All posts by Ellen Leith

What Happens When Best Practice Is Ignored?

Most organisations know that they should be aiming towards best practice processes – but what does it really mean – and can something as diverse as accounts payable ever be constrained to a simple set of rules across all organisations?

Ignore Best Practice

This article was originally published on PPN.

If we’re talking about specifics, the answer is probably no. But the general framework and methods of working can be aligned in a way that can be translated across AP departments regardless of size, and to some extent industry and internal culture.

The opposition can come from those who decide to carry on working in a manner which they feel has served them well enough in the past. Others may simply not have sufficient resources to implement the practices which management are asking them to do.

Three results of Bad Practice

Ignoring best practice in any environment, but especially in AP, can have catastrophic consequences for the organisation. There are three very tangible results from an organisation where the operation is overly flexible and unstructured.

The most obvious one is that inefficient organisations cost more to run. Financially crippling as this may be in the long run, often this area should be the least of your worries.

An operation where internal controls are lax is leaving itself open to fraud. An enterprising individual can take advantage of such an organisation with relative ease, and as long as they’re not too greedy, their fraudulent activity can go unnoticed for a very long time – perhaps forever.

None of us like to think that any of our colleagues would behave in a duplicitous fashion, but the sad truth is that, in all probability, some of us already have.

Lastly, the third most tangible effect of not adhering to a code of best practice is the existence of duplicate payments within the accounting system. The Institute of Internal Auditors have found that duplicate payments make up between 0.05 and 0.1 per cent of annual invoice payments.

This may not sound like a lot, but if your organisation makes £50 million in annual invoice payments, you are likely to be paying out £50,000 or more in duplicate payments every year. Unfortunately many people assume that if a vendor receives payment twice for the same service or product, then he will simply return the payment. However this is seldom the case.

Quick Solutions to Common Failures

Current Practice: Many people can input invoice numbers and can make changes to the Master Vendor File.
Best Practice: Restrict this to just one or two key personnel – preferably those who do not approve invoices.

Current Practice: Invoices arrive, are approved and paid in a variety of locations.
Best Practice: All are dealt with in one centralised area, preferably by specified employees.

Current Practice: Issuing travel and entertainment reimbursement cheques.
Best Practice: Include payment along with monthly salary.

Current Practice: Petty cash box which anybody can access.
Best Practice: Don’t have one.

Current Practice: Urgent cheque request.
Best Practice: Don’t allow rush cheques.

Current Practice: A long winded paper trail of invoices and reconciliations.
Best Practice: Automate the 3 way match.

Current Practice: Time consuming duplicate payment retrieval.
Best Practice: Implement duplicate payment prevention technology.

Current Practice: Long processing and approval times – no early payment discount capture.
Best Practice: Implement AP automation solutions, including automated dynamic discounting.

Even if your organisation is unable to implement some of the more costly changes, by changing even just a few of the more minor ones, your organisation will see both a rise in productivity and, over time, this will generate an increase to the bottom line.

However, it’s good to bear in mind that best practice should be something which is constantly evolving. It’s no good to slavishly adhere to outmoded working methods. Ultimately, departmental success will depend on the ability to work within given boundaries, while keeping an open mind, receptive to change.

Purchase to Pay Network® (PPN) is a trusted information base with direct access to 14,000 key decision makers in the finance sector across a variety of different industries. 

Lessons in Accounts Payable Fraud

In these days of greater reliance on technology to save us from the perils of fraudulent activity, it’s interesting to consider that tip-offs and accidental discovery remain the two most pertinent methods of detection.

AP Fraud

This article was originally published on APN.

So what does this tell us about the way AP departments are run?  Overall, it points to a degree of complacency and perhaps overwork.  With more people unemployed, the remaining employees are expected to do more with fewer resources.  Without doubt this is an environment where fraud can flourish.

In addition, perhaps because of the new technology, there has been a move away from the labour intensive checking evident in the past.  In a busy AP environment, some managers are happy to leave the ‘checking’ and controls to the technology.  However those controls and that technology are only as effective as those who monitor it.

Yes, technology can stop duplicate payments going out for example, but if it’s flagging up errors in the vendor file time and time again without the appropriate action being taken – then somewhere along the line the checking systems have broken down.

Look out for the Warning Signs

  • Unexpected Invoice Number Frequency

Using “Benford’s Law” we can expect numbers to behave in a certain way – i.e. that the number one will be the first digit 30 per cent of the time, and the number six roughly 7 per cent of the time.  Therefore if you have invoices starting with the number seven, 40 per cent of the time – it could be time to investigate.

  • Multiple Invoices Under Checking Radar

A supervisor may only be allowed to process invoices up to a certain amount – i.e. £3,000 or less.  The easiest way to skim a few pounds off would be to create an invoice or two just below the approval amount at say £2,900.  Therefore a part the checking process should include a routine check on all invoices at just below any approval levels in the department.

