This article is reprinted/republished by the express written permission of IOMA (The Institute of Management & Administration). ©2010; for more information about IOMA publications visit www.ioma.com

 

During a recent audit of a school in California, auditors found so many questionable business practices—including some that involved AP—that unless the problems were fixed, the school would be shut down. This is the kind of nightmare that no AP managers want to deal with. And they don’t have to—as long as certain basic internal control rules are followed.

 

Written Up

According to the Oakland Tribune, a state audit found that because certain employee perquisites were paid through the school’s AP system rather than through payroll, not all taxable income was reported on W-2 forms. The school, the FAME Public Charter School in Alameda County, has several campuses and serves more than 1,400 students in the Bay Area.

The audit problems included a Mercedes-Benz that the school purchased for the school’s founder that should have been reported in her 2007 tax statement as a leased vehicle, with a portion of the car’s value listed, the paper reports. In addition, a housing allowance, mileage and grant-writing stipends, vacation payouts, and in-lieu benefits totaling $109,200 over two years were not reported. The founder explained that difficulties in getting the payroll department to disburse checks in a timely manner forced the school to draw money from its AP department.

The school reports that it will correct the problems the auditors cited.

As in this case, auditors typically give the client a chance to respond to any problems or charges. The trouble is, the problems—and the responses—end up in the management letter, which is the document the auditors prepare and give to the top brass. The only time things can be removed from the management letter is if the issue has been totally resolved. Just promising to fix something won’t get you off the hook. The matter has to be completely corrected.

 

Most Common AP Issues

Of course, there are many things that can land AP in the auditor’s management letter. But most of the time, it’s just the same few things that crop up again and again. Here are the most common reasons why AP would get a black eye from the auditors.

Writing checks too soon:
"Now, hold on," you may be saying. "We always pay at the last minute, so this doesn’t apply to us." Well, think again. For example, it’s not uncommon for over-zealous AP clerks to clean their desks every night. They do this by processing all vouchers the minute they hit their desks, although the checks aren’t mailed until they’re due. Result: A large number of checks floating in limbo.

This poor control practice just pushes the responsibility for these checks up the ladder and results in wasted time when vendors call looking for payments. Plus, think how it looks to the vendor when it receives a check a month or more after it is dated. On top of everything else, it appears as though the company is experiencing cash-flow difficulties. This is not the impression that most companies want to give their suppliers.

Lack of control on check stock:
This includes signature devices, including digitized signatures and the old-fashioned signature plates if still used. Check printers and signature devices should be locked away when not in use. The numerical sequence on checks (and check-signing machines) should be accounted for by someone other than the person preparing the check (or running the machine). Check stock should be stored in a locked location. Access should not be given to those with responsibility for preparing the checks. In one case of a company with loose controls, an auditor was able to print a signed check for $1 million. To make his point, he left the check on the controller’s desk.

Not enough segregation of duties:
This will get AP into the management letter faster than almost anything else. At a minimum, the person approving a payment should be different from the one responsible for writing the check. Bank reconciliations should also be done outside the AP department.

Also, employees should be required to take vacation. And while they’re away, someone else should handle their daily work. This way, if any member of the staff has been able to perpetrate fraud, it will be uncovered during the person’s absence. But you have to make sure that someone else does the work of the vacationing employee. Otherwise, you’ve defeated the purpose of this control. And there’s a side benefit to this: You’ll be able to cross train the staff and have coverage in case of emergencies.

Other common reasons AP gets written up include:

• invoices do not all have the appropriate approvals;
• the backup attached to check requests is not adequate or approved;
• the check signer is not required to compare the data on the backup to the check;
• not all duplicate invoices are marked "Duplicate;"
• supporting documents are not canceled (marked paid or stamped) to avoid duplicate payment or fraud; and
• checks are returned to requestors instead of being mailed to payee.

 

Try to Sidestep

AP managers should try to get a sneak preview of the management letter before it is sent to the controller. Whether the draft is offered or obtained through some other means, try to get the opportunity to persuade the auditors to remove any AP-related points from the report which may seem unreasonable.

This is important for several reasons. For starters, getting the item off the list means it doesn’t have to be addressed to the auditors’ satisfaction, only your own.

But there is another—more subtle—reason to avoid a debate with the auditors with top management acting as the referee. In many instances, controllers and other members of upper management were hired from the very accounting firm that is now performing the audit. Should you get into a serious disagreement with the audit team, top management is apt to go along with the auditors’ point of view. In addition to being the experts, a close relationship may exist—and you will definitely be considered the outsider.

Of course, the best thing is to not have to deal with this issue at all. The savvy AP manager who handles things before the auditors show up will sidestep many "discussions" with them about what does and does not belong in the management letter. After all, this is a list you want to avoid like the plague.

 

# # #

• Back to Accounts Payable Articles Index