Posts Tagged ‘Balance Sheet’
I want to know what measures I can put in place to prevent the vendor bank account fraud that was recently in the news. It concerned changing bank account information. What measures or best practices are most effective to prevent this?
– Accounting Manager, Raleigh, N.C.
The safe bet: Know whom you are dealing with
Bankers handle money day in and day out. They have a saying they drill into everyone on staff, and it applies just as well to commercial vendors: Know your customer. Many readers share that thought, along with other best practices to prevent bank account fraud:
- Communicate regularly with suppliers.
- Control master file access.
- Make technology work harder.
Communicate regularly with suppliers
A retail accounts payable director who chose to remain anonymous says, “If you communicate regularly with a supplier and receive a fax, e-mail or letter requesting a change in remittance address, call to confirm the request is valid. If you do not have a personal contact, find someone in your organization who does, and have that person make the call. To add another layer of control, place a second call to the vendor’s credit manager, controller or CFO.”
An anonymous A/P business process analyst agrees. “We require validations with both the bank and the vendor for any new account set-ups or changes to the banking data in our vendor master file. We also use validation tools to ensure the vendor is legitimate.”
Control master file access
An anonymous controller advises that you limit vendor master file access to as few members of your staff as possible. Also, periodically audit the master file, and specifically examine banking data for anomalies. This may help problems surface before they get out of hand.
“When ACH/wire payments are involved, and bank account information is changing, I have the requestor complete an authorization to confirm who owns the new bank account. The requestor sends it to the bank and receives bank confirmation of account ownership before my staff makes the requested change. It extends the timeline on this type of change but prevents payments to criminals.”
Make technology work harder
Pilar Tirado, accounts payable manager at Baker Hughes, Inc., recommends moving as many vendors as possible to electronic ACH payments. “It is not that difficult,” she says. “Then implement Positive Pay for checks that you still have to issue and re-visit the security features used in and on your paper checks. Consider using a Secure Seal as well to provide a means to verify all info on a check.”
But don’t trust technology too much. “Look carefully at e-mail addresses and document letterheads,” says the anonymous retail A/P director. “Some are set up to be easily misinterpreted as valid business e-mail addresses, while letterheads can be copied quite accurately. Look for sloppy, misaligned ones that lack color in the company logo. These should raise red flags to your vendor maintenance processors.”
How to prevent millions from slipping through the cracks
by Jim Arnold, President of APEX Analytix
Contract overpayments are a little like a slow leak in your right rear tire. You don’t usually notice until it’s too late, and you find yourself fixing a flat by the side of the road. The good news: You can solve the problem and get back on the road to business as usual
No one sets out to routinely overpay on supplier contracts. But despite everyone’s best efforts, money gets wasted — a lot of money. Ironically, part of the blame rests on efforts to streamline paper-driven accounts payable processes and drive down manual error rates.
Using enterprise resource planning (ERP) systems or best-of-breed approaches, many companies have done well at automating the purchase-to-pay process. And some have gone a step further, to implement Evaluated Receipt Settlement (ERS), which automates invoice payment, eliminates traditional three-way matching and saves a lot of paper-shuffling.
But contract compliance has lagged behind. Few companies have a global contract repository or any easy way to match contract terms to purchase orders or invoices. Even companies that image documents may be exposed to above-average error rates. That’s because contract terms aren’t culled out and stored so they can easily be matched with transactions.
The bottom-line questions to ask: How can we make sure every invoice we pay is in compliance with the contract terms? If we pay $15.52 per unit for Part No. 1234 on the face of the invoice, was that the price negotiated on the contract?
Big discrepancies
Lack of contract compliance leads to some of the highest error rates, biggest disconnects and largest dollar amounts slipping through the cracks. Here are a few recent examples:
• A global entertainment company contracted with a temporary staffing service to fill 1,100 different positions in different countries. But the contract only established rates for 350 of those positions. At stake: Total contract payments of $40 million annually. Since most temporary service contracts are billed cost-plus, inability to know the true base rate drained away even more cash.
• An automotive manufacturer wound up paying $421,000 too much to a vendor because someone “fat-fingered” the price with a misplaced decimal point. The manufacturer’s ERS assumed both the purchase order and receipt were correct and automatically cut the checks.
• A large manufacturer that used industrial gases arranged for a contract price of 75 cents per cubic foot, but a data entry error turned that price into $75, and an invoice that should have been $1,150 added up to $115,000. Again, their ERS just paid the calculated amount on the check.
