA joined with The Accounts Payable Network to develop a certification program for accounts payable profession. The certification is available at two levels: the accounts payable specialist and the accounts payable manager. Additionally, companies that are committed to the certification process, as well as those that want to ensure a core level of proficiency in their accounts payable departments, can obtain departmental certification. Detailed information about this program can be found at www.ioma.com/apcertification. Companies that want to certify several employees can get group pricing for their employees. Note Some companies now require that their accounts payable professionals be certified.
41.11 CONFERENCES In addition to conferences run by the professional organizations listed above, a number of other organizations run specialized conferences directed solely to the accounts payable professional. These include: •
IOMA Managing Accounts Payable conferences. IOMA holds numerous training events each year for accounts payable professionals (for more information, call IOMA at 212-244-0360). Here’s a sample:
A large multispeaker, multiexhibitor event held each October in New York
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Ch. 41 Professionalism in the Field
An Advanced AP Institute conference each winter Several single-topic one-day events Numerous audio conferences on AP-related topics
RECAP Enhancing Accounts Payable conference. This is held each year in March, for three-plus days, during which a variety of speakers address issues of import to the accounts payable community. For information, call 201-697-6430, or visit the Web site at www. recapinc.com. • National Association of Purchasing Card Professionals conference. This national event takes place each year in April. The association also sponsors numerous regional forums. For additional information go to www.napcp.org. • Basic Accounts Payable conferences. Two organizations offer oneand two-day seminars that address introductory through intermediate accounts payable issues. These seminars are generally taught by one instructor and are offered at many locations around the country. The organizations are: •
Padgett Thompson/AMA (800-433-3635) Pathmasters (800-611-0088)
The accounts payable professional with a staff might want to give them the opportunity to become involved in one or more of these courses. 41.12 ACCOUNTS PAYABLE IN THE TWENTY-FIRST CENTURY As corporate America continues to look for ways to cut costs and increase productivity, the accounts payable function must adapt. It is probably safe to say that, in just a few short years, the typical AP department will not look anything like its predecessors of today. For proof of this, it is only necessary to look back on the last 10 years to realize how the accounts payable function has already been changing. What does this mean for today’s AP professionals? Here are some thoughts on the subject. Accounts payable work will become less transactional and more analytical as companies look for ways to automate certain parts of the function and eliminate paper. Ultimately, this will translate into fewer, but higherlevel jobs in the field—good news for those who remain and bad news for those who must lose their positions, especially those who process payments. Undoubtedly, employers will demand a college degree as a matter
41.12 Accounts Payable in the Twenty-first Century
385
of course. So, whereas your current employer may not care if you don’t have a degree, because you’re doing a terrific job, a new boss will not likely be so understanding. In fact, many companies already use the lack of a degree as a way to weed out candidates if too many apply for a job. The best advice, then, to those of you who do not have a college degree is: Go back to school. Typically, this can often be done at night; and perhaps your current employer will foot all or part of the bill. Also impacting the AP professional of the new century is the fact that many departments are going paperless. What was once a pie-in-the-sky dream is actually starting to come true in many organizations. E-mail, imaging, and workflow got the ball moving; electronic invoicing may be the tool that succeeds in getting a good deal of the paper out of the accounts payable department. In a recent survey, close to half the accounts payable associates responding indicated that their companies were either already receiving invoices over the Internet or intended to do so over the next two years. The word to the wise is: Learn everything you can about the process and the companies offering the service.
CHAPTER
42
SALARIES AND TITLES IN ACCOUNTS PAYABLE TODAY
42.1 INTRODUCTION Despite reports to the contrary in the popular press, the last few years, have been good for the men and women who head today’s accounts payable departments. In a Managing Accounts Payable salary survey from 2002, the “average” accounts payable manager earned $63,255, an increase of almost 17 percent over the previous two years. This is in stark comparison to overall salary increases in the United States, which averaged only 4 percent. Increases in bonuses have not, for the most part, been as lavish. The average bonus for an accounts payable manager was $6,252, less than $300 higher than two years ago. This chapter takes a look at actual salary data as well as some emerging trends in the field. 42.2 BASIC DATA For the first time, a significant number of respondents to the Managing Accounts Payable salary survey bear the title of controller, director, or senior manager. For this reason, salary data here is broken into three managerial levels: Accounts payable supervisor • Accounts payable manager • Controller/director
•
As Exhibit 42.1 shows, there is reasonable progression between the salaries for these titles, ranging from an average of $50,833 for supervisors to 386
A VERAGE S ALARY
50,833 75,455
$63,255
FOR
AND
6.8 8.5
7.8
D IRECTORS
48,333 65,000
$58,258
Average Salary
Average Years Experience
7.7 6.2
7.5
Average Years Experience
16.2 16.6
18.3
Average Years Experience
Women
48,333 65,000
$58,258
Average Salary
Women
14.6 18.9
18.5
Average Years Experience
AP M ANAGERS , S UPERVISORS ,
50,833 75,455
$63,255
Average Salary
44,787 —
$54,226
2003–2004
Source: Managing Accounts Payable Management Operations Survey, 2003.
