It is increasingly common for companies to allow customers to place orders through electronic forms over the Internet, while other firms have created in­terfaces into their order entry modules that allow electronic data interchange (EDI) messages to be entered without manual intervention. It is necessary to create a set of automated controls for these inputs, so that you can enjoy the benefits of automated order entry without any manual intervention that would slow down the process flow. The basic controls for receiving elec­tronic orders are shown in Exhibit 1.

The controls noted in the flowchart are described at greater length next, in sequence from the top of the flowchart to the bottom.

• Verify credit card. If the customer is paying through an electronic form on the Internet, it is likely that the order is being paid for with a credit card. If so, the computer system should verify the amount of credit left on the card and notify the customer if it is insufficient to process the order.
• Automated credit review. When an electronic order arrives via an EDI transmission, this typically means that the order is from a long-term business partner who does a high volume of business with the com­pany, so there is a large credit line already in place. Consequently, the computer system should allow these transactions to proceed unless the most recent order exceeds the total amount of the credit limit-in which case the system should flag the order for a manual review by the credit staff.
• Flag order as approved for shipment. Once either credit card verifica­tion or the automated credit review is completed, the system automat­ically flags the order as being approved for shipment. This control is not really needed anymore, but since the flag is likely to still be present in the computer system (and used for manually entered orders), there needs to be a mechanism for flagging automatically approved orders.
• Communicate order status to customer. When the human interface is removed from the order entry process, it is possible that the electronic systems will fail and not enter the order into the company’s computer systems at all. Consequently, the system should issue a confirmation message to the customer, stating that the order has been received and perhaps noting an expected delivery date as well. If the customer does not receive this confirming message, its own control systems may flag the order as not having been received by the company, thereby trig­gering a follow-up call from its purchasing department to the com­pany’s order entry staff.

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The evaluated receipts process was first discussed in Chapter 2 as an ad­vanced approach for planned purchases within the accounts payable system. This system involves issuing a purchase order number for each authorized delivery by a supplier, which the supplier affixes to its physical order to the company; the company’s receiving staff then matches the received pur­chase order number against a database of open purchase orders, and the accounting software pays the supplier based on the purchase order-no supplier invoice is required. It is possible that customers will have their own evaluated receipts systems, in which case a company’s order entry and shipping systems must be configured with the proper controls to deal with these customer systems.

Customers with evaluated receipts systems always place orders with purchase orders, since the purchase order number is the key number used by them to approve incoming shipments. Consequently, the evaluated receipts process flow shown in Exhibit 1 is designed to handle both paper-based and electronic purchase orders. As part of the order entry process, the key control is to ensure that the evaluated receipts flag is turned on in the cus­tomer master file, since this triggers the creation of an evaluated receipts tag that is sent to the customer with the delivery and also warns the billing department not to send an invoice to the customer. The credit analysis process is also simplified, since any customer placing orders under an evalu­ated receipts system is probably a long-term business partner with an es­tablished credit line.

The controls noted in the flowchart are described at greater length next, in sequence from the top of the flowchart to the bottom. Read the rest of this entry »

In some situations, a company does not keep a product in stock for deliv­ery to customers. Instead, it routes customer orders directly to its supplier, who in turn ships the goods directly to the customer. As a result, the com­pany never handles the related inventory at all, which reduces its working capital requirements. However, additional controls are needed to ensure that customer orders are sent to and received by the supplier. It is also nec­essary to ensure that notification of delivery is received from the supplier in a timely manner, so the company can issue an invoice to the customer. The additional controls are shown in Exhibit 1. In the exhibit, other controls related to the general process flow have been removed in order to make room for those controls used only for drop-shipped orders.

Exhibit 1 Controls for Drop Shipment Deliveries

The controls noted in the flowchart are described at greater length next, in sequence from the top of the flowchart to the bottom. Read the rest of this entry »

Credit management is a difficult process to integrate into the order entry process flow in an automated manner. At best, systems can be designed to automatically approve modest changes in credit levels, grant credit at very low levels to new customers, or hand off credit issues to employees when order sizes or submitted financial information falls into the manual override conditions designated by the accounting software. Consequently, the inte­grated credit management system noted in Exhibit 1 provides a combina­tion of limited automated credit reviews, combined with some manual credit analysis steps. A number of controls have been removed from the basic process flow shown earlier in order to focus on credit-specific controls.