Other examples range from mistakes that hinge on incorrect units of measure (pounds to kilos is commonplace) to companies that buy at the correct contract price but get refunds for returned items at a lower price. The latter cost one plastics manufacturer $27,000.
What you can do to prevent errors
Most CFOs and other financial executives understand these things happen. They may not realize the scope of the problem, which tends to increase as companies grow, merge and build a global presence. Clearly, the larger the enterprise, the more likely you’ll find information silos, fiefdoms, little or no interface between Accounts Payable and Purchasing and other signals that overpayments need attention. To prevent these errors, companies can take two main approaches:
• Marry the contract master file and the transaction file, so you can more readily compare the two. For example, say the contract calls for Company A to pay Company B $16 per widget from January 1st to July 31st. When you run a transaction report, you see that you’ve been paying $18, or $2 more than you should. That gives you the data you need to take action and recover those overpayments.
• Look for anomalies in the data, and then chase down the contract to determine why the anomalies occurred. Let’s say you review the transactions over time and see that for Part X you’ve been paying $12 per invoice except for twice when you paid $18.50. In context, that $18.50 anomaly sticks out like a sore thumb. And if you’re talking about thousands of parts and invoices, some number of anomalies will surely turn into overpayments.
Flag exceptions early and often
Certainly, keeping exceptions to a minimum and flagging them as early as possible is a “best practice” well worth pursuing. You will not only put a stop to overpayments, but cut your overall processing costs as well. Fixing problems during invoice processing carries one cost; finding the problem later, when you have to reverse it out in accounting, carries an even higher price.
And of course, if your overpayment is out the door, you have to get it back from your supplier, and that creates another set of problems. What if you discover the overpayment is a year old or more? Is that supplier still in business? Are your contact people still in place? Can you get to the right people?
Relationship issues add yet another dimension. Hunting down $5,000 from a distant third-tier vendor is one thing, but asking a downstream supply chain partner to take a $250,000 hit is quite another. Yes, they’ve been billing you the wrong amount, and yes, you deserve to get your money back. But that’s still going to be a difficult conversation — and an adversarial situation.
Consider sending statements
Another recovery option that can pay handsome dividends is to send statement requests to vendors, in an effort to resolve open invoices or credits on their books. Often vendors have credits on their books that aren’t reflected in clients’ internal records. For example, say a plant across the country returned $50,000 worth of parts, but that credit never made it into the company’s ERP system.
At some point, the vendor will take that $50,000 into income, even though it’s money owed to you. And let’s be candid: Vendors have little or no incentive to tell you about credits on their books — in some cases Accounts Receivable departments are instructed to hide credits, to respond only if specifically asked about them, or not to respond at all.
For example, APEX Analytix has found that a series of two or three letters generates about a 40 percent response rate from the vendor master list. Calling the major vendors often brings the total to 50 percent. If that effort generates $2 million, you can bet there’s another $2 million held by vendors who didn’t respond.
It’s a safe bet that, if you have 50,000 vendors globally, some will be forthright about credits, and some won’t. Others will rationalize that those credits amount to a compensating balance or represent just payment because you made them wait 90 days to get paid.
A final word
The longer you wait to recover overpayments, the more effort and expense involved, and the more time needed to resolve the issues. Across thousands of payments and vendors, these dollars can be significant. As the late Sen. Everett Dirksen once said, “A million here, a million there, and pretty soon you are talking about real money.”
That’s why smart companies use technology solutions that will find overpayments or other errors as early in the procure-to-pay process as possible, when least costly to fix — and less likely to leave you stranded by the side of the financial road, wondering why the spare tire isn’t in the trunk.
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Jim Arnold is the president, founder and chief technology officer of APEX Analytix. A CPA, CMA, CFE, CISA and CAPP, Arnold previously worked in application development at Texaco Inc. and internal auditing at General Foods/Philip Morris, and for two years was manager of financial planning for the Maxwell House coffee division. He received a bachelor’s degree in accounting information systems from Pace University.
I am one of the managers at a large A/P shared services center in the Midwest. At this year’s holiday party, my spouse cornered my boss and complained to him about my “long hours and low pay.” I didn’t find out about this little encounter until we got home. I’m furious with my spouse, but with time, we’ll work it out. My boss is another matter.
Do I hope he had “one too many,” and won’t remember what happened? Or do I make a point of speaking to him about this conversation? If so, what do I say?