E XHIBIT 42.1
AP supervisor Controller/director AP
AP manager
AP Experience
AP supervisor Controller/director AP
AP manager
Overall Experience
2001–2002
Average Salary
Men
42.2
56,818 81,552
$71,714
4.3 10.1
8.4
387
Average Years Experience
10.4 20.9
19.0
Average Years Experience
BASIC DATA
Average Salary
56,818 81,552
$71,714
Average Salary
Men
388
Ch. 42 Salaries and Titles in Accounts Payable Today
$75,455 for controllers/directors. The disparity between male and female salaries continues, unfortunately, most notably at the supervisor level. More discouraging is that men with the same title, earning more money, have significantly less experience than their female counterparts. The gap is even more significant at the manager and director levels, where women earned 81 cents and 80 cents per dollar, respectively, for every dollar paid a male professional with those titles, in comparison to 85 cents per dollar at the supervisor level. Additionally, the men at the controller/director level had significantly more experience (both overall and APrelated), which at least in part explains the salary discrepancy. This experience differential comes out to about four years. In fact, by increasing the female controller/director salary at a rate of 4 percent per annum, the $65,000 becomes $76,000, or 93.25 cents for every dollar earned by male counterparts. Perhaps female professionals with high-level titles in the accounts payable profession are finally within striking distance of achieving salary parity.
42.3 BONUSES Although bonuses do not play a major part in the compensation structure of accounts payable management overall, the significance of this extra compensation is rising—and women are close to holding their own in this regard. According to the survey, bonuses were paid to: 20.6 percent of those surveyed • 23.8 percent of the men surveyed • 18.8 percent of the women surveyed •
At the director level, 16.7 percent of the women received bonuses. However, the bonus size battle still must be fought. The average bonus paid to controllers was $8,056 (down from $9,812 two years earlier); and bonuses paid to men were more than twice those received by their female counterparts. At the manager level, bonuses paid to women actually exceeded those given to their male counterparts, by $652, with the average bonus equaling $6,252. Bonuses at lower levels were much smaller. Exhibit 42.2 details the bonuses paid by title this year compared with two years earlier.
A VERAGE B ONUS
AND
B ONUS R ECIPIENTS ,
100 4,443
1,625
1,200
1,850
6,519
$5,000
Women
BY
T ITLE AND
100 5,027
1,300
600
2,300
6,252
$8,056
G ENDER
4,000 —
—
—
2,443
6,564
$9,812
2001–2002
Overall 2003–2004
Source: Managing Accounts Payable Management Operations Survey, 2003.
E XHIBIT 42.2
— 5,815
0
AP coordinator Grand total
0
Analyst/specialist
2,750
AP supervisor
Accountant
5,867
$10,500
AP manager
Controller/director AP
Men
Average Bonus
16.7 23.8
33.3
25.0
36.4
25.0%
—
Men
25.0 18.8
25.0
10.0
14.8
18.8
16.7%
Women
Recipients
42.3
Bonuses
20.6
19.6
26.3
14.3
21.1
21.0
16.7%
Overall
389
390
Ch. 42 Salaries and Titles in Accounts Payable Today
2001–2002
2003–2004
Master’s degree/MBA
36.0%
College degree
50.0
61.4
Some college High school
30.0
19.9
7.0
3.7
E XHIBIT 42.3
A VERAGE E DUCATION L EVEL AND AP D IRECTORS
OF
14.9%
AP M ANAGERS , AP S UPERVISORS ,
Source: Managing Accounts Payable Management Operations Survey, 2003.
