Accounts Payable - Week 4 PDF

ACCOUNTS PAYABLE WEEK 4- USING THE INTERNET IN ACCOUNTS PAYABLE, FRAUD: VENDOR, EMPLOYEE AND CHECK, HIGH- LEVEL ACCOUNTS PAYABLE CONCEPTS. USING THE INTERNET IN ACCOUNTS PAYABLE Most Basic Use of...

ACCOUNTS PAYABLE WEEK 4- USING THE INTERNET IN ACCOUNTS PAYABLE, FRAUD: VENDOR, EMPLOYEE AND CHECK, HIGH- LEVEL ACCOUNTS PAYABLE CONCEPTS. USING THE INTERNET IN ACCOUNTS PAYABLE Most Basic Use of the Internet: E-mail How did we ever survive without e-mail? Virtually all companies have given their accounts payable associates the ability to use e- mail with the outside. This is vital because most vendors not only correspond in this manner but are also starting to send invoices electronically. Most Basic Use of the Internet: E-mail When combined with imaging, e-mail can become a powerful tool, eliminating much of the manual paperwork in accounts payable. Here’s what’s happening at some leading-edge companies. The paper-intensive approval process might have an invoice coming first to the accounts payable department. An associate would open the invoice and forward it to the appropriate party for an approval. Depending on the corporate culture, the original invoice might be sent or a copy of the original sent with the original held in accounts payable for safe keeping. That way, when the approver lost the invoice (or never received it), accounts payable had the original to make another copy to send for approval. (and you wonder why duplicate payments are such a problem?). Most Basic Use of the Internet: E-mail Eventually, after several phone calls, the approver would dig the invoice out from under an in-box, approve the invoice, and send it back to accounts payable using inter-office mail. If the approver were in the same building, the whole process could take as little as two days or as long as— well, your guess is as good as mine. If the approver were in another building or worse, across the country, the most efficient approvers might have the invoice back in a week, and the less efficient…. Most Basic Use of the Internet: E-mail Enter imaging and e-mail. Now, the invoice when received in accounts payable can be imaged and the original hard copy either destroyed or sent to cold storage, depending on the company’s policy. Then, using e-mail the image is forwarded to the approver for review and formal approval. There is now an audit trail for everyone to see. The send date is on the e- mail and the approver can no longer claim he didn’t get the invoice, it was lost in the inter-office mail, accounts payable never sent it, or any other excuse. Most Basic Use of the Internet: E-mail If the approval is not received back in a timely fashion, the accounts payable associate can follow up using e-mail. Many companies have what is referred to as escalating approvals. They work like this. If after an agreed-upon number of days, say three or five, the approval has not been obtained, a reminder message is sent, usually automatically. If the approval is still not returned within a few days, the invoice is then forwarded automatically to the next-level approver—on an escalating basis. In theory, the invoice could eventually land on the president of the company’s desk, but it is unlikely that this would ever happen. Most Basic Use of the Internet: E-mail The beauty of escalating approvals is that not only are they exceedingly efficient at removing an unpleasant task (the follow-up, please approve- the-invoice phone calls) from the accounts payable department, they also cover vacation, sick days, and other emergency contingencies. After all, most bosses know when their subordinates are on vacation. There is also a subtle pressure on the approver. Once approvers realize that if they do not review invoices on a timely basis, the boss will know rather quickly, they tend to take the invoice approval process a lot more seriously. DEALING WITH DISCREPANCIES E-mails to cover discrepancy resolution can be handled in a similar manner. Forms can be designed to make the process easier on everyone involved—and if accounts payable does not receive a response in the agreed-upon number of days, the e-mail can and should escalate to the next highest person on the list. This should not be done without the knowledge of everyone involved. It is an extremely efficient way of resolving the discrepancy and deduction issues. A Word about Company E-mail Accounts Some accounts payable associates are surprised to learn that their company e-mail accounts do not belong to them but to the company. That means the company has the right to monitor any and all information that goes through those accounts. Many companies do this on a regular basis. Thus, you should have no expectation of privacy when it comes to that account. Although some companies do not mind if their employees receive personal e-mails in their corporate accounts, it is wise to remember that corporate policy can change at a moment’s notice. Do not have anything come into or go out of your company account that you do not want your boss to see— that includes off-color jokes, resumes, company secrets, and anything else that others might deem objectionable. A Word about Company E-mail Accounts More than one employee has lost his or her position due to inappropriate use of the Internet at the office. You do not realize how dependent you’ve become on e-mail until circumstances contrive to deprive you of the ability to communicate electronically. What Accounts Payable Pros Can Expect Accounts payable professionals feel pressure from purchasing and management to become e-commerce proficient and to find ways to modify existing systems and procedures to work under the new paradigm. In