– Embarrassed (company withheld)
Time for an open dialogue
Nearly everyone has a story to tell about a holiday party — and many involve some sort of inappropriate behavior fueled by alcohol. As embarrassing as this incident was, one anonymous reader says “count your blessings,” because in a similar situation, her significant other engaged in sexual harassment! Advice from readers on “damage control” with your boss in this specific situation centers on three strategies:
- Be up-front and apologize.
- Turn it to your advantage.
- Ask for a performance review.
Be up-front and apologize
Several readers say that the best approach is to bring the matter up with your boss and apologize for your out-of-line spouse. In the opinion of one anonymous A/P manager, “If you don’t mention it, the boss may think you planned it. Apologize, say your husband had a few too many drinks, and leave it at that. If the boss says he doesn’t remember, all the better.”
An anonymous payroll manager shares the same view, but offers a different strategy. “Better to address things up-front with your boss — not knowing where the rocks are can be more dangerous than any embarrassment. Ask your boss for a moment to talk about what happened, but rather than blurt everything out, try to open the conversation with a few questions and let HIM do the talking.”
Turn it to your advantage
Reader Dave Pouliot sees this as the opportunity for a win/win outcome. “Your boss may chalk it up to a disgruntled spouse, and most likely will address you,” he says. “This may be your opening for discussions relevant to a balanced work/life schedule. Treat it as a ‘lesson learned’ about discussing your work situations at home and not addressing them in the office, too.”
An anonymous manager also sees an opportunity. “You can demonstrate that you are a problem solver who can face an uncomfortable issue head on and deal with it swiftly and maturely — all excellent qualities for anyone who wants to move ahead in an organization.”
The first step, she says, is to go to your boss and tell him that you are aware your spouse spoke out of concern — but also out of turn. Be honest and let him know that if your work situation is an issue, you will bring up the subject, not your spouse. Apologize for your spouse taking personal liberties and for any resultant confusion.
Another opportunity for a positive outcome comes from a reader who chose to remain anonymous. “If long hours and low pay are indeed an issue, do meet with your boss. However, come prepared to discuss possible solutions. Dig for data: Has volume increased with the same resources; has the deployment of new systems caused some implementation overload? Are other people underperforming? Are systems not working? Could the company handle manual work differently? Are there processes that staff can change or re-engineer?”
Ask for a performance review
An anonymous reader from San Diego says to assure him that you feel comfortable speaking directly about any issues you have. “Don’t let long hours and low pay turn into ‘the elephant in the living room.’ Tell the boss you don’t mind ‘paying your dues’ to advance in the organization, but you would like to have a definite career path. Schedule a time when you can discuss it, without waiting for the traditional annual performance review — especially, if that review will be months and months down the road.”
Alternatively, an anonymous CFO recommends working within the normal performance review timeframe. “If you do have issues to bring up during your review, be sure to have backup documentation handy that shows your accomplishments, how you add value to the organization and how much time you average on the job.”
A final note
As readers have pointed out, a heartfelt apology goes a long way in restoring a relationship in trouble, whether it involves the boss, a co-worker or your spouse. In most cases, the courage to say “I’m sorry” will lead to open communication and a more positive outcome than you might expect.
A media recovery audit can plug holes, salvage millions
by Chris Siemasko, Vice President of Product Management
These days, faced with a fragile economy, shrinking spend and relentless pressure on margins, companies are looking everywhere for opportunities to cut costs. One area many companies have overlooked is advertising and marketing communications. They may be losing millions of dollars through overpayments, missed discounts and lack of performance against contract guarantees.
The dollars involved are eye-popping. In 2008, the top 100 advertisers spent $612 million each on broadcast, print, outdoor and Internet media alone. When you add all other types of marketing communication, such as sales promotions, event marketing and public relations, total spending reaches $777 billion. And that’s just in the U.S. market.
Despite the huge amounts of money in the advertising and media “bucket” at most large companies, the procure-to-pay process in this area gets surprisingly little scrutiny, compared to other vendor supply chains. And error rates are estimated at 1 to 3.5 percent, based on established rules of thumb.
Companies may assume that “our agency takes care of that” — or be reluctant to upset a solid working relationship by questioning what’s going on behind the numbers, but with so much bottom line dollars at risk, is that a prudent approach during these times?
Costly mistakes drain away dollars
The largest category of marketing spending, and thus the most important target for recovery, is typically media advertising. Similar to your other procure-to-pay processes, risks of overpayments exist throughout your media and advertising sourcing:
- Duplicate payments: Agencies typically invoice media costs to advertisers based on an up-front estimate. If media shifts or the media vendor issues an invoice for a different amount than originally planned on the approved buy sheet, the agency may input that invoice into the system again without reconciling or cancelling the original estimate. The advertiser ends up paying twice for the same media.