Two years earlier, 15.3 percent of men in accounts payable management received bonuses, as compared with 10.7 percent of the women. This implies that the number of professionals receiving bonuses is climbing at a rather steady pace. 42.4 EDUCATION Though still today a college degree is not a de facto job requirement for the top position in accounts payable, according to the survey, a large majority of those running accounts payable today have one. Less than one-quarter of the respondents do not; and less than 4 percent have only a high school diploma. The handwriting is on the wall in big, bold letters: To get ahead in most accounts payable operations, a college degree has become a necessity. Over three-quarters of the survey respondents have college degrees, with 15 percent having advanced degrees. Exhibit 42.3 shows the percentages at each level. 42.5 EFFECTS OF INDUSTRY AND COMPANY SIZE Across the board, it seems safe to conclude that company size is not an overwhelming determinant of salary, contrary to what may seem the logical assumption: that bigger companies pay higher salaries and, conversely, smaller companies offer lower compensation. In fact, accounts payable managers at the smallest companies, those with fewer than 200 employees, are the second most highly compensated group. Different industries compensate their accounts payable professionals differently, with a few actually compensating women as well as or even better than the men. Exhibit 42.4 details these differences by industry, company size, and gender.
55,000 57,000 53,000 69,375 63,333 59,000 70,000
Government
Healthcare
Nonprofit
Utilities/transportation/communications
Wholesale/retail/distributors
Education
Other
58,214 72,895
1,000 to 4,999 5,000 and more AND
55,000 63,846
55,000
53,889
63,333
75,000
55,000
48,333
68,000
45,000
55,000
56,667
58,000
58,333
$60,200
Women
AP S UPERVISORS ,
65,000 92,500
55,000
64,167
65,000
65,000
75,000
70,833
71,667
65,000
60,000
45,000
92,500
68,333
$77,083
Men
Source: Managing Accounts Payable Management Operations Survey, 2003.
AP M ANAGERS
55,000
500 to 999
A VERAGE S ALARIES
58,000
200 to 499
E XHIBIT 42.4
63,500
Up to 199
FOR
63,750
Business services
By Number of Employees
63,333
$65,676
Finance/banking/insurance
Manufacturing
By Industry
Average Salary
AP Manager
BY
OF
72,778 82,778
83,000
80,625
65,000
55,000
87,500
80,000
80,000
84,000
73,750
—
70,833
62,857
$82,778
Average Salary
E MPLOYEES
51,000 47,500
50,000
55,000
37,500
—
45,000
45,000
75,000
45,000
55,000
45,000
46,667
55,000
$46,000
Women
79,167 89,000
83,000
94,000
64,167
—
87,500
80,000
80,000
82,500
92,500
—
86,667
70,000
$84,167
Men
391
75,000
60,000
—
58,333
66,667
55,000
—
80,000
—
90,000
55,000
—
55,000
45,000
$80,000
Women
Controller/Director AP
EFFECTS OF INDUSTRY AND COMPANY SIZE
N UMBER
45,000 68,333
45,000
55,000
55,000
—
—
35,000
71,667
60,000
—
—
45,000
45,000
$60,000
Men
AND
42.5
I NDUSTRY
50,455 56,429
47,500
55,000
43,333
—
45,000
40,000
72,500
55,000
55,000
45,000
46,250
50,000
$48,333
Average Salary
AP Supervisor
392
Ch. 42 Salaries and Titles in Accounts Payable Today
42.6 TRENDS In reviewing the salary data from Managing Accounts Payable’s survey, several encouraging trends emerged, including: Accounts payable management is attracting an educated group of professionals, with over three-quarters having at least a college degree. Almost all had at least some college education. • Accounts payable management is being put under the tutelage of higher-titled positions, with more than one in five having the title of director, controller, or senior manager. • The profession remains the purveyance of women, with 62.4 percent of the departments run by females. • Bonuses, while by no means the norm, are becoming more commonplace. •
The conclusion, then, is that the outlook for the accounts payable profession is bright. Management seems to be recognizing the contributions made by the professionals who run their accounts payable operations, as reflected by the data revealed by this study. 42.7 REEVALUATING AP POSITIONS FOR GRADE-LEVEL CHANGES Most managers face the dilemma of what to do with staffers at the top end of the pay range. To help answer this question, accounts payable professionals should, first, realize that there is great flexibility in salary ranges. Despite what it may say in the company personnel manual, in many companies it is not unusual to pay someone more than the high end of their salary range. So, before embarking on a campaign to raise the job level or grade, determine if the grade restrictions are simply being used as an excuse not to pay a higher salary. If that is the case, you will be wasting valuable time and subjecting yourself to a lot of needless stress by trying to have the grade level raised. Assuming that is not the case, realize that bosses will benefit by the accounts payable function being raised in grade level, for a very simple reason: The higher the grade level of the people reporting to a boss, the higher his or her level can be. By pushing to have the accounts payable department’s jobs raised in grade level, the accounts payable manager may be indirectly benefiting the boss.
