This article is reprinted/republished by the express written permission of IOMA (The Institute of Management & Administration). ©2009; for more information about IOMA publications visit www.ioma.com

 

Despite their best efforts, AP departments continue to be plagued by erroneous payments. The ever-increasing number of AP audit and payment recovery firms is evidence of the fact that this remains a serious and financially troubling issue.

 

Latest Stats

Preliminary figures taken from the MAP AP Benchmarking Survey of over 450 AP departments reveal that 20 percent of respondents say 4 percent or more of vendor payments have errors (see table). The largest group of respondents (39 percent) report payment errors in the range of 1 percent to 1.9 percent.

 

Vendor Payments With Errors, by Range
Error Rate	% of respondents
Zero	7%
0.1 percent-0.9 percent	18
1 percent to 1.9 percent	39
2 percent to 2.9 percent	9
3 percent to 3.9 percent	7
4 percent and more	20

(Source: IOMA)

 

You’ll note from the table that 25 percent say they experience errors in less than 2 percent of vendor payments. MAP believes this percentage tends to be understated. Reasons: Not every AP department is willing to admit the full extent of their payment errors. This is perfectly understandable because people tend to underestimate things when talking about their own mistakes.

Also the numbers reflect only the errors that AP knows about. Obviously, they can’t report the overpayments and duplicate payments that are unknown to them—and these certainly exist.

 

Types of Erroneous Payments

One of the first steps to be taken in eliminating payment errors is to identify the types that can occur. The most common include:

• duplicate payments
• invoices paid for an incorrect amount (e.g., $1,000 instead of $100)
• paying for items that should not be paid for (e.g., freight or insurance)
• discounts not taken
• fraudulent payments
• payments not in compliance with contracts

Fortunately, there are ways to combat payment errors that fit any size budget, and they include low-tech as well as high-tech solutions.

 

Low-Tech Solutions

While it is probably impossible to eliminate every single erroneous payment, many actions will reduce the number of these mistakes. Accounts payable pros have reported success by:

• cleaning up master vendor files
• instituting controls on adding and deleting information from the vendor files
• paying only from original invoices
• setting up strict rules for handling invoices without invoice numbers
• insisting that purchase orders be completely filled out before being sent
• canceling all invoices once they are paid
• having an external auditor review controls as part of the annual review
• implementing a contract compliance program

Of course, you may not be able to enforce all of these rules. Insisting that you will pay only from an original invoice sounds fine, but there are times when the bill is legitimately lost in the mail. However, setting strict controls when an invoice is not an original will reduce the number of errors.

Having an external audit review is fine, but you don’t want to get written up for lax controls. If the auditors do find something, it is possible to persuade them to remove it from the management report, but make sure you don’t forget about it. Consider whether the criticism was legitimate and what you can do to correct the condition.

 

High-Tech Solutions

Invoice automation solutions—receiving as many invoices as possible electronically, doing the three-way match electronically, and so on—help prevent payment errors because they address data verification and quality assurance issues. This is done either before the invoice is received or after it hits AP and is being prepared for approval.

Automation also promotes "clean" invoices—ones with no exceptions that can move straight through the payment process.

The point is you can eliminate the need for a person to view it because the system will verify the invoice automatically. If it passes muster, it gets paid. If not, it gets rejected.

While there is a distinct advantage to having data quality verified by an automated system instead of an AP employee, the disadvantage is the up-front investment required. For each field that must be verified, it may be necessary to write and revise a complex set of programming commands, an assignment that requires many hours of effort on the part of highly paid IT professionals. The costs multiply when the invoicing application must reference more than one database or system to verify information on the invoice.

Be aware that if you use a system to verify invoice data automatically, the cost savings will apply only to those invoices that you can process electronically. Thus, supplier adoption becomes the driving factor in determining the return on investment for the solution. That is, the more e-invoices you receive, the more the cost savings in this regard.

 

Recovering Payment Errors

To claw back payments sent out in error, AP departments have two options: (1) find and recover the erroneous payments themselves or (2) hire an outsider to handle the process for them.

If they do it themselves, they will need to work with purchasing, vendors, invoice submitters, invoice approvers, and the internal and external auditors. Once the problems have been identified, AP departments need to analyze their sources and then work to alleviate the errors.

Auditing past payments to uncover duplicate payments and overpayments—and then actually recovering the funds—requires a specialized skill that an AP department may not have. But even if it did, it may not have the time to do the task—or its time may be better spent doing something else. So many AP departments outsource recovery audits to a specialized provider, who does the job and is not paid until money is actually recovered. This means it will cost your company nothing if you made no payment mistakes. Additionally, you will get a "free" appraisal of your systems and procedures, as the best firms will also identify any weaknesses in your systems and procedures.

 

An Overlooked Technique

Most companies overlook their most valuable asset to use for plugging the leaks—their own employees. The people involved in the day-to-day activities usually know where and how the problems occur. Unfortunately, they are rarely consulted. So start by asking the people involved in the daily processing of payments where they perceive the holes to be. You might be very surprised to hear what they have to say.

In the end, the best approach that the AP professional can take in solving the erroneous payment issue will also help in other aspects of his or her job. By keeping up-to-date on the latest techniques and approaches, you will be in the best position to do the most effective job both for your company and yourself.

 

 

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