ACCOUNTS PAYABLE A GUIDE TO RUNNING AN EFFICIENT DEPARTMENT SECOND EDITION MARY S. SCHAEFFER JOHN WILEY & SONS, INC.

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1 ACCOUNTS PAYABLE A GUIDE TO RUNNING AN EFFICIENT DEPARTMENT SECOND EDITION MARY S. SCHAEFFER Executive Editor IOMA s Report on Managing Accounts Payable co-creator The Accounts Payable Certification Program JOHN WILEY & SONS, INC.

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3 ACCOUNTS PAYABLE

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5 ACCOUNTS PAYABLE A GUIDE TO RUNNING AN EFFICIENT DEPARTMENT SECOND EDITION MARY S. SCHAEFFER Executive Editor IOMA s Report on Managing Accounts Payable co-creator The Accounts Payable Certification Program JOHN WILEY & SONS, INC.

6 This book is printed on acid-free paper. Copyright 2004 Mary S. Schaeffer and the Institute of Management and Administration Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, , fax , or on the web at Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, , fax Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at , outside the United States at or fax 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 at Library of Congress Cataloging-in-Publication Data Schaeffer, Mary S. Accounts payable : a guide to running an efficient department / Mary S. Schaeffer.-- 2nd ed. p. cm. Includes index. ISBN (cloth) 1. Accounts payable. I. Title. HF5681.A27S '26--dc Printed in the United States of America

7 For my dear husband, Hal Schaeffer, who s been there for me through the worst of times as well as the best.

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9 CONTENTS Preface Acknowledgments xxi xxiii Part One Processing 1 1 Invoice Handling Introduction The Invoice Purchase Orders Receiving Documents Proper Invoice Handling When Accounts Payable Receives Invoices Last Entry by Month-End Timely Approvals Unidentified Invoices Sent to Accounts Payable Use Best of Terms Strategies to Use When Short-Paying Invoices Goods Improperly Ordered Outside Purchasing Nonpurchase Order Buying Encouraging Others to Follow Accounts Payable s Guidelines Invoices without Invoice Numbers Invoice Amnesty Day Keeping Difficult Invoices from Disappearing Using Vendor Statements: Theory Using Statements: Reality Filing: Batch versus Alpha Filing Reducing the Number of Invoices Handling Bills with Remittance Advices 21 2 Alternatives to the Three-Way Match Introduction Assumed Receipt Evaluated Receipt Settlement 25 vii

10 viii Contents 3 Check Preparation Printing and Filing Introduction A More Common Approach Manual Signatures Authorized Signers Proper Check-Signing Procedures and Control Limiting Time Spent Getting Checks Signed Mailing versus Picking Up Checks Check Filing Time-Saving Techniques in the Check Production Cycle Canceled Checks and Irate Vendors 43 4 Automated Clearinghouse and Direct Deposit Introduction Direct Deposit Other Common Examples Combining Electronic Billing And Payments Terminology Check Truncation and Check Conversion What Companies Are Doing Today Case Study: How One Company Gets Suppliers to Accept ACH Payments The Future 50 5 Making International Payments Introduction Foreign Exchange Bank Account Issues Payment Mechanisms International Payment Service Benefits of International Payment Services Payments to NAFTA Partners 55 Part Two Controls 57 6 Exception and Rush Processing Introduction Dealing with the Issue 60

11 Contents ix 6.3 Hard-Line Approach Identify Rush-Check Troublemakers Modify Systems and Procedures to Reduce the Need for Rush Checks Publish a Newsletter 64 7 Errors and Duplicate Payments Introduction Statistics Types of Erroneous Payments Low-Tech Solutions High-Tech Solutions Employees: Your Most Important Resource Tolerance Levels Handling Discrepancies Accuracy and Timeliness Timing Issues Eliminating Duplicate Payments without an Auditor Duplicate Pay Audits: The Future of Accounts Payable and AP Audits 75 8 Paying When the Original Invoice Is Not Available Introduction Who Pays from Copies Controls When Using Copies Common Techniques to Ensure a Second Payment Will not Be Made Controls When Paying from Copies 81 9 Master Vendor Files Introduction The Data Cleanup Policies When to Set Up a New File Maintenance Policies Good Master Vendor Policies 86

