By CPE Link instructor Mary S. Schaeffer
Many believe that vendor issues are the sole province of the purchasing department. While procurement has the primary association with the vendor, there is an equally important connection with accounts payable. If the road between accounts payable and the vendor is rocky, everyone suffers. A vendor who doesn’t get paid promptly may decide to put the organization on credit hold. Even if that does not occur, there can be delay in shipments, time wasted unnecessarily as the vendor and accounts payable try and resolve discrepant invoices, and if matters aren’t handled properly, duplicate payments that are not returned.
Therefore it is my contention that the sooner the accounts payable function is alerted to a new relationship with a vendor; the better it will be for both the supplier and the customer. They can begin to collect information, do whatever verification is needed and will be discussed further in this course and be ready to pay when that first invoice shows up.
Unfortunately, what happens most frequently is the first time accounts payable learns about the new vendor is when the invoice shows up. Then one of several scenarios plays out.
Scenario #1: The Worst Case
The processor gets the invoice and looks in the master vendor file to try and find the vendor. Not finding it, he or she sets up the vendor using the information on the invoice and proceeds to process the invoice. They may or may not have been correct in their assumption that the vendor wasn’t in the master vendor file. They may simply have spelled the name incorrectly or someone else had entered the vendor maybe using its DBA or some other similar name. In this scenario, the processor may make a cursory attempt to determine if a 1099 will have to be issued. If they decide one will be needed, they may mail or e-mail the vendor asking for a W-9. Maybe the vendor provides one or equally possible, the vendor simply discards the request. No tracking is done to ensure the W-9 is returned.
It will probably come as no surprise to most reading this to learn that this approach completely negates the requisite segregation of duties required in the accounts payable function. It is also likely duplicate payments will slip through. Finally, there’s a decent chance that the correct information reporting at tax time will not be done.
It should also be noted that this lackadaisical approach to setting up vendors in the master vendor file is likely to allow fraudulent invoices to not only get through, but the crooked vendors could end up in the master vendor file. That way, when the crook emboldened by his or her success with the first invoice sends a second larger invoice, there’s a good chance the invoice will be paid.
Keep in mind, the scenario here is being presented as a worst case. Most organizations, even if they don’t have the controls they should around the master vendor file and a process in place for new vendors do rely on the three-way match and purchaser approvals to avoid the complete disaster described here. However, also keep in mind that many purchasers routinely approve invoices without giving too much attention to the details.
Scenario #2: The Average Case
In this situation, the processor gets the invoice realizes it is not in the master vendor file and stops processing. The invoice is sent over to the person responsible for the master vendor file and he or she sets up the vendor. This is an improvement over the earlier case as at least there is some semblance of segregation of duties used.
Unfortunately, if the best practices regarding data entry discussed later in this course are not used, this situation is only marginally improved over the earlier one. It is still possible to get vendors in the master vendor file more than once and if no attempt is made to solicit taxpayer identification number information, information reporting at tax time is likely to be inaccurate.
Scenario #3: The Best Case
In this situation, the procurement professional notifies accounts payable the moment they are considering doing business with a new vendor, before the first purchase order is written. The person responsible for new vendor setup, immediately contacts the vendor with the organization’s vendor application or profile form. As part of this process, a W-9 is sent to collect the necessary taxpayer number information. And, if the vendor is deemed to be critical, credit information is also gathered to be analyzed, again before the purchase order is submitted.
Once the vendor returns all the information, the person responsible for the master vendor file sets the vendor up using all the best practices discussed later in the course. The taxpayer identification number is run through TIN Matching and assuming everything matches, the vendor is good to go. If there is a mismatch, the vendor is contacted to get the information corrected.
Only after the company has all the information needed is the company permitted to issue the first purchase order. An organization that follows these guidelines is also likely to employ good practices throughout their accounts payable function thus minimizing the number of duplicate payments and almost eliminating fraudulent invoices that make it through the process.
What’s more, a company that explains to the vendor exactly what its processes are and how it operates on the payment side is likely to run into few problems with its vendors. For, let’s be honest, all any vendor really wants is for your organization to place lots of orders with it and to pay them on time.
We’ve just hit the tip of the iceberg when it comes to vendor issues in accounts payable. As you see as you work your way through this course, there are more issues than an outsider might expect.
This article is an excerpt from Mary S. Schaeffer’s Master Vendor File in Accounts Payable. To learn more about Master Vendor File in Accounts Payable, visit her course.