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Introductiontimes industry peculiarities stand in the way, and other timesit might be the corporate culture or practices in another department. If the receiving dock does not do a good job atchecking packing slips, it is pointless to implement a processthat relies on accurate information from Receiving.Thus, in this book, you will see discussions of best practices as well as what we refer to as “almost best practices.”These take into account that not all practices will work at allcompanies and offer an alternative to those who cannot implement the absolutely best practices.We also include a discussion of those practices that definitely should not be used but, as many reading this knowfrom painful experience, are in use in parts of CorporateAmerica. Hopefully, by seeing these practices identified inprint, some will decide to replace them in their own organizations.WHAT’S INSIDEThe book starts at the beginning, reviewing the way invoicesare processed. It identifies a number of potential problem areas and then offers best practice solutions. Some of the itemsmay seem mundane to those not intimately familiar with AP.However, if they are ignored, expect duplicate payments andperhaps even fraud to increase.At least for the present, as most AP departments have notmade the leap to 100 percent electronic payments, checksdominate the payment landscape. If all aspects of this function are not handled properly, check fraud, duplicate payments, and processing costs will all increase. Also, the company may put itself in the position of being completely liablefor any check fraud that does occur.The mundane operational aspects of AP are reviewed in away that focuses attention on issues that are sometimes ignored. A complete chapter follows this on one of the most imxvi

Introductionportant, yet overlooked aspects of the purchase-to-pay cycle—the master vendor file. You would be surprised how often themaster vendor file is not even an issue on the table—with disastrous consequences. With the renewed interest in internalaudit and controls, thanks to the Sarbanes-Oxley Act, companies disregard their master vendor file at their own peril.P-cards are one of the easiest innovations to understand,and companies everywhere are adopting them. The potentialfor growth in this area is staggering. Thus, it is imperative thatthose who use them do so correctly. The cost and time savingswill be maximized if best practices are implemented from thebeginning.T&E is an area that has changed dramatically in the lastdecade. Online filing, the increased use of T&E cards, andother electronic initiatives have changed the way most of corporate America handles their T&E function. The chapter onT&E reveals some of the techniques used at innovative companies.While few people think of AP and regulatory issues in thesame breath, there are a few issues that, if not handled correctly, can bring trouble to a company. Specifically, in thischapter we take a look at 1099 reporting, sales and use taxhandling and reporting, and unclaimed property, also calledescheat. It is the last two areas, sometimes ignored by companies, that are drawing increased attention from the states.As the AP function becomes more analytical, it is inevitable that companies begin to expect that the professionalswho run AP take a cash management approach to the function. In some ways, paying too early is just as bad as paying toolate. This chapter takes a look at some of the cash management initiatives that are increasingly falling on the shouldersof the AP department.Although in many cases, AP was one of the last groupswithin some companies to get computers, they are making upfor it in a big way today. Technology is making inroads intoxvii

Introductionthe department in an extraordinary manner. This chaptershares some of those innovations. We expect this area to continue to expand, especially as AP takes the lead in pushing forelectronic invoicing and a move to electronic payments—away from the check standard.Finally, successful AP departments are starting to realizethat they have customers—both internal and external. Byfinding ways to deal with both, they are also improving vendorrelationships. Those that do not make this leap can hurt thevendor relationship and increase costs as poor communications with other departments run up the dispute resolutionbill.Upon looking back at the items covered, it is truly amazing how much AP has changed in the last 5 to 10 years. Thisbook attempts to identify the best practices that will makeyour AP department first rate.xviii

1InvoicesInvoices can present a real challenge to the payment function. If any of the aspects are not handled correctly, the payment process bogs down. In this chapter, we’ll look at䢇䢇䢇䢇䢇䢇䢇䢇Invoice handling: approvalsForwarding invoicesVerifying invoice dataInvoice-coding standardsShort-paying invoicesPaying small-dollar invoicesHandling unidentified invoicesHandling invoices without invoice numbersINVOICE HANDLING: APPROVALSBackgroundAs most reading this are well aware, Accounts Payable (AP)does a three-way match before paying an invoice. This entailsmatching the1

Accounts Payable Best Practices䢇䢇䢇Purchase order (PO)InvoicePacking slipIn theory, if all POs are filled out completely and correctly, ifreceiving thoroughly checks all packing slips, and vendors create accurate invoices, the AP department should be able to paythe invoice without input from any other party. However, fewcompanies are at this point. Even at those companies in whichthe documentation is good, management often demands thatthe original purchaser get involved and approve the invoicefor payment. Part of the reasoning for this is that often POsare not completely filled out and special pricing or paymentdeals are not reflected on the PO. Unfortunately, the purchaser who neglects to include special terms on the PO is justas likely to forget about them when the invoice shows up.With no formal policy governing where invoices are sent,first invoices sometimes float around the corporation, layingthe groundwork for all sorts of poor practices. For starters,the invoice often fails to arrive in any location that couldprocess it before the end of the early discount period. Additionally, it provides cover for those approvers who tend to letthe invoice lie on their desk for weeks without taking action.Then, when the supplier is threatening to put the companyon credit hold, these individuals deceitfully claim that they“sent that invoice down to Accounts Payable for processingweeks ago.”Recent innovations in the area of electronic invoicing arerapidly changing the way we think about invoices. This is reflected in some of the following recommendations.Best PracticesAt most companies, only certain people can approve invoicesfor payment. Most companies limit this ability by rank, job re2