12 x Contents 9.7 Establishing Vendor Naming Conventions Tips on Setting Up the Master Vendor File New Vendor Setup Adjustments, Corrections, and Additions Maintaining the Master Vendor File 91 Part Three Cash Management Terms and Taking Discounts Introduction Should the Discount be Taken? An Ongoing Process Possible Problems When Paying Late Are All Possible Discounts Being Taken? Should You? Cash Management Introduction Why Discuss Cash Management in Accounts Payable? Payment Timing Maximize Float Purchasing Cards Bank Fees ACH Background ACH: Types of Corporate Payments Clean-Desk Syndrome Games Companies Play Petty Cash Introduction Petty Cash No-Nos Recommended Procedures Other Recommended Procedures Payment Timing Introduction Can Another Day be Squeezed out of Payables? 114

13 Contents xi 13.3 Timing Payments in Difficult Times Stretching Vendor Payments Place Smaller Orders Talk to Vendors A Formalized Approach Audits and the Outside Accountant s Management Letter Introduction Most Notable Payables Issues Using This Information Sarbanes-Oxley Effect 123 Part Four Travel and Entertainment Handling Travel and Entertainment Reports Introduction The Problem Solutions How Much Checking Is Enough? T&E Manual Policy and Procedures Changes What About Electronic Receipts? Faster Employee Reimbursements E-Tickets Handling Electronic T&E Reports Introduction Advantages Homegrown Systems Third-Party Electronic Software E-Tickets Automating the T&E Report Process Introduction Making the Most of Direct Deposit Spreadsheet Approach 147

14 xii Contents 17.4 One-Card Intranet-Based Solution In-House versus Third Party Value-Added Tax Refunds Introduction What is Vat? Assistance Available Vat Reclaim Companies Time Limitations: Deadlines Focus on Vat-Friendly Countries Focus on Vat-Valuable Expenses 152 Part Five Technology Electronic Data Interchange Introduction What Is EDI? TECHNICAL Basics: introduction Why EDI? Getting Started Business Infrastructure Requirements Managing Accounts Payable EDI Accounts Payable EDI Opportunities Accounts Payable EDI Success Factors Systems Requirements Trading Partner Directory EDI Standards Effect on Supplier Partnerships Convincing Management FEDI Applications Cost-Justifying FEDI Getting Up the EDI Learning Curve Internet EDI Web EDI: An Idea Whose Time Has Come Security and Standards Issues Why the Internet? Special Application: ACH Debits for Tax Payments 172

15 Contents 20 Imaging Introduction Poor Man s Imaging Planning for Full-Scale Imaging Using Full-Scale Imaging with Imaging on a Smaller Scale Overview Imaging in Practice: Growing Pains Legal Acceptance Disaster Recovery Frequently Asked Questions about Imaging Preparing Documents for Imaging 182 xiii 21 The Internet, , and E-Invoicing Introduction The Internet Case Study: An Accounts Payable Department Web Site What to Include on an Accounts Payable Web Page Electronic Invoicing Everyday AP uses for the Internet Case Study: Putting the Web to Work for Accounts Payable Encryption and Digital Signatures Introduction Basics Case Study E-Marketplaces and XML Introduction E-Marketplaces XML How Accounts Payable Professionals Can Prepare Themselves How to Participate in the E-Commerce Revolution 209

16 xiv Contents Part Six Specialty Topics Purchasing Cards Introduction What Is a Purchasing Card? How a Purchasing Card Differs from a Consumer or Corporate Card Why Use a Purchasing Card? How Does the Purchasing Card Work within the Company? Plan Administrator User Feedback Vendor Feedback Control Features Maximizing Cost Savings Considering a Program Post Audit Firms Introduction Why Are Accounts Payable Audit Firms Necessary? How Post Audit Firms Work Accounts Payable Benefits Costs Getting Money Back Selecting the Best Profit Recovery Firm Other Considerations Reaction to Profit Recovery Firms Self-Auditing Self-Auditing for Duplicate Payments Current State of Duplicate Payment Audit Industry Benchmarking Introduction What is Benchmarking? Sources of Benchmarking Data Benchmarking Applications Case Study: How to Start or Improve a Benchmarking Program 234

17 Contents Part Seven Regulatory Issues Form 1099 and Form 1042-S Introduction Background Best 1099 Practice What if the 1099 Is Not Filed? Who Should Receive a 1099? Letters Instead of W-9s B-Notices Types of Payments Reflected on 1099S More Help from the IRS It s 1099 Time: Changes Implemented in S 249 xv 28 Sales and Use Tax Introduction Defining Sales and Use Tax Education Policies and Procedures Sales and Use Tax Audits Sales and Use Tax Terminology Types of Sales and Use Tax Keeping Up To Date Use Tax and Nexus Specialized Software Additional Learning Opportunities Help Others Help Accounts Payable Industry-Specific Sales and Use Tax Advice Avoiding a Sales and Use Tax Disaster Conclusion Escheatment Introduction What Is Escheatment? 264

