Error Prevention in Accounts Payable - Technology … · Error Prevention in Accounts Payable CEO...

Error Prevention in Accounts Payable

CEO Technology Insight

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Technology Insight Corporation 2 Mount Royal Avenue, Suite 400 Marlborough, MA 01752Phone: 508-480-8990 | Fax: 781-634-0500 | Web: www.technology-insight.com

Copyright © 2012 Technology Insight Corporation.All rights reserved.

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Mount Royal Avenue, Suite 400Marlborough, MA 01752

www.technology-insight.com

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n every accounts payable department, even those

within stringently run organizations, the persistent

problem of inaccuracy lurks. This issue results directly in lost

profits to the company and mitigation of this risk is a top

issue for A/P managers and CFOs. In an ever-changing

business landscape companies and their

employees have learned to exist in a constant

state of flux. While they have readily

adapted to this state, constant change itself

has the greatest impact on losses within

accounts payable. Those who

remain focused on this risk and manage

it consistently are best poised for

long-term success in this area.

OVERVIEW

LOSS REDUCTIONIS AN ON-GOING

ENDEAVOR REQUIRINGTHE RIGHT TOOLSAND A LASTINGCOMMITMENT.

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Best practices do exist to reduce this risk and they

vary from technology-based to management-based

solutions. It is estimated that 60%-70% of accounts

payable errors can be traced to just a few core

sources, though each company must drill down on

the root causes unique to their own organization.

As a result of a dedicated loss reduction

endeavor, a company can expect to

recapture a significant portion of those lost

profits. Even when inaccuracies equal less

than 0.5% of total payables, a deceptively

negligible figure, in many companies this

translates to a potential regeneration of

millions of dollars in cash flow. At the end

of the day, no one wants to leave that

kind of money on the table.

60%-70% OFACCOUNTS PAYABLEERRORS CAN BETRACED TO JUST AFEW CORE SOURCES

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THAT RESULT IN ACCOUNTS PAYABLE ERRORS

TOP 6 ISSUES

Invoice Data Entry Errors and Inconsistencies

Unclean Vendor Master Files

Purchase Order Mismanagement and Over-Reliance

Temporary Personnel and Employee Turnover

Incomplete or Flawed Implementation of New Systems

Mergers and Acquisition Transitional Failures

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This remains the biggest reason for lost profits in

accounts payable. Inconsistencies in how each invoice is

entered run the gamut. The invoice number, the date

and FX issues are the most obvious but a slew of things

related to data entry standards can sneak in. Each

results in the same potential of duplicate payments.

Even something as ordinary as the increasing use of p-

cards within companies creates more duplicate

payments. Vendors continue to send statements (which

mimic invoices) for purchases made with a p-card and

these are erroneously entered as a new invoice. Despite

invoice entry usually being a primary training issue for

new hires, it remains the most likely source of

inaccuracy - simply because there are an infinite

number of ways to get it wrong.

THERE AREAN INFINITENUMBER OFWAYS TO GETIT WRONG

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Many duplicate payments can be traced back to a

single source, the Vendor Master file. A lack of data

entry standards for Vendor Master files results in not only

duplicate vendor names, but even a completely duplicate

vendor, including addresses and contact information. The

simple drop of a hyphen or an ampersand changes

everything. Even when an organization has exceptional

data entry standards concerning invoices, they may have

weak Vendor Master file standards which result in the same

consequence of duplicate payments. Complicating matters

further, acquisitions create an even greater chance that

Vendor Master files will be duplicated. A push to merge the

new company with the existing company as quickly as

possible usually means that Vendor Master files will not be

thoroughly inspected for duplicates. Additionally, on the

vendor side, duplications easily occur when distributors are

involved or the vendor is party to their own merger.