Exhibit 1 Controls Used to Integrate Credit Management into Order Entry

There is really only one major credit control noted in the flowchart, though it is spread over a number of decision points. An explanation of the control follows. Read the rest of this entry »

It is increasingly unlikely that companies will use entirely paper-based order entry and shipment systems, but some smaller ones still use this ap­proach. The flowchart in Exhibit 1 shows the basic process flow for these organizations, with the minimum set of controls needed to ensure that it op­erates properly. In essence, the order entry person converts a customer’s purchase order into a sales order that is used as the foundation document for credit approval, shipment, and billing. The main reasons for controls in this process are to ensure that the initial purchase order is correctly trans­lated into the sales order and that the order meets with the corporate credit-granting guidelines. The small black diamonds on the flowchart indicate the location of key control points in the process, with descriptions next to the diamonds.

Exhibit 1 Basic Controls for Paper-Based Order Entry/Credit/Shipment

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Usually a small subset of payments is in exactly the same amount each month, and the payables department typically handles these payments by set­ting them up in the accounting software as recurring payments that require no three-way matching. Examples of such payments are rent, copier leases, and garnishments.

There are two problems with the automation of recurring payments. First, the computer system may continue issuing payments even after the underlying obligation has disappeared. Second, some payments may have es­calation clauses that call for changes in the recurring payment, which the ac­counting staff may miss if it is relying on the computer system to make payments. A few simple controls can alleviate these problems.

• Set up payment termination dates in the accounting software. Most ac­counts payable systems allow users to set a termination date on a set of recurring payments. If this is not the case, then create a list of payment termination dates and include it in the month-end closing procedure, so the accounting staff is forced to review it once a month.
• Create a payment escalation schedule. If a recurring payment has a scheduled payment change at some point in the future, include this in­formation in a central list of payment escalations and in the month-end closing procedure. This forces the accounting staff to review the esca­lation schedule every month.
• Terminate payments in the accounting software on escalation dates. Another way to remind the accounting staff to update recurring pay­ments is to initially set up recurring payments in the accounting soft­ware to terminate as of their escalation dates. This forces the accounting staff to review the underlying documentation and reset the recurring payment schedule in the accounting software. However, this control can backfire if the accounting system does not issue a warning that a pay­ment has been automatically terminated; if this goes unnoticed, the com­pany will probably miss the next payment entirely.

[tags]automate repetitive payments[/tags]

valuated receipt settlement is an alternative approach to the traditional ac­counts payable process. Under evaluated receipt settlement, a company pays its suppliers based on receipt data rather than the supplier invoice. By doing so, the supplier invoice is eliminated from the three-way matching process, while the receiving staff is allowed to match receipts against online purchase orders. The result is no matching process at all, with the computer system automatically making payments based on the quantities received and the per-unit prices specified in the initiating purchase order. This is a much more efficient process than three-way matching, since all manual process­ing steps can be completely eliminated from the accounts payable process.

The evaluated receipts settlement approach is used primarily for pur­chases related to the cost of goods sold, since it requires training of suppliers to submit a specific set of information on packing slips that occasional sup­pliers may be less willing to do. Consequently, the normal three-way matching process is still likely to be retained for incidental, maintenance and repair, and capital purchases, so the control issues here should be con­sidered additions to the standard computerized accounts payable system, not a replacement of them.

The key procurement card controls are enumerated in Exhibit 1, where controls are summarized next to the small black diamonds. The process flow begins with the issuance of a purchase order to a supplier, who uses it as authorization to make a delivery to the company, along with a packing slip containing the purchase order number, packing slip number, quantity delivered, and unit of measure. Once the delivery is received, the company’s computer system verifies that the reported packing slip number is not a duplicate, that the referenced purchase order number exists and cov­ers the delivered quantity, and that the reported unit of measure matches the one used in the purchase order. This is intended to be a highly automated process, so manual intervention in any of these control points is discouraged. Instead, the MRP system automatically issues the purchase order, supplier packing slip information is bar coded for simplified scanning into the re­ceiving system, and all subsequent controls are handled automatically by the computer system. The only exception is a possibility of manual inter­vention if there is a conflict between the units of measure used by the two business partners.