42.8 Titles
393
Once you have decided to push forward, begin by performing a review of the function and the accounts payable professional’s performance. Document any actions that have saved the company money, reduced costs, or earned the company money. Include in the review any new responsibilities you or the department has taken on. Many people who have been in the same job for more than a few years have gradually taken on more responsibility without ever having a change in title. Consider what the job entailed when it was first taken on and what it encompasses today, and detail all changes in the review. By documenting progress and discussing the situation with your boss, perhaps you will find that you can have your job levels and your associated compensation raised. Once the manager has successfully done this task, the rest of the positions within the department can be similarly reviewed. 42.8 TITLES It is time for corporations to take a long, hard look at the titles given to accounts payable professionals. Many have completely inappropriate titles that hinder supervisory efforts to have pay levels increased. Assigning the proper title is the first step to securing adequate pay. It also goes a long way toward ensuring that the accounts payable professionals are afforded the respect they deserve from the rest of the company. Accounts payable professionals who want to upgrade their positions often do not know where to begin. “What titles are other companies using?” is a common question. Here is how one company handled this issue:
(a) THE PROBLEM.
We have done several things in my department. Currently, my accounts payable person is called an “accounts payable coordinator.” However, we are reorganizing, and there will be two employees doing accounts payable and one doing T&E. My two accounts payable employees will become payables associates, and my T&E person will become a T&E associate. My current title is payables manager. I chose “payables associate” because my accounts payable and T&E people do much more than just processing. They each have their own reconciliation and are responsible for several other tasks. I also feel that “associate” is a more meaningful title, and helps employees to think of our department as a real customer service environment. This way, they know that we are here for them.
Another company differentiates its accounts payable positions as follows: We use “accounts payable clerk” as our title for invoice processors, and we also have a file clerk whose main duty is filing. I am the accounts payable supervisor. You should contact your human resources department for job titles and descriptions. My
394
Ch. 42 Salaries and Titles in Accounts Payable Today
human resources department has reference books with this type of information, and they will not change a job title unless the duties are significantly changed as well.
Another accounts payable professional reports that: We call our accounts payable clerks “accounts payable bookkeepers” because they reconcile G/L accounts. This can be extremely complex due to the number of subsidiary companies that the parent corporation pays.
As indicated earlier, the way to change titles is to work through human resources, and only with the approval of the accounts payable department’s immediate supervisor. Often, the human resources department will not have a clear idea of an employee’s many responsibilities. Therefore, it is a good idea for supervisors from both departments to meet and resolve that situation. Before this meeting, make a comprehensive list of everything the employee does; try not overlook anything—no matter how insignificant it may seem. Include: petty cash, sales and use tax, escheatment, 1099s, value-added tax (VAT), duplicate payment procedures, automated clearinghouse (ACH), electronic data interchange (EDI), and purchasing cards. Do not forget things like recommendations for process improvements, and past accomplishments with, if possible, cost savings. Only when HR staffers have this information firmly in hand can they do their job properly. (b) APPROACHING HUMAN RESOURCES.
Given all the recent advances in technology and the use of purchasing cards, small invoices are disappearing from the corporate structure. This frees the accounts payable manager to make process improvement recommendations and participate in other corporate activities. As a result companies are now using the term “disbursements” to replace “accounts payable,” which means they have a disbursement manager instead of an accounts payable manager. All the titles listed in the next subsection may also be modified to accommodate this change. There is no apparent advantage or disadvantage to such an approach; it is simply a personal preference—although those who feel accounts payable has a bad reputation within their companies might find the renaming to be a useful way to, in part, reframe their image.
(c) RECENT TRENDS.
(d) SUGGESTED TITLE STRUCTURES. The following list shows a possible structure (in reverse order from bottom to top) for an accounts payable department:
Accounts payable clerk/coordinator/bookkeeper • Accounts payable associate/specialist/analyst
•
42.8 Titles
395
Accounts payable supervisor/assistant manager • Accounts payable manager • Accounts payable director • Vice president-accounts payable •
If your company has fewer than six people in its accounts payable department, you may eliminate some of the suggested levels.
