ACCOUNTS PAYABLE- WEEK 2.pdf

ACCOUNTS PAYABLE WEEK 2- CHECKS: THE TRADITIONAL PAYMENT MECHANISM, PREVENTING DUPLICATE PAYMENTS AND OTHER COMMON ERRORS & PAYING LOST OR MISSING INVOICES WITHOUT CREATING ADDITIONAL PROBLEMS. CHECK PRINTING Once an invoice has been approved for payment, and the a...

ACCOUNTS PAYABLE WEEK 2- CHECKS: THE TRADITIONAL PAYMENT MECHANISM, PREVENTING DUPLICATE PAYMENTS AND OTHER COMMON ERRORS & PAYING LOST OR MISSING INVOICES WITHOUT CREATING ADDITIONAL PROBLEMS. CHECK PRINTING Once an invoice has been approved for payment, and the accounts payable department has verified all the documentation and mathematics, it is time to actually print the check. In order for this to happen, the item has to be scheduled for payment and the check has to be run. Large companies typically run checks every day, but smaller and even large midsize companies are more likely to run checks at most several times a week. When the checks are printed, they may or may not be facsimile signed, depending on the corporate policy and the dollar amount of the check. Types of Checks Most people are familiar with checkbooks. In their simplest form, these checks are bound in a small book and handwritten. This is what most individuals use to pay their own bills. Some companies take a more sophisticated approach, using multipart checks that can be printed in one of two ways—either in a continuous format or individually usually using a laser printer. Continuous Checks Continuous-format checks typically are preprinted with the appropriate bank account information, along with the company name, logo, and mailing address. There are usually two, three, or more copies of each check printed. This type of check stock has to be kept in a secure location, and access must be severely limited. Additionally, a log should be kept of the checks used each time there is a check run. A calculation should be made using the number of checks printed, the last check number used and the ending check number. This is to ensure that no checks slip through the cracks and that no checks are unaccounted for. Accounts payable must also account for voided and damaged checks. The controls for this type of check are numerous—and tedious, given the technology now available. Laser Checks Laser checks are printed on laser printers identical to the ones used by most personal computer owners. Many of the brand-name laser printers most readers are familiar with can also be used to produce checks. In the best circumstances, checks are printed on blank paper that has certain security features imbedded in it. The beauty of using blank paper is that no special controls have to be used to store it or monitor the stock—other than to make sure that the company always has an adequate supply on hand. The software used by the company will print the entire check, including the Magnetically Incoded Character Recognition (MICR) link, the company logo, the check number, the dollar amount, and all other related information. The remittance information is printed on the check stub at the same time. The printer must have a special MICR cartridge to handle the MICR line, and it can also be outfitted to put a facsimile signature on the check at the same time the printing is done. Frequency of Check Runs Even companies that print checks every day usually do so at a set time— especially if the facsimile signature plate is locked away in a safe. This allows the accounts payable department to operate most efficiently. However, many companies do not have check runs every day and may schedule them as infrequently as once every two weeks. The frequency of check runs at your company will depend on many things, including the company’s needs, the corporate culture, and the company’s approach to payment stretching. Check Signatures It is important to differentiate between those authorized to sign a check and those authorized to approve a payment. Typically, people who can sign checks do not approve payments. Check signers are generally members of the treasury and/or accounting departments as well as very senior-level company executives. Each bank will require a signature card for each signer for each account, as well as a board resolution authorizing the person to sign on behalf of the company. In some instances, companies will delegate the authority to senior-level executives allowing them to designate other employees as authorized signers. In those instances, that documentation is supplied to the bank in place of the board resolution. Some companies limit the dollar amount for which certain employees can sign. For example, a company might allow an employee at the manager level to sign checks up to $10,000 but require that a higher ranking executive sign checks for larger amounts. Check Signatures- Con’t Additionally, checks above a certain dollar amount will sometimes require two signatures. These limits and requirements are set by the company and must be given to the bank. Although some people see it as an honor to be allowed to sign checks for a company, those charged with the task quickly realize that it can be a royal nightmare—especially in those companies that issue many emergency checks. Proper Controls of Check Signer Information The information regarding who can sign on which bank accounts and for what dollar amount is typically compiled in a report used by those who need the information. This report will also indicate whether one or two signatures are required on checks and at what dollar level a second signature would be required. The distribution of this information should be limited and the reports kept in a safe, secure place. This would be valuable information to someone intent on using checks to defraud a company. Thus, anyone who has a copy of this report should keep it in a desk and not lying around where anyone walking through the department can see it. Additionally, the information is usually periodically updated. When this occurs, new reports are distributed to those who need the updated information. At that point, either the old reports should be collected and destroyed or a cover memo should be put on the report asking the recipients to destroy their old copies. Facsimile Signatures These are signatures made by a machine that match a real signature. They are used by most mid-size and large companies and are the signature of a high-level authorized signer. In those