MANY DUPLICATEPAYMENTS CANBE TRACED BACKTO A SINGLESOURCE

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Many organizations are under the misguided

assumption that the implementation of PO

requirements creates an automatic control within the

purchasing department, thus eventually reducing

erroneous payments down the line. In actuality, more

than 50% of duplicate payments have a PO attached to

them. The greatest culprit is the blanket purchase

order, a phenomenon that is increasing in usage as a

reaction to accountability measures like Sarbanes

Oxley. Blanket purchase orders dilute the validity of

POs as reliable source documents in the accounts

payable department, rendering them virtually

useless as a loss prevention measure.

MORE THAN50% OFDUPLICATEPAYMENTS HAVEA PO ATTACHED

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On average, upwards of 60% of A/P departments

experience an on-going turnover in staff. Whether this

is the result of transitions in permanent employees or

cyclic demands that require temp staffing, new faces

inevitably lead to an increase in errors. Data entry

skills from other companies, or multiple companies

with temp staffing, rarely match the current company's

standard. Despite the common premise that data

entry skills are easily transferable from company to

company, too many nuances exist. Lowering

turnover and developing efficient new hire training

procedures is crucial for many companies.

A/PDEPARTMENTSEXPERIENCE ANON-GOINGTURNOVER INSTAFF

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Beginning in the late nineties, an influx of ERP systems

changed the face of many accounts payable departments.

This ushered in an era of software dependence, changing

the way business was managed going forward.

While the systems and software are now integral to

everyday operations, too many were rushed into

implementation, leaving holes in their usefulness and

weakening the positive impact they could have on loss

prevention. This is compounded in mergers, where

multiple ERP systems might be in use and the potential

for duplicate payments and errors skyrockets.

Straightforward decisions to not integrate ERP systems or

the invoice history of a new acquisition are the key

reasons that duplicate payments and errors occur.

Additionally, companies have eagerly ventured out to

SOMETECHNOLOGIESLACK RELIABLESAFEGUARDS TOCAPTUREDUPLICATIONS

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other technologies that streamline data entry,

including imaging (with or without OCR) and various

types of EDI feeds. Again, while these concepts are

great in theory, the practical implementation and

then, more importantly, the on-going assessments of

their true accuracy are usually neglected. Many

organizations see a spike in duplicate payments after

installing these kinds of technologies, whether from

misinterpretation of text in OCR, duplicated EDI

feeds or even simpler spreadsheet uploads

that happen more than once. What these

technologies lack are reliable safeguards

to capture duplications.

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In our current marketplace, despite the economic

downturn, this continues to be a big topic. Usually, the

greatest culprit is basic confusion, on part of the staff,

the customers and the vendors. In the worst scenarios,

when the two companies have common vendors, they

react in fear to the transition, wondering how they will

get paid. Their solution is to send the invoice to both

companies in the transition. Obviously, a surge in

duplicate payments is inevitable in the short term and

in the long term, open credits and statements begin to

trickle in, creating a rat's nest that eventually needs

unraveling. In some mergers, the decision is made to

utilize a shared service or outsourced model, in hopes

of quelling some transitional upheaval. What many

THE GREATESTCULPRIT ISBASICCONFUSION

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companies are surprised to find is that these models

actually have more errors than a traditional in-house yet

decentralized environment. The outsource model is flawed

essentially by disconnecting employees from a process

they are attuned to and in which they can easily spot

errors. In an outsourced model, implementation and

startup cost are much lower, because the focus is on

creating a lean, repetitive task-oriented environment. What

is lost is the connection of an employee who knows where

to look for potential problems. Over time,

outsourced models can adapt, resulting in

lower errors but in the interim, problems may surge.

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While minimizing these risks can seem like an

insurmountable task, there are actually a number of

interesting and practical ways to avoid losses in accounts

payable. Below are just a few of the tactics that can help.

Invoice Standards:

It all begins and ends with invoices.

Most important is the receiving of invoices.

With the simple implementation of a single

location for invoices to go each and every

time, the handling of that invoice

becomes timelier and then payment

follows suit. Consistent communication

with staff is imperative here,

to create a system that everyone

is aware of and understands.