APPENDIX
ACCOUNTS PAYABLE RESOURCES
Books Mary S. Schaeffer, Accounts Payable Best Practices (Hoboken, NJ: John Wiley & Sons, 2004). Steven M. Bragg, Design and Maintenance of Accounting Manuals: A Blueprint for Running an Effective and Efficient Department (Hoboken, NJ: John Wiley & Sons, 2003). Mary S. Schaeffer, Essentials of Accounts Payable (Hoboken, NJ: John Wiley & Sons, 2002). Steven M. Bragg, Essentials of Payroll (Hoboken, NJ: John Wiley & Sons, 2003). H. A. Schaeffer, Essentials of Cash Flow (Hoboken, NJ: John Wiley & Sons, 2002).
Newsletters “IOMA’s Report on Managing Accounts Payable,” www.ioma.com, 212 244 0360 “The AP Insider” (a free AP e-zine), send an e-mail to
[email protected] with the words “Sent AP Insider” in the subject line “The Accounts Payable Network” (online, fee-based), www.tapn.com
Audio Conferences IOMA holds at least two audio conferences each month on topics related to accounts payable, as well as additional topics that might be of interest to readers. Tapes and CDs are available for past events. Go to www.ioma.com for more information.
Conferences IOMA Accounts Payable Conference and Expo, held annually in New York City, www.ioma.com IOMA Advanced Accounts Payable Institute, held annually in late winter, www.ioma.com IOMA AP Issues Forum, held annually in June, www.ioma.com International Accounts Payable Professionals (IAPP), held annually in spring, www.iappnet.org National Association of Purchasing Card Professionals (NAPCP), held annually in April, www.napcp.org National Association of Purchasing Professionals (NAPP), held annually in January/February., www.nappconference.com 397
398
App. Accounts Payable Resources
Local Seminars IOMA’s Training and Certification Review Sessions, www.ioma.com, 212 244 0360 National Seminar Group, www.natsem.com, 800 258 7246 Padgett-Thompson, www.pttrain.com/
Web Sites www.ioma.com: for information about AP publications, certification, audio conferences, live conferences and regional training, and one-day AP events www.tapn.com: for information about online fee-based AP newsletter www.apcertification.com: for certification information www.google.com: for searches
Benchmarking Information Biannual in-depth AP Benchmark survey. For a free executive summary of the information, go to www.ioma.com/mr/uploads/apexesumm.pdf
INDEX
1042-s, 249 1099, 241 15/15, rule 102 810, 158 820, 158 850, 158
ANSI, 166,169 ANSI X12, 158, 162 AP conferences, 383–384 AP salaries, see Salaries AP titles, 393–395 ASAP checks, see Rush checks assumed receipt, 23–25, 24 audit firms, 75–77 authorized signers, 34–35 Automated Clearinghouse, see ACH
A Absorption, 254 account reconciliation, 355–356 ACH, 47–51 ACH credit, 108 ACH debits, 108, 172, 174 adjustment letters, 7 Airline Ticket Manager, 143–144 Algorithm, 202 American Payroll Association, 244
B B2B exemption, 270 balanced scorecards, 290 benchmarking, 63, 230–237 best of terms, 11 399
400
Index
bills, see invoicing blanket PO, 5–6 BNA, 255, 258 B-notice, 241, 244–245 C cascading certifications, 276 cash advances, 129 cash fraud, 361–362 cash management, 104–110 CCD, 108 CCD+, 108 check filing, 40 –41 check runs, 42 check security features, 349–351 check signing, best practices, 36 check stock, 120, 349 check truncation, 49 checking, T&E, 129 checks, rush, see Rush checks clean desk syndrome, 109 cobradores, 56 COLD, 182 Communication, 379–381 comparative culpability, 348 con artist vendors, 369–371 conferences, 383–384 consumer levy, 254 controls, 80,82 copies, paying from, 79–83 corporate procurement cards, see p-cards corporate T&E cards, 120 CTX, 109 customer service, 338–341
D dealing with union staff, 314–318 detail, 157 digital signatures, 201 direct deposit, 47 disaster recovery, 180–181 disaster recovery, 281–283 discount, early payment, 95–98 discounts, taking 96–7, 104 discrepancies, 70–71 duplicate payments, 74–78 E early payment discount see discount, early payment EDI, 157–174 EDI, 29 EDI World, 169 e-invoicing, 191–199 e-invoicing, 20 EIPP, 193 EIPP, 48 Electronic Data Interchange, see EDI Electronic invoice presentment and payment, see EIPP electronic receipts, 136–137 electronic tax payments, 173 e-marketplaces, 206–208 encryption, 201 erroneous payments, 68 ERS, 17, 20, 26, 25–32 escheatment, 264–272 ethics, 275–280 e-tickets, 138, 142 e-Trak, 144