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There is a relatively small body of controls in use for electronic payments be­tween business partners, because these payments typically have been be­tween related parties or parties having done business with each other in significant volume over a long period of time. This familiarity has been sub­stituted for control points. Nonetheless, given the large amounts of money in­volved and the rapidly expanding use of electronic payments, this is an area in need of the most stringent possible controls. A reasonable set of controls over the standard electronic payment process is noted in Exhibit 1, with additional supporting controls noted later in this section.

The controls shown in the flowchart are described in the bullet points that follow, in sequence from the top of the flowchart to the bottom.

• Restrict access to master vendor file. For those electronic payments being made automatically by the accounting software, it is important to keep tight control over changes to the vendor master file, since someone could access the file and alter the bank account information to which payments are being sent.
• Require signed approval document for manually initiated electronic payments. In a high-volume payment environment, nearly all electronic payments are routed through the accounting software, which handles the payments automatically. However, since a manually initiated pay­ment falls outside the controls already imposed on the regular accounts payable process, the addition of an approval document is mandatory, preferably requiring multiple approval signatures.
• Verify ACH debit filter with bank. If the business arrangement with a supplier is for the supplier to initiate an ACH (Automated Clearing House) debit from the company’s account, rather than the company ini­tiating the transfer to the supplier, then the company should verify that it has authorized the bank to allow a specific supplier to debit an account.
• Require password access to payment software. It is necessary not only to enforce tightly limited access to the software used to initiate electronic payments, but also to ensure that passwords are replaced on a frequent basis. This is a critical control, and should be rigorously enforced.

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The central problem with the accounts payable system is that the primary control point-supervisory review of the purchase-occurs after the service or product has already been delivered, so a company typically is obligated to pay for whatever was purchased, even if it has no need for it or manage­ment did not initially authorize it. In essence, a lack of up-front control over the purchasing process results in an excessively late approval process just before payment is due to be made to the supplier.

This problem is exacerbated if supervisors are not asked to approve supplier invoices, so that the sole control point becomes the check signer. This person is now obligated to sort through the voucher package that ac­companies all unsigned checks and investigate any suspicious payments. In reality, this person is usually a senior-level manager who has many other ac­tivities to accomplish and so conducts no more than a cursory review of the accompanying voucher packages and then signs the checks. The result is the almost total lack of any real control over the purchases that a company makes.

Many larger companies have recognized the futility of the control rep­resented by the check signer and have eliminated this control through the use of a signature stamp, signature plate, electronic signature image, or some similar device. However, by doing so, they must ensure that a suffi­cient level of control has been added earlier in the purchasing and payables process to compensate for this loss of control. As shown in the flowchart in Exhibit 1, the check signer control point has been cancelled, while a new control has been added at the top of the flowchart for purchase order au­thorization, as well as another that rejects any materials received at the receiving dock if there is no authorizing purchase order. The use of a pur­chase order is a better control point than a check signer, since purchases must now be approved in advance, rather than after receipt, thereby giving the company greater control over what materials are allowed to be received at the receiving dock. Read the rest of this entry »

The accounts payable process flow most familiar to readers is the one shown in Exhibit 1. This process flow takes advantage of the basic features of a computerized accounting system, including the minimum set of controls needed to ensure that it operates properly. The small black diamonds on the flowchart indicate the location of key control points in the process, with de­scriptions next to the diamonds.

The process flow in Exhibit 1 includes many steps already seen in the paper-based payables process flow. By consolidating some accounting in­formation into a central accounting database, the accounting staff now has access to more online information for the three-way matching task, but most computer-enabled users still conduct a manual matching, rather than at­tempting to automate the process. There is also no need to review the system

Exhibit 1 System of Controls for Computerized Accounts Payable

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