Invoicessponsibility, type of purchase, and sometimes even the dollaramount. In the best of circumstances, the board of directorsshould have given these approvers authority, and AP shouldhave copies of these board authorizations.Copies of the list, if it exists in paper format, should begiven only to those who need it, and in all cases should befiled away carefully. The list should not be hung on the wallfor easy reference or left lying on a desk where anyone walking by could see it and easily make a copy. When the list is updated, as it periodically will be, old copies of the list should bedestroyed.If you want to be super careful, new copies of the listshould only be exchanged for the old ones, and all the oldones can be destroyed together.The fact that an invoice arrives in Accounts Payable with asenior executive’s signature on it does not mean that the senior executive actually approved the invoice. To protect theAP staff, the department should have signature cards containing the actual signature of anyone authorized to approve invoices. It should be the executive’s real signature, the one heor she uses every day, and not the Sunday-school signature.More than one executive has taken the time to sign a signature card carefully, when in actuality everything else has an illegible scrawl on it. In these cases, the signature card shouldhave the illegible scrawl as well, or the AP associate might suspect fraud when the signature cards are checked.We are not suggesting that these cards be checked forevery invoice that shows up. However, spot checking once in awhile is not a bad idea. And, obviously, if a suspicious-lookingsignature arrives on an invoice, the signature cards should bechecked immediately.Ideally, invoices will arrive electronically. Admittedly, today, only a small portion of invoices is received electronically,but that number is growing by leaps and bounds. When an invoice is received electronically, it should be forwarded to AP3

Accounts Payable Best Practicesfor processing. Using workflow, the AP department can forward the invoice for approval to the appropriate approver.This is based on information provided on the invoice integrated with the approver list discussed earlier.Companies should include in their workflow programmingan escalating approval feature. What this means is that if thefirst approver does not respond within a given time frame, sayfive days, the invoice is automatically routed to the next higherapprover in that chain of command. This not only takes careof tardy approvers, but also vacations and unexpected absences. It simultaneously creates an audit trail for everyone tosee. No longer can Purchasing claim it sent an invoice back toAP when it is still in the department. Finally, the audit trail feature combined with escalating approvals make it far less likelythat managers will relegate invoice approval to the bottom oftheir workload—especially when not approving invoices mayactually create more work for their immediate supervisors.When companies receive paper invoices, as virtually everycompany does, the invoices should be directed to AP ratherthan the individual purchasers. This allows AP to log the invoice in and forward it to the appropriate approver. It helps geta handle on the voluminous paper that can spread throughouta company without any boundaries. Ideally, when all invoicesare directed to AP, they can then be scanned and forwarded, asdescribed above, for approvals. Even if the intricate workflowprogramming is not feasible, there is still some audit trail andthe number of lost invoices is greatly reduced. The invoicenever leaves AP, and thus the “opportunity” to get lost on someone’s desk or in the mail is diminished. In order to make sucha process work efficiently, vendors should be directed to include the name of the purchaser on all invoices. Companiesthat make this process work the best are those that send invoices without the purchaser’s name back to the vendor.Having all invoices come first to AP also introduces another control against employee fraud. Invoices cannot be al4

Invoicestered, nor can they show up out of the blue with what lookslike an executive’s signature on them. By scanning the invoices and forwarding them for approval, it makes it all theharder for a scheming employee to forge a boss’s signature.Almost Best PracticesIn the absence of board authorizations, AP should have a listof who can approve what purchases. A high-level executive atthe company should sign off on this list. Otherwise, it is exceedingly easy to have fraud, and AP could end up taking ona responsibility it should not.If it is not possible to get imaging—even an inexpensivemodel—in AP, a policy still should be set up for receiving invoices. If all the invoices come to AP first, it will be necessaryto set up a log to track which invoices were received, their duedates, and whom they were sent to for approvals. This can bea tedious and time-consuming, paper-intensive process—ascopies should be made of the invoices before they are sentout for approval.Having the invoices come first to AP helps with the possible employee fraud issue discussed earlier.Reality Check for Accounts PayableWhile sending invoices lacking the purchaser’s name back tosuppliers may lead to a smoother AP operation, not all management teams are going to think this is a great idea—especially ifkey suppliers balk or complain. Thus, it might be a good ideato get management on board before instituting this policy.Worst PracticesWorst practices include䢇Having no policy regarding where invoices should besent for payment5

