Essentials of Accounts Payable
Think Accounts Payable Is No Big Deal??? Read on!
Accounts Payable is really a lot more than just paying bills. If I had a dollar for every person that has said to me "What's the big deal about accounts payable - you get a bill and you pay it?" I'd have a nice bank account. If I had all the money lost by companies who follow the ‘a-bill-is-just-a-bill’ philosophy, you might find my name on the list of wealthiest Americans. Now you may think that I'm exaggerating, but let me explain what can (and does) go wrong and then see if you agree with me.
You get a bill and you pay it - right? Companies that follow this philosophy routinely double and triple pay ordinary invoices. Now, you say, not an ideal situation but the vendor will eventually return the extra payment - right??? Maybe. Most companies use lockboxes and unidentified cash gets posted to a suspense account and researched when someone has free time, which is often never. Eventually, the money gets written off and taken into miscellaneous income.
The problem is so bad that firms that do nothing but search for duplicate payments on a contingency basis now exist and their number is growing. At last count, there were about 30 in the U.S. alone. While many of the items found by these firms are for small dollar amounts they routinely find duplicate payments that exceed $1,000,000. What’s even more staggering about this issue is the number of companies that rely on the “memory of the accounts payable clerk” to avoid such disasters.
Even those who manage to avoid the worst of the duplicate payment issues, still run into problems by just ‘paying the bills’ as they arrive. Is the pricing right on the invoices? Most accounts payable associates don’t know because many purchasing departments neglect to fill out purchase orders completely. Still worse, many purchasing departments negotiate wonderful price concessions and then fail to notify accounts payable. When the invoice arrives at the old price, what do you think happens?
Then there is the little issue of fraud and scams. A number of crooks make a living by invoicing companies for goods or services that were never ordered. Usually, but not always, these are low dollar invoices that few pay much attention to. So, if you just get the bill and pay it, you may be paying inflated prices for toner, office supplies, newspaper adds (not authorized), etc. And once you pay one such erroneous bill, you can bet you will be included in future fraudulent initiatives.
Often when goods are ordered from another state, sales tax is not included on the invoice. That does not mean sales tax is not owed. Alternatively, tax is charged when it shouldn't be. Ignoring the sales and use tax considerations can land a company in hot water with state sales and use tax authorities – not just once but from every state that charges some sort of sales and/or use tax – and you got it, the laws are all different.
Along the same lines, uncashed checks are supposed to be turned over to the state under certain circumstances – not written off to miscellaneous income or reversed as some auditors suggest. Ignore these rules at your own peril as state auditors are becoming increasingly aggressive in their pursuit of revenue. Both unclaimed property, sometimes referred to as escheat, and sales and use tax are areas that politicians love. They can audit companies and increase state coffers without raising the ire of voters. States share information and sometimes hire outside auditors. These audits can be time consuming and penalties are often assessed against companies found to be breaking the law. In theory, a company could have a visit from 50 unclaimed property auditors and almost the same number of sales and use tax auditors (a few states, mercifully, don’t charge sales or use tax).
There is also the issue of check fraud – a growing business in the U.S. Companies that believe their banks will eat whatever losses accrue to them due to check fraud are in for a rude awakening. While banks routinely covered these losses in the past, they no longer can afford to do so – and in many instances the law is on their side. Changes in the UCC now assess responsibility based on the exercise of reasonable and ordinary care. How check stock is maintained and what fraud prevention features are included in the check stock are key to determining liability for losses due to check fraud.
Companies everywhere looking to reduce costs are initiating all sorts of electronic initiatives to help in that regard. Accounts payable functions can be included in many of those initiatives - and sometimes key vendors will insist that accounts payable join the electronic revolution or the vendor will take its business elsewhere.
These are just a few of the relevant issues. This piece is intended as a wake-up call to those executives who don’t understand why they should devote adequate resources to their accounts payable function. Yes, I want to sell books. But, I’ll share another little secret with you. You don’t have to buy my books or newsletter. Much of what you need to know can be found on the Internet if you are willing to spend the necessary time. Don’t expect to uncover it all in one afternoon. Of course, you could always just buy this book …
Full of valuable tips, techniques, illustrative real-world examples, exhibits, and best practices, this handy and concise paperback will help you stay up to date on the newest thinking, strategies, developments, and technologies in accounts payable.