18 xvi Contents 29.3 What If You Do Not Escheat? Dilemma What Can Be Done? Necessary Documentation Software Solutions What Can Accounts Payable Professionals Do? What If You Have Not Been Escheating? Professional Organizations for Unclaimed Property Owners Typical Unclaimed Property Experience An Unclaimed Property Game Plan 270 Part Eight Management Issues Ethics Introduction Sections of Sarbanes-Oxley Act Pertinent to Accounts Payable Cascading Certifications Sarbanes-Oxley Act: A Case Study Foreign Payments Office of Foreign Assets Control What This Means to Accounts Payable Disaster Recovery Introduction Personnel Travel Policies Telephone Trees Computer Backups Protecting Paper Outsourcing Introduction Why Companies Do Not Outsource Accounts Payable When Outsourcing Makes Sense Hiring an Outsourcer Outsourcing: A Case Study 286

19 Contents xvii 33 Management Techniques Introduction Six Sigma Balanced Scorecard 290 Part Nine Department Management Making Your Accounts Payable Department First-Rate Introduction Typical Accounts Payable Department Who Runs the Department? Hiring Practices How to Assemble an Accounts Payable Dream Team Procedures Manual The Impact of Technology on Accounts Payable Departments Outsourcing Managing the Staff Introduction Training Finding Challenging Work for the Staff Listening Skills Hiring Staff Overtime: A Serious Issue Managing a Unionized Staff Staff Motivation and Morale Introduction Motivation Techniques Evaluating Your Motivation Skills Motivating the Seemingly Unmotivatable Using the Staff Knowledge as Company Resource Dealing with Poor-Attitude Problems Getting the Accounts Payable Staff to Take on More Work 327

20 xviii Contents 36.8 A Realistic Approach to Motivating Accounts Payable Staff Improving the Image of Accounts Payable Working with and for Purchasing and Other Departments Introduction Why Interdepartmental Cooperation Is Important Basic Approaches Handling the Big Issues Getting a Customer Service Mentality in Accounts Payable Quick Answers to Common Problems 341 Part Ten Fraud Check Fraud Introduction Check Fraud as Growth Industry Legal Issue of Reasonable Care Corporate Responsibility Controls If Preprinted Check Stock Is Used Check Security Features Short-Circuiting the Forger Taking Reasonable Care Positive Pay Reverse Positive Pay Ongoing Fraud Problems A Total Fraud Protection Program Identifying Fraudulent Checks Quickly Segregation of Duties Account Reconciliation Accounts Payable Controls Payment Pitfalls: What Your Banks May Not Tell You Laws Covering Check Fraud Positive Pay: The Next Generation 359

21 Contents xix 39 Employee Fraud Introduction Be Aware of Typical Candidates What Can Go Wrong Steps to Prevent Cash Fraud Exercise Patience Call in the Professionals When Fraud has been Identified Dealing with the Aftermath Preventing Fraud in the Future Vendor Fraud Introduction Master Vendor File Con Artist Vendors Scam Solutions Vendor Profile Forms 372 Part Eleven Accounts Payable Today and in the Future Professionalism in the Field Introduction Evaluating the Big Picture Leadership and Preparation Technology Communication Relevant Trends Gaining the Attention of Management How to Win Approvals on Accounts Payable Proposals Taking Control of Your Own Destiny Certification Conferences Accounts Payable in the Twenty-First Century Salaries and Titles in Accounts Payable Today Introduction Basic Data Bonuses 388

22 xx Contents 42.4 Education Effects of Industry and Company Size Trends Reevaluating AP Positions for Grade-Level Changes Titles 393 Appendix Accounts Payable Resources 397 Index 399