Accounts Payable Best Practices䢇䢇Not having a list of authorized approversAllowing anyone to submit invoices for payment.FORWARDING INVOICESBackgroundOn the face of it, it would seem that where invoices weremailed should have little impact on the payment function.Unfortunately, this is not the case. In a typical company withno invoice forwarding policy, invoices that are addressed tothe company but not a particular individual can float forweeks from desk to desk before eventually ending up in AP oron the desk of the purchaser. When invoices are not properlyrouted,䢇䢇䢇䢇Any chance of earning an early payment discount is lost.Duplicate payments can occur when a second invoice issent.Late fees can occur.Vendor relations are weakened.Best PracticesCompanies need to have a firm policy regarding where invoices should be sent. This can be one of two places:1. The AP department2. The original purchaserEither way works just as long as there is consistency in the approach. There is a slight advantage of directing all invoices toAP. When the invoices are sent directly to AP, a best practice isto insist that the purchaser’s name be included on the invoiceso the AP staff knows where to forward the invoice for approval. Some companies adhere to this approach, strictly re-6

Invoicesturning invoices to vendors if they arrive without the requestor’s name.The appeal of sending the invoice to AP first is that APcan easily track invoices. The downside is that, if electronic invoicing is not used, AP needs to make copies of the invoicesbefore forwarding them for approval unless the following areused:䢇䢇䢇ScanningNegative assuranceAssumed receiptIf the invoice is sent first to the original purchaser, AP mayfind itself inundated with “Where’s my money?” and “Did youget my invoice yet?” calls. However, many simply advise thecaller to telephone the purchaser.Electronic invoicing (e-invoicing) eliminates this problemcompletely.Almost Best PracticesDirect the mailroom to forward all invoices—regardless ofwhom they are addressed to—to the AP department for processing.Reality Check for Accounts PayableEven with the advent of e-invoicing, paper invoices will behere for the foreseeable future, although hopefully in smallernumbers. Thus, it is imperative that a policy for forwardinginvoices be established.Worst PracticesWorst practices include having no policy on this issue.7

Accounts Payable Best PracticesVERIFYING INVOICE DATABackgroundIn an ideal world a company would sell its customers productsand would in due course be paid for those goods according tothe prenegotiated payment terms, once the purchaser hadverified that it had received what it had ordered. (Some reading this may recognize this as the underlying principle of evaluated receipt settlement [ERS].) Unfortunately, there is a lotthat can and often does go wrong with this simple scenario.Some of the things that go awry include䢇䢇䢇䢇䢇䢇Terms on the invoice not matching what was negotiatedPartial shipmentsDamaged goodsPrices on the invoice not matching the negotiatedpricesInclusion or exclusion of related charges such asfreight, insurance, and so onSales and use tax charged/not chargedConsequently, the process for paying for goods can be complicated, especially when it comes to verifying the suppliers’ invoices.Best PracticesOnce the invoice has been approved (if that is required), athree-way match should be performed on all invoices oversome minimal level. Small-dollar invoices will be addressedfurther on. The AP associate should match the PO against theinvoice and packing slip to verify that the goods ordered havebeen received and the price and other fees (e.g., tax, insurance, freight) are as agreed.Differences must be resolved before the invoice can be8

Invoicespaid. If the difference is in the pricing, the better priceshould be taken. If the lower price happens to be on the PO,not only should the lower price be taken, but Purchasingshould be notified as well. The reasoning for this is that if alower price is put on an invoice, it probably indicates that thesupplier is offering a lower price to other customers and Purchasing should pursue that for your company.Accounts Payable can do a good job on this issue—especially when it comes to terms, insurance, freight, and so on—only if the PO is completely filled out. Often, Purchasing doesnot include special deals on the PO, and AP never knowsabout it. If the supplier does not include the special terms onthe invoice—and this often happens—AP will pay accordingto the standard terms or pricing, and the company is theloser. Thus, a best practice that needs to be emphasized withPurchasing is that POs must be completely filled out.The process described above can be done online. The bestsystems now have online dispute resolution features built in,especially when using e-invoicing.As mentioned earlier, some companies use a processknown as evaluated receipt settlement (ERS). This eliminatesthe invoice from the process—the document that many APprofessionals believe causes the most problems with the threeway match. Using ERS, the AP staff receives POs from Purchasing, and when it gets the packing slip from receiving, itpays according to the terms indicated on the PO. Companiesthat insist that the PO be completely and accurately filled outhave taken the first step toward being able to get rid of the invoice. If the PO line is under control and the professionals onthe receiving dock thoroughly check the packing slips on incoming orders, a company could effectively use ERS. Use ofERS has to be negotiated with suppliers before implementing.This is also known as pay-on-receipt.In addition to verifying that the PO matches the invoiceregarding price and other fees, many companies are now tak9

Accounts Payable Best Practicesing the verification process one step further with a contractmanagement function. As the title implie

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 atww w.wiley.com. Library of Congress Cataloging-in-Publication Data: Schaeffer, Mary S