- Missed discounts: Agencies typically invoice advertisers in different billing formats (i.e., gross, net, net plus commissions, gross less discounts, etc.). An incorrect billing format can cause the advertiser to pay the wrong amount. Print media is typically negotiated off “rate cards,” often with a sliding scale based on spend levels. These discounts are difficult to track and easily overlooked.
- Credits not applied: When ads don’t run as planned, the media issues a credit. But these credits rarely get back to advertisers on a timely basis, due to reconciliation delays. It may not be clear exactly what campaign or month or spot the credit is for, and months can go by, while the credit sits on the agency’s books. If the advertiser is unaware of these credits, it may never receive them.
Underperformance compared to plan
Just as a supply-chain provider might short a delivery of component parts to your loading dock, media can underperform against negotiated contract goals and guarantees. For example, say you want to target 18- to 24-year-old consumers with a campaign around the X Games. The media plan guarantees your campaign will reach 80 percent of the target audience. Did you hit the performance criteria? Did the right commercials run in the right time slots?
Agencies are obligated to track and post these results for review against media guarantees, and then solicit credits for underdelivery. These credits are most commonly in the form of “make-goods” — additional advertising time allotted to the advertiser to make up for the original shortfall. If agencies are not diligent in tracking the media, they may leave value on the table to which advertisers are entitled.
| Because it is a natural extension of our expertise in auditing the procure-to-pay process, APEX Analytix has launched a Media & Advertising Audit Service that includes review and verification of:
Over a span of six to eight weeks, APEX Analytix identifies overpayments, including duplicate invoices and payments, and presents the claims to you for verification and agency credit or reimbursement. Our approach to audit assignments and our culture is not disruptive. We recognize that the relationships companies have with their suppliers is very important, and that most do everything they can to strengthen the relationship and keep each other in business. We work to arrive at a win-win solution for all concerned. At the same time, leakage anywhere in the supply chain keeps everyone from getting what they expect. Give us a call to explore this opportunity further. |
Failure to promptly track and reconcile make-goods against contract guarantees may result from lack of oversight, manual processes, a shortage of agency staff or turnover among media buyers. In any case, the longer it takes to complete the reconciliation, the more likely an advertiser will lose value.
The sooner the agency reconciles make-goods throughout the year, the better. After an annual review, it does little good for a major retailer running a multi-million dollar holiday promotion to get credits applicable to next year’s campaign. That value is still lost when it comes to this year’s bottom line.
This is not to suggest that agencies are asleep at the switch. But they are stretched thin in terms of time and resources just like everyone else. And in many cases, are only spot checking to ensure contract compliance.
Loss as a result of agency float
Agency float is second only to missing credits in terms of total dollars advertisers lose. How it works: An agency might require net-15 payment on an estimated invoice to the advertiser, while at the other end of the transaction, the media may have net-45 or even 60-day terms on its invoice to the agency. Thus, the agency has use of the advertiser’s funds for an unusually long period of time. With tens of millions of dollars involved, that can translate into substantial interest income to the agency and loss of value to the advertiser.
Most contracts are written in a way that minimizes float on media dollars. All parties recognize that there’s a level of reasonable profit-taking surrounding this risk, but there are cases where the agency can and should return that value to the advertiser. Example: In a recent case, a pharmaceutical company found that over a three-year period, its agency had pocketed $3.2 million in interest income, and negotiated a return of $1.7 million.
Questionable practices
When you are dealing with big companies and big agencies, instances of blatant fraud are quite rare. After all, reputations are at stake. However, it’s possible that a thorough media recovery audit will uncover practices that, at minimum, could raise ethical issues. For example:
- Related-party transactions. Agencies may use related parties to provide undisclosed services, resulting in profits that, while not necessarily undue, are unknown. Contracts are usually written so that pass-throughs are at cost, or if cost-plus, at a fair markup. Example: In a recent case, an agency used a sister company to place outdoor advertising in airport terminals, at prices that were unjust.
- Non-disclosed media. Large agencies may use their buying clout to negotiate bulk-rate deals with media, buying time or space on their own account, which they later resell to client advertisers. They’ll usually pass along a discount to the advertiser, but it may not be a full or fair value.
Actually, companies that do not use outside advertising agencies face a higher risk, even with solid internal controls in place. As with any other type of payment fraud, it’s possible for an employee to authorize payments to a “ghost” consultant or graphic artist, who turns out to be a mistress or girlfriend. That’s why a thorough audit needs to look at the controls you have in place and where you remit invoices, and flag potentially fraudulent transactions.