theory, a commerce model with information passing between buyer and seller electronically should leave little room for human error. This should translate into fewer discrepancies as a result of pricing or other information errors. On the plus side for accounts payable, the purchasing professionals using the new systems will also be responsible for inputting all information. Not only will they have to become e-commerce proficient, they will be monitored by their own companies to ensure that they do everything correctly. This may patch up some of the “black holes” into which needed information sometimes falls. Action Steps This is an area where accounts payable professionals can be the missionaries within their own organizations. By alerting management to the upcoming changes and recommending changes to accommodate electronic commerce within the accounts payable department, managers will be ready when electronic orders and invoices become the norm. The accounts payable department will need to be staffed with professionals who are 100 percent computer- and related-technology- literate. Summary Become as proficient as you possibly can when it comes to using the Internet. It is here to stay and will continue to make inroads into accounts payable. Those who thrive will be those who are adept at using the Web and who make it part of their everyday arsenal of tools. Fraud: Vendor, Employee, and Check Check Fraud 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 Check Fraud A few years ago, banks usually ate the losses that accrued because of the fraudulent use of their customers’ checks. No more. It has simply gotten too costly for banks to cover these losses. Why has check fraud grown so much? Check Fraud 1. It’s easy—Anyone with an inexpensive computer, a scanner, a color printer, and a little bit (and here the emphasis is on the word little) of knowledge can make a good copy of a check— good enough so that most banks will cash it. What’s more, with the current technology not only can a crook make a good copy, the crook can also alter it so that instead of being payable for, let’s say $100, it can be made payable for $1,000 or $10,000. 2. The risk of getting caught is low—Most police work is focused on violent criminals and those that commit crimes with dangerous weapons, rather than on people who commit fraud. Check Fraud 3. Even if apprehended, the odds of actually serving prison time are quite low—With the overcrowding of prisons, most people would prefer to see violent criminals behind bars instead of those who commit nice white collar crimes that don’t really hurt anyone. This last statement, unfortunately, is a misperception. White-collar crime hurts everyone—the harm is just not as visible as the damage done with a knife or a gun. So, if you were a criminal, would you hold up a bank with a gun to gain a few hundred dollars and intensive police scrutiny, or sit in the safety of your home with some fancy, low-cost equipment and print up bogus checks with little chance of police attention? It doesn’t take a rocket scientist to figure out why check fraud has increased. What Companies Can Do to Limit Their Chances of Having Checks Copied Let’s be clear about one thing. Although you can never completely eliminate the risk of check fraud, there are many things a company can do to minimize the chances of having a crook focus on its checks. After all, if you make it too difficult, the crook will simply move on to another target—there are so many of them out there. What Companies Can Do to Limit Their Chances of Having Checks Copied If preprinted check stock is used, the company can take these precautions: Keep it under lock and key. Limit access to the area where the check stock is stored. Keep a log of the checks used. Have someone with no access to the check stock perform a routine to determine the number of checks used. Perform surprise audits on the check stock by either the internal or external auditors. Authorized check signers should not have access to the area where the check stock is kept. This is for their protection, as well. Never, ever use a rubber stamp to sign checks. This practice completely negates a bank’s liability and makes the company 100 percent liable, as rubber stamps are not considered using reasonable care. After all, who knows who stamped the check. What Companies Can Do to Limit Their Chances of Having Checks Copied If a check signing machine is used, the company should take these precautions: The signing machine should be stored in a secure location where access is limited to a few authorized individuals. The signer should be kept separate from the check stock. The signature plate should be removed and placed in a safe or under lock and key—again separate from the check stock. Adequate controls should be put in place to monitor the number of times the signer has been used. Most have some sort of a counter on them. What Companies Can Do to Limit Their Chances of Having Checks Copied Most importantly, use common sense. Don’t think, “Oh, it’s okay, Joe is a trusted employee, he’s been here for ages.” As you’ll read a little further on, most employee fraud is committed by the Joes of the world, those long-time trusted employees, who at least at this point are predominantly male—although as women gain momentum in the workplace, this stereotype is sure to change. Identifying Fraudulent Checks The sooner a fraudulent check is identified, the more likely a company is to recover its funds. Here are two tricks to quickly identify fraudulent checks: 1. When the checks are received back from the bank, quickly spread them out and compare the color. A forger may have gotten the color close, but the odds are quite good that it won’t be a perfect match. 