instances where two signatures are required, most companies will allow one of those signatures to be the facsimile. Typically, the treasurer or controller’s signature is used for the facsimile plate. Manual Signatures Typically in the Corporate world here; handwritten signatures are what is commonly being used. Double Signatures Double signatures are generally required on all checks over a certain dollar amount. What that dollar amount is will vary from company to company. A few companies with very good controls will allow all checks to go out the door with only one signature. Most firms, however, require two signatures when the dollar amount of the check is large. The definition of large depends on the company. Some set the limit for one signature as low as $10,000 while others have it as high as $1 million. We know a few that require a second signature for all checks over $1,000. Getting Checks Signed Should checks require a manual signature, someone will be assigned the responsibility of tracking down the authorized signer and making sure the checks are signed. Usually, before signing the check, the authorized signer will check the documentation that supports the check to make sure that the check should be issued. This is part of what makes getting checks signed manually such a labor-intensive process. After the checks are printed and before they are given to the signer, they must be reattached (usually with a paperclip) to the back-up documentation. The signer should check the documentation and then make sure the check is made out to the correct party, for the correct amount, and on the correct bank account. Additionally, the signer will want to ensure that the proper authorizations are in place.Although this checking can be done relatively quickly for one check,if there are many checks it can take some time. Getting Checks Signed- Con’t Thus, checks are often left with the signer. This can and often does present a problem if the check signer isn’t prompt in signing the checks. The checks might sit around for several days before being signed and returned to accounts payable for handout. The problem arises when a check is waiting for signature and the vendor calls looking for its payment. If a log isn’t kept of who has what checks at all times, time is wasted as accounts payable runs around and tries to find the check. Worse still, if confusion reigns, a duplicate check will be cut, signed, and given to the vendor—with no guarantees that the original check will be destroyed when it eventually finds its way back to be mailed. It is a much better practice to have strong up-front controls. Alternatively, checks should not be taken to the signer unless he or she is ready to sit down at that very moment and sign the checks. Protecting the Check Stock If preprinted check stock is used, it should be stored in a secure location with access limited to a few authorized employees. In no case should an authorized signer be the person responsible for securing the check stock. A log should be kept so that at all times it is possible to determine which checks are in the secure location. Periodic audits should be made of the check stock, and occasionally these audits should be surprise audits conducted by the internal audit department. When New Checks Arrive Immediately check the box to see that it hasn’t been tampered with. If it has, make a note to that effect and notify the appropriate personnel. Check the beginning check number and the ending. Is this the sequence that you ordered? Are any checks missing? Log the checks in and immediately store them in your secure locations. Reordering Checks Most companies have established policies and procedures for reordering checks. For starters, the existing supply should be monitored and an order should be placed for additional checks well before the existing supply runs out. The printer should have instructions listing the few employees that are allowed to reorder checks. Finally, there should be limitations on who can change the “ship to” address for new orders. When the order is placed, the employee placing the order should ask to be notified when the checks are ready. Stop payments can be placed on the check numbers in the missing batch or the account can be closed, if that is deemed appropriate and not too disruptive. Although these measures might seem extreme to some, given the extent of check fraud and the potential financial damage that can be done with unauthorized checks, no action is too extreme when it comes to guarding the check stock. A Check-less Society Many futuristic publications predict a check-less future. Yet, this never seems to happen. The payment process, whether for government or private industry, will always have a certain element of paper checks. Every firm has a number of small vendors that perform necessary services that do not have the sophisticated banking relationships. Second, many people are still not comfortable even in today’s electronic commerce unless they can physically hold and touch a check. Third, many transactions must be completed between multiple parties, and the check seems to still fill this void. Consider a closing between parties for a parcel of real estate. The seller’s real estate agent, the selling party, the purchasing party, the purchasing party’s real estate agent, and the title company all have a vested interest in being paid “on the spot.” Lastly, miscellaneous purchases, where credit cards may not be accepted, leave only cash or a check as the alternative payment vehicle. Summary Policies and procedures regarding all facets of checks are not as simple as it may appear at first glance. Handled appropriately, a company will run into little trouble. Ignored or managed sloppily, a company can run into major problems.A well-informed accounts payable staff is the first deterrent against such an unfortunate occurrence. Preventing Duplicate Payments and Other Common Errors Errors in accounts payable–related activities cost companies thousands or in some cases millions of dollars each year. The mistakes lead to nonpayment, duplicate payments, excess payments, and insufficient payments. Each of these outcomes results in extra work for the accounts payable department, sometimes for the purchasing department as well, and usually deteriorated customer relations. What few outside accounts payable realize is that duplicate payments