Action steps to take now
Unlike traditional supply chains, controls and oversight over advertising spending haven’t matured the way they have in retailing or manufacturing. Of course, you are right to expect a level of ethics and controls in place, but errors will take place. Here are steps you can take to bring marketing and advertising in line with the rest of your spending:
- Understand your media expenditures, and review existing oversight and controls to test whether you are being fiscally accountable in terms of your total dollar outlay.
- Decide whether or not leakage in the range of 1 to 3.5 percent is acceptable, and if recovering that amount would augment the bottom line.
- Don’t take a fox-in-the-henhouse approach and assume that the agency will make sure you aren’t overbilled or miss discounts.
- Get an independent media recovery audit of this year’s spending, since the earlier you identify variances from plan, the better. An independent review can also lead to new ideas for best practices and process improvements.
Taking these steps will ensure that you are doing all you can to get both maximum value from your dollars and the performance you expect. Handled properly, it can also serve to strengthen the existing client-agency relationship — serving as a “win-win” experience for everyone involved.
Chris Siemasko is vice president of product management for APEX Analytix. He joined Apex Analytix in April 2006 to provide strategic framework for the future direction of the FirstStrike™ product suite. Prior to joining APEX Analytix, Chris worked as vice president of channel solutions for Fidelity Information Services, a leading provider of core financial institution technology services for 35 of the top 50 global banks and nine of the top 10. Chris has spent 16 years in the financial services software marketplace, introducing, developing and delivering strategic and operational technology solutions to Fortune 500 companies. He graduated from the University of Pittsburgh with a bachelor of science degree in electrical engineering with collaborative research in software development and information systems.
My employees have been complaining about a coworker who takes long lunches whenever I am out of the office for a meeting or vacation. The employee doesn’t report the time in our time tracking system. I’ve talked to her about the situation, and she says she doesn’t do that.
Last time I was out of the office, it happened again. Several employees complained, and they’re frustrated. Obviously, this isn’t good for team morale. I’d love to stay in my office at all times, but I need to do business offsite. What is the best way to address this when I’m not there to see it happen? When it’s her word against her coworkers’, how can I ensure she is productive?
– A/P Manager, Pittsburgh, PA
Start with accountability
President Ronald Reagan often used the phrase, “Trust but verify.” Those of us in management positions are predisposed to trust that people who report to us are grown-ups who act responsibly, and that we can take their word. This situation is a reminder that not everyone measures up to that standard of behavior. Readers suggest three ways to deal with this situation:
- Establish a policy and stick to it.
- Appoint a “second in command.”
- Use special projects and deadlines.
Establish a policy and stick to it
A forensic analyst says, “If you don’t have a policy in place, you don’t have much of a leg to stand on.” She advocates implementing a policy that requires everyone on your staff to document time in and out for lunch, and using what the folks in human resources call “progressive discipline” to enforce it. That is, a first offense triggers a verbal warning, a second offense calls for a written warning, a third offense results in a three-day suspension without pay, and so on up to termination.
A finance director points out that you can use the computer system to make this log-in, log-out easy. “It will also allow you to identify long periods of inactivity,” he says.
Appoint a “second in command”
Appoint someone on your staff as the “go to” person in your absence, says an anonymous program manager. “This person should be someone capable of assuming the role of your assistant or right-hand person. That way, your group will know that this person is in charge in your absence,” he adds. The payoff: Your “second in command” can watch what goes on and report back to you about any “mice” who try to play in your absence. “This will also send the message to the group that you are trying to resolve the issue, and morale should improve.”
An alternative is to explain the situation to one of your peers in management and ask him or her to oversee this person in your absence. “This would give you an independent person’s perspective without requiring one of your staff to act as ‘the boss’ when you are not in the office,” he says.
Use special projects and deadlines
Kathy Harvey, accounting assistant at 1st Franklin Financial, offers a creative suggestion that doesn’t require a policy initiative or disciplinary procedure that affects everyone else in the department.
“I would assign extra job duties or special projects to this employee and set time limits so the work needs to be done when I return to the office. This would eliminate any extra time spent visiting with coworkers or taking longer lunches,” she says. If projects don’t get done on time, that becomes a performance issue that you can address in salary reviews.
The verdict is in. Whether you implement an across-the-board policy, appoint a second in command, use special projects or hit this person in the pocketbook at salary review time, readers unanimously agree that, as a manager, you cannot tolerate this type of behavior on your team.