Index
E-TrakPro, 144 evaluated receipt settlement see ERS F Fair. Isaac and Company, Inc., 146 FEDI, see financial EDI Filing, 18 filing, checks, see check filing financial EDI, 157 float, 106–107 fraud, 345–373 fraud, cash, 361–362 fraud, check, 347–359 fraud, employee, 360–365 fraud, vendor, 366–373 Freedom Group, 267 G GL code, 7 grade level changes, 392–393 gross receipt, 254 H header, 157,158 html, 171
401
Internet EDI, 170 invoice amnesty day, 14–15 invoice handling, 3 invoiceless processing, see ERS invoices without invoice numbers, 14 invoices, discrepant, 15 invoices, unidentified, 10–11 L Leadership, 378 M managed compliance agreement, 262 management letter, 119–223 manual, policy and procedures, 299–300 master vendor file, 84–91, 366–373 master vendor file cleanup policy, 85 master vendor file maintenance, 86, 91 master vendor file naming convention, 87 master vendor file setting up, 88–90 Meridian VAT, 151 MICR, 349 motivation, 295, 319–327 N
I Imaging, 175–183 imaging and workflow, 20 independent contractors, 241 index structure, 178 interdepartmental cooperation, 333–336 international payments, 52–56, 278–280
NACHA, 109, 157, 166, 169, 222 NAPCP, see National Association of Purchasing Card Professionals National Association of Clearinghouses, see NACHA National Association of Purchasing Card Professionals, 222 negative assurance, see assumed receipt
402
Index
newsletter, 64–66 nexus, 255, 256
purchase order, see PO purchasing, 28 purchasing cards, see p-cards
O OFAC, 279–280 Office of Foreign Assets Control, see OFAC one card, 148 outsourcing, 284–288, 303–306 P packing slip, see receiving document Padgett Thompson, 265 pay on receipt, see ERS paying from copies, see copies, paying from payment timing, 105–106, 114–118 payments, duplicate, see duplicate payments payments, international, see international payments p-cards, 19, 42–43, 107, 213–222 personnel travel policies, 281–282 petty cash, 111–113 phantom vendors, 367 physical presence, 255 PKI, see public key infrastructure PO, 5, 72 positive pay, 353, 359 positive pay, reverse, 353 positive receiving, see assumed receipt post audit firms, 223–229 processing, 1 profit recovery firms, see post audit firms public key infrastructure, 202
R reasonable care, 351 receipts, 129 receivers, see receiving documents receiving document, 25 receiving documents, 6–7 reengineering, 304–306 remittance advice, 21 remittance advice, 28 ResTRACK, 144 reverse positive pay, 353 reverse sales and use tax audits, 262 Rush checks, 59 S salaries, 386–391 sales and use tax, 250–263 Sales Tax Institute, 251, 256, 258 Sarbanes-Oxley, 123, 275–278 secure messaging, 201 segment, 158 segregation of duties, 40,120, 355 self auditing, 228–229 seller privilege, 254 separation, 254 shifting, 254 signature cards, 35 signature plates, 120 signatures, manual, 33–34 signers, authorized, see authorized signers
Index
six sigma 289–290 spot checking, 132, 133 sub-certifications, 276 summary, 158 summary statements, 18 supplier relationships, 27 SWIFT, 54 T T&E manual, 134–135 T&E policy, 134–136 T&E, electronic, 139–145 taking discounts, see discounts, taking telephone tree, 282–283 TicketTrax, 143 TIN, 241 Tin Matching program, 248–249 titles, 393–395 tolerances, 70 trading partner directory, 166 trailer, 158 training, 307–310 transaction sets, 157 travel and entertainment, 138 trends, 392 truncation, 179 two-way match, 25
Unclaimed Property Recovery and Reporting Inc., 268, 270 unclaimed property, see escheatment unions, 314–318 upstream certifications, 276 V VAB, 158 VAN, 158 VAT, 150–153 VAT Clearing House, 151 VAT friendly countries, 152 VAT Reclaim companies, 151 vendor profile form, 372–373 vendor statements, 16 vendor verification program, 372 vendors, phantom, see phantom vendors vendor-to-vendor exemption, 270 W W-9, 247–248 web EDI, 171 web invoicing, see e-invoicing web site for AP, 187–191 X XML, 208–210
U Y UCC, 348 Unclaimed Property Act, 264, 265
403
Yetter Consulting, 256