are a huge problem for most companies—regardless of size. It is in everyone’s best interest that these mistakes be minimized. What Causes Errors? Just about anything under the sun can cause an accounts payable mistake. However, most of the mistakes are a result of incomplete information. Deductions and discounts are lost when purchasing fails to keep accounts payable in the loop or when it fails to fill out a purchase order with all the details. Many suppliers send vague or misleading invoices, the result of which is that an incorrect amount is paid. And occasionally, accounts payable does make a mistake. However, even though accounts payable may get blamed for most of the errors, the reality is that most of the mistakes come about because of poor communication or misinformation from other departments. That’s why it is imperative that good communication channels be established and relationships with other departments be good. Many accounts payable departments have to work on improving their ongoing relationships with other departments. Most Common Types of Errors One of the most basic causes of errors in accounts payable are the errors introduced when data are re-keyed. This can occur in many, many places.When the purchase order (PO) is filled out and sent to the supplier, the vendor takes information from the PO and uses it to prepare an invoice. This is the first possible place for a keying error. Once the invoice is received, the associate in accounts payable takes the information and re-keys it into the company’s accounting system, providing another opportunity for a keying error. Other common errors include improper calculation of discounts, misapplied deductions and allowances, improper freight calculations, insurance charges, and incorrect due dates. Handling Discrepancies Accounts payable is a very poor place to resolve discrepancies. The accounts payable staff had virtually nothing to do with the transaction and does not have the needed information to resolve the discrepancies. The decision as to where to handle discrepancies must be made at a very high level. People from other departments must be involved. The most efficient way to resolve the problem is to refer it back to purchasing. All accounts payable associates can do is to point out how they do not have the necessary information to resolve the problem. If management determines that accounts payable will handle the matter, it then becomes imperative that accounts payable be given complete and accurate information. Timeliness Payment timing has become a big issue as companies look for ways to hold onto their cash. Likewise, those experiencing cash-flow crunches can manage the tightness a little bit by simply delaying payment. What’s more, some suppliers tolerate the practice, thus inducing their customers to delay payment even further. Is this fair? Probably not, but since few companies actually pay their bills within terms, it might be necessary in order to remain competitive. In any event, the issue of payment timing is a management consideration and should be left to the executives who make these decisions. Accounts payable associates who take the liberty of paying late without specific direction of management put themselves in jeopardy when a valued supplier complains or puts the company on credit hold. At best, the associate will end up with a tarnished professional reputation within the firm; at worst, the associate will be out of a job. Don’t make this decision yourself. Look to management for formal guidance on the issue. Duplicate Payments Completely eliminating duplicate payments may be an impossible dream, given the realities of today’s hectic business environment. However, severely reducing the number of such payments is possible if the proper procedures are put in place. Here are some strategies to lower the risk in the number of double payments: 1. Set up a policy for consistently creating invoice numbers for invoices without invoice numbers. The guidelines should include rules for logically creating invoice numbers. All personnel should be instructed on the invoice number protocol. The rules should not use dates by themselves or the account number. Duplicate Payments- Con’t 2. Establish a policy when paying from copies rather than original invoices. These procedures should include flagging payments made from copies and invoices over 30 days old. Require high-level approval for each such payment and pay only after a thorough search has been made of the paid invoice file. 3. If payments are made from statements, implement a strong policy for researching each item before the payment is made. It is imperative that consistent entry be made for the statements to be consistent. Duplicate Payment- Con’t 4. Maintain a log of all prepayments and deposits. Additionally, keep a copy of the contract or agreement in the paid invoice file. Managers should regularly review the payment history of those vendors that require prepayments. 5. Do not request credits. If for some reason a vendor owes you funds, have a check sent. Allowing the vendor to issue a credit is just asking for trouble down the road—assuming the credit is even given. Handling Missing Invoice Numbers Another leading causes of duplicate payments is invoices that have no invoice numbers. The reason for this is simple. One of the ways that companies track which invoices they have paid and which they have not is by referencing the invoice number. If one doesn’t exist this will increase the odds of a duplicate payment. Compounding the problem is the fact that many invoices without invoice numbers are for repetitive payments, or payments that are made on a regular basis. A perfect example of this might be the rent or the monthly Internet connection charge. Although it is less likely that the rent would get paid twice because the dollars involved are usually large, smaller invoices might easily be paid twice. Thus, it is a good idea to assign invoice numbers to those invoices that arrive without one. This should be done in a systematic way to avoid using the same invoice number twice. This implies that using the date as the invoice number is not a good idea, as several invoices could arrive on the same day. Handling Missing Invoice Numbers- Con’t Accounts payable should devise a numbering scheme that incorporates your own requirements and then make sure that everyone uses it when