Purchase orders are considered a good internal control mechanism, right?Even introductory accounting and auditing classes teach the value of “two-way matches” and “three-way matches”.Would it surprise you if I told you that 41% of all of the validated duplicate payments made by our clients were PO related? I believe in the value of using purchase orders but think organizations place an over-reliance on the control they bring.
I have been told over and over again by companies that they cannot make a duplicate payment because they require purchase orders for everything they purchase.I agree from a theoretical perspective, but from a real world perspective, it’s simply not true.Let’s take a look at the breakdown in PO management that causes duplicate payments.
Poor Purchase Order Management – Using purchase orders as a good control tool requires strong purchase order management business processes.The truth is that most organizations do not have strong purchase order management skills.A common issue we find when analyzing data is that old, open purchase orders are not being closed out appropriately.In theory, a purchase order is set-up once and then receiving and invoicing match against the purchase order which is then automatically closed.We have found that’s not the case in our analysis of purchase order change logs; just as many purchase orders are being changed as are being created by buyers.Many of these changes are due to differences in quantity, unit price, delivery dates, etc.These changes can lead to breakdowns that cause duplicate payments to happen.
After The Fact Purchase Orders – Every A/P organization knows what these are.Accounts payable receives an invoice that requires a purchase order according to their business processes.A/P then needs Purchasing to create a purchase order before they can process the invoice.For many organizations this happens more times than they like every month.This type of breakdown can easily lead to a duplicate invoice getting entered and a duplicate payment being made.
Blanket Purchase Order – The “magic” blanket purchase order.It creates the appearance of a two-way or three-way match process, but it really is not one.I had one client that had over 1,800 invoices applied to a single purchase order line item.Many of the duplicate payments we identify are due to blanket purchases.
Poor Receiving Controls – This one may surprise some of you.We had a client that had receiving controls that triggered over $1 million in duplicate payments.Thereare a few breakdowns that can occur here.Let’s address a couple of them.
Receiving applies a good receipt to the wrong purchase order for the wrong supplier.If the purchase order is an “evaluated receipt settlement” transaction or a “pay from receipt”, the wrong vendor will be paid.Eventually the correct vendor will call looking for payment, be able to provide proof of delivery, and you will have to pay them.
Error Corrections.Many times during the receipt of goods the person entering the good receipts transaction will enter it incorrectly – i.e. wrong # of units, wrong unit of measure,etc.The manner in which the error correction is entered can trigger duplicate payments.Here is a real world exampleReceiving enters the receipt incorrectly and then performs an inventory adjustment to reverse out the goods.They then re-receive the goods from the PO.So what happened?The inventory count of product on hand is correct, there is a G/L expense for the inventory adjustment, but there are two liabilities on the books for the two goods receipts.
I hope these examples help you understand how duplicate payments can happen even if you use Purchase Orders.
Thanks for reading,