BEST PRACTICES

THERE AREACTUALLY

A NUMBER OFINTERESTING AND

PRACTICAL WAYS TOAVOID LOSSES

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Inactivating Old Vendors:

Avoiding duplicate Vendor Master files is essential, but one issue

that crops up beyond that is a litany of Vendors that should be

inactivated. Declare a time limit, perhaps 36 months, and inactivate

any vendors that have not been used in that time frame. Depending

on the business, this time frame may serve to be further reduced,

even down to just 18 months. The time frame should align with each

company's business processes.

Hard Stop Implementation:

Hard stops can be a very effective tool to eliminate basic

duplications. Instead of a soft stop system, which only alerts the user

that duplicate data exists (duplicate invoice number, date, amount,

vendor), a hard stop completely blocks the entry of said invoice.

Pre-ERP Duplicate Payment Checks:

These can vary extensively, but the underlying concept is the same,

to stop duplicate payments before they hit the ERP system. They are

powerful tools that check for duplications in EDI feeds, spreadsheet

uploads, p-card payments or any other pre-workflow process.

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PO Management:

Although PO management occurs outside of accounts payable,

companies who undertake streamlining this process realize great

results down the line. Minimizing blanket POs, curtailing after-the-

fact POs and correcting price changes are best practices that garner

benefits for both purchasing and accounts payable departments.

Annual Vendor Statement Reviews:

Companies should put a process to audit the top 100-200 suppliers'

statements by merely requesting a statement and comparing that

balance to what is on the books. This is an easy way to discover open

credits and thus, found money, but taking it a step further can yield

more relevant information. Auditing a statement first for matching

balances and open credits is essential, however by looking deeper,

for invoices over 180-days can shed light on where real lapses are

occurring. Knowing where weaknesses exist allows a company to

strengthen their business processes accordingly.

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Monthly Self-Audit on A/P Processors:

When done consistently, a monthly self-audit of processors does two

things. First, it ensures that data entry standards, company policies

and processes are being adhered to. Secondly, it adds significance to

quarterly and annual reviews with on-going documentation

to assist in objective assessments.

Root Cause Logs:

Correction is vital to prevention. When errors are found or brought to

light, one of the best measures to prevent its future occurrence is to

drill down on the root cause. A simple log entry each time an error is

discovered along with a determination of the root cause can

illuminate real problem areas. Very often, what we suspect is the

problem, isn't really the core issue. A laser focus on causation can

initiate development of effective solutions.

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Even after a series of Best Practices are implemented

in an organization, the difficult truth is that

errors will still occur - they are inevitable in

even the most proficient accounts payable

departments. In a company where standards

are effective and processes are adhered to,

it can make sense to bring in a third-party

recovery audit team. Recovery audits can

provide valuable insight in those

organizations operations. When considering

a recovery audit team, there are

five major points to consider.

RECOVERY AUDITS

THE DIFFICULTTRUTH IS THATERRORS WILLSTILL OCCUR

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The reach of the team must be determined. Are theyperforming statement reviews, sales/use tax audits, contract

reviews, duplicate payment audits or a combination thereof?Companies should be apprehensive of those audit services

who claim to do it all. Very often, the result is marginal qualityover quantity - money is usually better spent on choosingsingle areas of focus in order to obtain beneficial findings.

What is the methodology? In a practical sense, how is theaudit actually going to be conducted? On-site or in a virtual

environment with heavy emphasis on technology basedinvestigation? Each style has its merits, though some may

work better in your company than others.

Determining the communication style the team employs iskey. Essentially, when the team contacts vendors (andemployees) they are a de facto representative of your

company and ensuring that they do so in a way consistentwith company values is imperative.

What are the outcomes of the project? Understandingthe transparency of their process, whether updates areprovided daily/weekly, access to web updates and the

myriad of invoicing/payment issues should allcontribute to the decision making process.