assigning an invoice number. Some companies use a combination of the vendor number and invoice date—assuming that they receive no more than one invoice per day from any vendor and that their invoice number field has an adequate number of fields. Summary Duplicate and other erroneous payments can be a big problem for all companies. Most who claim they never make a duplicate payment are probably not taking a realistic evaluation of the problem. By employing best practices, minimizing errors, and paying within the appropriate time frame, companies will be able to reduce the number of payments made in error. Those who employ payment-stretching techniques need to be especially careful about the duplicate payments in their organization. Paying Lost or Missing Invoices without Creating Additional Problems Unless you have worked in accounts payable for some time, lost or missing invoices may seem like no big deal. Here’s what happens —over and over again. A vendor calls up looking for a payment that was due two, three, or more weeks earlier. A search is undertaken, not only of accounts payable but also of any other department where the unpaid invoice might be. Typically, this would be purchasing. After this exhaustive investigation is made, it is decided that the invoice is indeed lost forever and the supplier is instructed to send in another invoice. Many times the vendor will fax or email the invoice in order to expedite the already-late payment. The second invoice may even be marked copy or duplicate. Payment is made, and everyone is happy. Now, a few days or weeks later, the original invoice shows up. Because of the enormous workload in most accounts payable departments, no one realizes that this is the same invoice as the one paid earlier. Complicating the matter even further, this second, but original, invoice is probably approved for payment. So it is paid. The vendor has now gotten paid twice—and only a very efficient and very honest vendor will return the second payment. Is It Realistic to Never Pay from Copies? Given this scenario, it is easy to see why many companies are loathe to pay from anything that is not an original invoice. In fact, the problem has gotten so bad that many companies refuse to pay from anything that is not an original invoice. Unfortunately, it is probably not realistic to never pay from a copy. Even in the most efficient organizations, papers—including invoices—get lost. Therefore, most accounts payable departments establish guidelines for dealing with payments made when the original invoice is missing. Marking the second invoice as a copy or stamping it duplicate does not really help when the original invoice shows up. Instituting Controls Obviously, the best control—never paying from a copy—is not realistic in most cases. Telling the utility company or a valued supplier that you do not pay unless you have the original invoice is likely to bring about undesirable consequences, such as no electricity or being put on credit hold and not being able to get needed supplies—something management at most companies would not find acceptable. This policy is not realistic for another reason: If the vendor is told, “Produce the original invoice if you want to get paid,” the vendor will just produce another “original” invoice. From the supplier’s perspective, it has acted in good faith, and is simply following the customer’s policy. But this policy actually increases the odds of duplicate payments, as the customer could eventually receive two original invoices. So it is better to allow copies, but establish policies and procedures to control the circumstances under which payments are made. Best Techniques for Preventing a Second Payment Double-check the files to make sure the payment was not already made. If the request was made by purchasing, demand that a valid Pobe provided. Make sure the duplicate is marked copy or duplicate and filed immediately. Run the information through a search routine based on the invoice number and dollar amount. Require an explanation for the lack of an original invoice with the payment request. Review requests for payment without an original invoice and make a determination on a case-by-case basis as to the advisability of paying. Make sure to get your manager’s input before rejecting a request. Pay from a copy only if the invoice number is completely legible —if not, ask for a clean copy so that you can check against other invoice numbers. Paying from a Statement The answer here is simple—DON’T. Statements are wonderful for reconciling accounts and identifying missing invoices. However, paying from a statement will certainly increase the odds of a duplicate payment. The reason for this is that there is no invoice to put in the file. Paying from statements can lead to major problems and duplicate payments. The exception is in those rare instances when a company pays its vendors strictly from the monthly statement. This is not the normal course of things. However, sometimes when a company has many invoices, they may choose to pay once a month, from the statement, rather than from the individual invoices. Usually, this is only done with the concurrence of the vendor, but it is a good solution when there are many small invoices from the same vendor. What Does the Vendor Do with a Duplicate Payment? Still not convinced that paying from a copy is a problem? Do you believe that vendors return duplicate payments as soon as they realize what has happened? Some do, once they get around to reconciling their accounts. However, even the most well-intentioned supplier is not going to put returning your money at the top of its list. In most companies, cash that is received is put into a miscellaneous income account and researched when time is available. Remember, the longer the vendor holds onto the money, the more interest it can earn on your funds —and no vendor returns duplicate payments with interest. Summary Invoices can and do get lost or mislaid. It is an inevitable fact of life. Payments must occasionally be made without an original invoice. The goal of the accounts payable associate is to ensure that this happens as little as possible, and when it does, to try and ensure that a duplicate payment does not arise as a result. Those companies that establish realistic guidelines for paying from copies are in the best position to minimize the risk of a duplicate payment.