2. Check for perforations on the check if you are using the type of check that should have perforations—either from being ripped from the checkbook or detached from the stub. Crooks often neglect this feature when forging a check. Vendor Fraud In its very worst form, vendor fraud can be intentional on the part of existing vendors in collusion with your employees. In its mildest form it can be petty-ante scams for small-dollar amounts. The first line of defense is the master vendor file. Good controls and practices regarding the master vendor file will eliminate certain types of fraud. For example, an employee, John Doe, who sets himself up as the John Doe Company will not be able to set up an account in the master vendor file for this new company and submit invoices if the proper controls are in place. Most fraudsters, however, are not this obvious. Vendor Fraud Here are other ways to protect the company. 1. Cross-check each vendor’s address, phone number against those of the company’s employees. 2. Check invoice number sequences of each vendor. Suspicious patterns should be investigated immediately. 3. Payments made without purchase orders or receiving documents should be scrutinized closely. 4. Most legitimate vendors can be found listed in standard business directories. Check out new vendors. Employee Fraud No one likes to address this issue, but employee fraud is an issue—one that is typically swept under the table, as few companies like to admit that they were taken by one of their own. What’s worse, since employee fraud is rarely prosecuted, companies can’t or won’t taint the employee with a bad reference. Some employees who are involved in a fraud stop after one encounter. But many others, undeterred by a bad reference, repeat the crime at their next place of employment. Segregation of Duties Most auditors will continually harp about the proper segregation of duties, and with good reason. Many frauds are possible because of a lack of segregation of duties and checks and balances. If a person is permitted to authorize a payment and then the check is given to this individual to deliver, the risk is great. Most auditors will insist that checks never be returned to the requestor for delivery. Similarly, certain functions, such as maintaining the master vendor file, check signing, payment authorizers and so on should be limited only to those who must have that ability. Never should someone have the authority to update the master vendor file, authorize a payment, and then sign a check. Common sense will tell you what other functions should be segregated. If in doubt, discuss the matter with your auditors. They will provide adequate advise in this area. Summary Fraud is a growing problem. By being aware not only that it exists but also of some of the signs, accounts payable associates will be best positioned to identify situations that are not quite what they appear to be. High-Level Accounts Payable Concepts The three-way match makes a lot of sense for big transactions. When a company pays a high-dollar amount, it should make sure that it got what it ordered and not a partial shipment, the product arrived in good shape and it was of the quality ordered. However, when the invoice amount is small (and the definition of small varies from company to company), the amount of effort that goes into verifying that everything is exactly as ordered can exceed the value of the product ordered. Does it make sense for someone in accounts payable to spend 15 minutes verifying everything on a $25 invoice? Yet, that is exactly what many companies do. This chapter addresses this issue, as well as some of the issues that come up on a less- frequent basis. Handling the Small Stuff There are several ways a company can prevent its verification processes from getting out of hand. Some companies use one or more of the following techniques: 1. Assumed receipt—As its title indicates, goods are assumed to have been received when an invoice shows up in accounts payable if the invoice is less than some agreed upon dollar amount. For some companies the level is $50, for others $500.We know of one company that uses a limit of $5,000. When the invoice is received, accounts payable schedules it for payment according to terms, say in 30 days, and then sends an e-mail to the person who ordered the product indicating that Handling the Small Stuff the invoice has been received, and it will be paid if accounts payable is not notified not to pay within x number of days. If accounts payable does not hear from the approved within the given time frame, the invoice is paid. 2. Negative assurance—Also for obvious reasons, some people call the approach described above as negative assurance. If the accounts payable department does not receive a negative reply from the purchaser, it pays the invoice, assured by the lack of response that the invoice is good, hence, negative assurance. Handling the Small Stuff 3. Many in accounts payable feel that most of the payment discrepancies result from errors on the invoice. If the purchase order is filled out completely and both sides agree to the information and the receiving dock thoroughly checks out all products received and matches the goods against the packing slip, why do you need an invoice? The answer is, of course, that if the two functions described are working properly, an invoice is not needed. After all, the vendor knows what it shipped, the price, and the terms—as does the customer. If the customer simply pays on the due date, everything should be fine and less paper will be generated. In theory this is correct, although reality is not quite so smooth.