  • Rounded up Invoices

It would seem unlikely – but this is one of the most frequent reasons why fraud is uncovered – fraudsters use rounded up figures.  So a simple test would be to go through your vendor list and flag up any with a suspiciously high volume of rounded up invoices.

  • Unusual Employee Activity

While 99 per cent of the time employees are working for the benefit of their organisations, occasionally they are working against.  If an employee is consistently and unexpectedly in the office early and/or leaving late, works weekends or nights – it’s probably worth running a quick check.  By nature perpetrators are those who don’t play by the rules, ignore internal controls and who may be contracted workers or temporary.

As I mentioned earlier, fraud is rare and is not something which many of us will come across on any large scale during our working lives.  However, during times of difficulty very occasionally the ethics of some begin to get a little blurred around the edges – whether that’s petty cash, payroll or travel and entertainment fraud – it still impacts on your organisation’s bottom line and ultimately its viability.

Trust, Shame and Reputations – Truth & Lies in Accounts Payable

It’s comforting to think that if fraud exists, it exists elsewhere – anywhere in fact other than right now – in your organisation and your own department.

Truth and lies in accounts payable

Thanks to APN for granting Procurious permission to republish this article

In fact, it’s that assumption which makes life a whole lot easier for those hoping to embark on a life of Accounts Payable (AP) crime.

Of course, no-one likes to think that someone they work with could be capable of fraud, and yet the truth is – fraud happens – and it happens quite a lot. And you’re not looking for a shady character in a badly judged mac with dodgy eyebrows. Statistically it’s likely to be “John” who’s worked for the company for the last 15 years. Perhaps “John” feels entitled after all the unrecognised hard work he’s put in. Perhaps it’s his way of righting a long standing wrong. Who knows.. but most of all – John is doing it because he can.

Of the many high profile fraud cases of recent months – they have all carried some element of shock – the trusted Head of Lloyds Fraud and Security for example, or the Manager of the Birmingham Dental practice involved in a £1.4m invoice fraud. Both were trusted employees with considerable access to the financial systems and the knowledge of how to navigate around them to their own advantage.

So we know that an excess of trust plays into the hands of fraudsters – but in some cases there’s another set of human emotions at play too – shame, embarrassment and perhaps corporate ego, or pride.  Back in the early 2000s, I had some involvement with a large (and to remain nameless) organisation who fell victim to a series of “threshold frauds” (those where the invoices sat just within the threshold for approval).

Percentage wise, the amounts were tiny – but after two years – the scheme had netted the perpetrator a considerable fee. And although the employee was “asked to leave”, the matter was not taken further – in a damage limitation exercise for the reputation of the organisation. So instead of serving as a warning to others, the fraudulent activity was swept under the carpet.

As it’s unlikely (and not particularly desirable) that we collectively decide not to trust our employees and fellow colleagues – it makes sense to adopt practices and technologies which can allow us to indulge our natural instincts while keeping appropriate checks in place. Most of the time people conducting fraud are simply taking an opportunity – it’s not necessarily a lifestyle choice and they’re not necessarily experts at hiding their actions.

For example, many fraudsters are caught because when something works once, they’ll try it again and again until they forget to be cautious. Implementing a series of automation solutions can provide many of the answers, but only if it’s placed at the centre of a tight set of thoroughly examined procedures.

Of course, a tightening of processes within accounts payable can have significant effects on areas other than just controlling fraud. If payments are being analysed for duplicates and master supplier files are being checked for erroneous entries and the AP manager has a new step by step process to follow from receipt of PO through to payment, analysing a series of pre-determined metrics along the way – then the cost per invoice goes down and the savings go up. All of which is good news for the business and great news for the reputation of the AP department.

Twelve Warning Signs to Look Out For

  • Invoices from various suppliers on similar stationary
  • Suppliers with incorrect VAT numbers
  • Transactions which are out of the ordinary – ie late at night
  • Excessive voids or credits in the receivables ledger
  • Large number of invoices, especially to a particular supplier, just beneath the approvals threshold
  • Few, or unclear reasons for a particular service
  • Suppliers with PO Box addresses, home addresses etc
  • Erratic employee behaviour – always in early or late
  • Sudden, or unexplained employee departure
  • An increase in duplicate payments
  • Excessive amounts of rounded up, or down invoice amounts (frequently ending in 5 or 0)
  • Above average payments to a supplier

 “Fraud and falsehood only dread examination. Truth invites it.” Samuel Johnson.

Accounts Payable News® (APN) is a trusted information base with direct access to 14,000 key decision makers in the finance sector across a variety of different industries.