What, if any, post-audit reporting is provided? Will anexecutable plan based on root cause determination be

provided? What long-term value will they bring to youroperation? Each of these factors will play into choosing the

best recovery audit service for your organization.

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In the end, the lesson is that effective loss

mitigation efforts always yield tangible results. With

dedication and focus on a few key areas,

companies can drive profits back to the

bottom line where they rightfully

belong. Although overhauling the

areas where errors occur can seem

arduous at first, the recovery (and

future avoidance) of those errors

strengthens companies overall, both

financially and operationally.

LESSON LEARNED

EFFECTIVELOSS MITIGATIONEFFORTS ALWAYSYIELD TANGIBLE

RESULTS

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Karl Andersson graduated from SUNY Plattsburgh in 1991 with aBS in Accounting and a minor in Computer Science.He then went on to work Coopers & Lybrand (now

PricewaterhouseCoopers) where he earned his CPA and CISA.Then, for the next three years, he was a Manager of Business

Process Re-Engineering for the Dexter Corporation. At the time,Dexter was a Fortune 1000 company and Karl was actively

involved in international projects in both Europe and Asia. It wasduring this time that Karl was able to bring all of his education

and experience to the table while discerning how data solutionssucceed and fail in real world corporate environments. After his

time at Dexter, Karl was at Ernst and Young as anApplication Controls Consultant for SAP.

After ten years working in the audit and consulting sectors, Karlwas convinced that clients could be better served by a company

that understood how to deploy targeted solutions instead ofstatic half-measures. By combining his expertise in accounting

and computer science, he was able to design a revolutionarysoftware technology which delivers exceptional value to hisclients. Therefore, in 1999 Karl founded Technology Insight

Corporation (TIC) and set out to bring laser-sharp result-orientedsolutions to the Recovery Audit service industry.

Ever since its beginning, Karl has gathered ateam of industry experts to support TIC and its

clients with dedication to the core values ofprofessionalism, respect and integrity. His leadership is

grounded in TIC's promise to bring sustainable solutions toevery organization they work with.

KARL ANDERSSON

KARL ANDERSSON

TECHNOLOGY INSIGHTCORPORATION

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Since 1999, Technology Insight Corporation (TIC) has provided companieswith results-oriented solutions to effectively manage every aspect of the

Purchase-to-Payment data cycle. By combining revolutionary softwaretechnologies with practical root-cause analysis, TIC brings an

unprecedented level of value to their clients. TIC understands that millionsof dollars are at stake for their clients and is committed to a distinct end

result: To reduce, recover, and redeploy lost profits.

The foundation of TIC is built upon an innovative approach to RecoveryAudit Services. Instead of the one-dimensional services that many other

companies provide, TIC dissects each component of the cycle; from spendmetrics to vendor master file analysis, in order to produce tangible results.

This comprehensive methodology is powered by groundbreakingsoftware which allows extremely large volumes of data from multiple

sources to be processed in record time. This level of efficiency means thatclients begin to see recovery in as little as 30 days.

Recovery Audit Services are supported by a proprietary web-based portalwhich allows TIC to perform most tasks off-site while still providing real-

time results to clients 24/7. Additionally, TIC believes so strongly in a truepartnership with their clients that Recovery Audit Services are contingency

fee based - they are paid only when the client realizes a recovery. Evenafter the audit ends, TIC offers additional solutions to enhance on-going

improvements. The DataShark A/P and Supply Chain Tools allowcompanies to harness their own future data for continuous improvements.

With a reputation built on results, TIC has assembled ateam of experts that embody the company's core

values of professionalism, respect, and integrity.These values dictate their conduct with every

client and bring a new degree of service to therecovery audit industry. Uniting TIC's people power with their

process power creates the kind of sustainable solutions thattoday's organizations demand.

TECHNOLOGY INSIGHTCORPORATION

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