23 PREFACE The fact that this book contains 42 chapters is indicative of the complexity of the accounts payable function today. While in the past many believed that accounts payable was no big deal and all the department did was shuffle paper and pay bills, most savvy executives now realize this is far from the truth. Today s leading edge accounts payable departments are staffed by professionals who understand not only all the nuances of the invoice processing and payment responsibilities, but the implications of all the related functions, including unclaimed property (escheat), sales and use tax, issuance of 1099s and 1042s, check fraud, EIPP, T&E, p-cards, the ACH, benchmarking, VAT refunds, petty cash, post audits, and more. They also know what can go wrong if the master vendor file is not handled correctly, if reasonable care is not exercised when issuing checks, if escheat laws are not followed, if payments are made from invoice copies, if the petty cash box is allowed to run wild, if policies and procedures are not clearly communicated and followed, and if checks are returned to requestors. Of course, this is just a sampling of the things that come back to bite a company in the shorts if the accounts payable function is not handled correctly. But rather than focus on what can go wrong, let s take a look at what goes right when savvy accounts payable professionals are allowed to implement the very best processes in their departments: Duplicate payments and check fraud are reduced when invoices are handled properly and efficiently. Proper handling of both the setup and maintenance of the master vendor file helps in this regard. Invoice processing and check preparation costs are reduced when alternatives to the three-way match, e-invoicing, electronic payments and effective procedures are used. Cash flow is maximized when early payment discounts are earned and payments are timed appropriately. Travel and entertainment reporting costs are held in check when the process is automated. There are several ways to do this. xxi

24 xxii Preface Huge inroads have been made in making accounts payable departments more efficient and effective. Technology can be thanked for this. This has in many cases eliminated some of the more clerical functions from the accounts payable landscape. Imaging, workflow, e-invoicing, EDI, and the Internet are just a few of the tools being used today in accounts payable. The reduction in the number of small dollar invoices in accounts payable is one of the best ways to make the department more efficient and professional. P-cards, e-invoicing, and the selective use of summary billing all help in this regard. Effective use of post audits, after self audits, helps reduce duplicate payments and recover those few erroneous payments that are made. Compliance with sales and use tax, unclaimed property, and 1099 rules minimizes the time state auditors spend reviewing a company s operations, as well as any fines they may impose. The goal of this book is to help accounts payable departments of all sizes achieve the goals described above and avoid some of the possible negative outcomes delineated at the start. It also provides information about benchmarking, Sarbanes-Oxley, OFAC, disaster recovery, Balanced Scorecards, and Six Sigma that will help the accounts payable manager run a first-rate operation. Additionally, it strives to show readers how they can run a first rate department, where the staff is happy, motivated, and respected throughout the organization. The book is laced with case studies and real life examples of organizations that have implemented the strategies discussed. Some are widely recognized organizations while others will only be known regionally. I appreciate hearing from readers, practitioners and experts alike whether they agree with me or not. Feel free to drop me a line at mschaeffer@ioma.com and share your likes, dislikes, thoughts, and observations. August 2004 New York, NY Mary S. Schaeffer

25 ACKNOWLEDGMENTS This book would not have been possible without the input of hundreds, if not thousands, of mostly unnamed accounts payable professionals. For the last ten years I ve been lucky enough to spend my days talking to both practitioners and experts about all things accounts payable. The results of those interactions have been first a newsletter, followed by this book, conferences, surveys, more books, audio conferences, and finally a certification program. This work has been supported by IOMA, a New York based newsletter publisher. Our accounts payable line was able to expand only because IOMA forged new ground, expanding from operating solely as a print publisher into new horizons as market forces demanded. This effort led by David Foster, the company s president, and supported by an equally innovative publisher, Perry Patterson, has made it all possible. Finally, a special thanks has to go to John Wiley and Sons for agreeing to publish the book in the first place. When they stepped up to the plate initially, there was very little written about accounts payable, and virtually no books on the subject. The demand for a second edition of the book proves they made the right decision in the first place. The process of producing the book runs eminently smoother under the guidance of Sheck Cho, Wiley s executive editor. He is a delight to work with. xxiii

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27 ACCOUNTS PAYABLE

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29 PART ONE PROCESSING On those rare occasions when most people give accounts payable a thought, they focus on some of the topics covered in this Part. Few realize the amount of work needed to get a simple check prepared to pay an invoice. Even fewer realize that their own careless actions cause accounts payable much unnecessary work while simultaneously putting the company at risk for a duplicate payment and possibly even fraud. So, what s the big deal, most think, the company receiving the extra payment will return it, right? Wrong! Most will not and they do not even inform the payor of the mistake. What is worse is that companies that make one duplicate payment are apt to have poor controls and thus make many more errors. The chapters in this Part look at some of the traditional accounts payable processes and suggest ways to improve productivity while simultaneously tightening controls and reducing the number of errors. 1

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