Transcript Slide 1

© 2012 Financial Operations Networks LLC
Vendor Master File Strategies to
Improve Productivity, Slash Costs
and Reduce Risk
About Your Presenter
Judy Bicking
TAPN Consultant, former Director,
Accounts Payable European Project, Johnson & Johnson
A 27-year Johnson & Johnson veteran, Judy Bicking led the U.S.
Shared Services Center for sixteen years. She helped design the
center by benchmarking best practices across industries and
matching those practices to a very decentralized environment. Her
understanding of people, process and metrics were integral to the
success of J&J’s Shared Services Center, which supports 99+
businesses in the United States and Puerto Rico. In 2003 the Center
processed 1.2 million invoices with 57 FTE’s. Judy more recently
served as Global Director to J&J’s European operations in its design
and implementation of an AP Shared Services Center in Europe. She
left J&J to start her own business. Judy is on the Advisory Board of
The Accounts Payable Network and is a frequent conference
speaker.
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Procure to Pay
Vendor Maintenance
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Vendor Master Overview
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Vendor Maintenance
Impact Workflow
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VM Job Description
• This position requires a person to keep the supplier file up-to-date by:
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Adding new suppliers
Changing existing supplier’s information
Adherence to all State, Federal and SOX
Ensuring all proper documentation, especially government documents, have
been submitted to properly prepare the supplier file and are easily accessed
when the IRS or Internal audits are conducted
• Prior to adding or changing a supplier’s record the documentation must
be:
― Thoroughly examined for completeness
― Researched to confirm the data is legitimate
― Entered the data into (name i.e., SAP) system, which will activate the supplier to
receive orders and payments
• Review reports to keep the supplier file cleansed and updated on a
regular basis
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Job Requirements
• Keyboarding: 70 WPM with no errors
• Detailed Oriented
• High Integrity
• Organization Skills
• Verbal and written skills
• Ability to multi-task
• Empowered (must stand firm on requirements)
• Time Management
• Knowledge of: P2P; 1099, 1042, W8/W9; commodity codes, impact
(duplicate payments, tax penalties)
• Computer skills: ERP System, Excel and Word
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Key Objectives
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Keep fraudulent suppliers OUT
Prevent/Remove duplicates
Cleanse suppliers with no history for 13 months
Comply with Fed & State tax laws (VAT, S&U,
1099,1042, child support, cross border services,
ER/1099…)
• Create/follow “rules” Name Conventions
• Business Classification:
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Small Business (defined by the Small Business Act – SBA)
Minority Code (SBA)
Woman Owned (SBA)
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Key Objectives
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(cont’d.)
Commodity code: supplies, inventory, utility, legal
Child/Parent
Pay Method
Priority suppliers
Terms: not a day early or late and preventing inv
processors from changing the terms
GL Coding
Cycle Time
Is this an
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entry level
job?
Keep them Motivated
• Job is mundane
• Entry level
• The keys to the VOLT
Vendor Added = Payment !!
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Purpose
• What are your:
― Needs for your VM File?
― Top issues?
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AP’s VM Internal Control
• The purpose:
― Integrity (tamper proofing) and Accuracy of the
vendor database
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Provides:
― Reasonable assurance for the safeguard of the company
assets
• Complies with all Federal, State and Sarbanes Oxley
requirements
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AP’s VM Internal Control (Cont’d.)
• Objectives of the internal control system should:
― Minimize waste
― Limit losses
― Prevent unauthorized use or misappropriation and
― Safeguard the assets
• You can build the VM policy to have controls that are:
― Detective, corrective or preventive
― Must state “why” control is important
• Segregation of duty:
― Own Department/group
― Can not create purchase requisitions, process invoices or
payments
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VM Workflow Overview
NEW SUPPLIER
1.Request to open a supplier via
― Receipt of an invoice
― Supplier Request Form
― In-House Invoice (Check Request)
2.Search system to insure the supplier is not already in the
system. If possible search by name, zip code or tax ID
― If it is, assign the supplier number and return to AP processor
― Otherwise continue with step 3
3.Send an information packet to the supplier requesting:
― Original W8/W9
― Complete Pay To
― Contact Info
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VM Workflow Overview (Cont’d.)
4. Validation (to prevent fraud and comply with
Sarbanes-Oxley Act)
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Web site of the Secretary of State where the business is incorporated
IRS TIN validation (http://www.irs.gov/govt/tribes/article/0,,id=131207,00.html)
OFAC – Anti-Money Laundering (Office of Foreign Assets Control)
Specially Designated Nationals List (SDN) website:
http://www.treas.gov/offices/enforcement/ofac/sdn/index.shtml
There is a no
tolerance for companies who issue payments to anyone on this list.
Yellow Pages on Internet
Dunn & Bradstreet or Austin Tetra review
Google and view their website
W8/W9
Drive-by; ask a local sales rep to check out the address
Cross reference supplier file against Payroll and Accounts Receivable. Payroll: Make
sure you identify employees that are also suppliers
Accounts Receivable: Identify suppliers that are also customers. You don’t want to pay
a company that owes you money
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VM Workflow Overview (Cont’d.)
5. FILE
― Maintain W8/W9s
― All supporting backup
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VM Workflow Overview (Cont’d.)
CHANGES TO SUPPLIER FILE
• Request to change Supplier File via
―Invoice (process the Invoice Request Only)
―Letter
―Phone Call
• Revalidate the information (see above)
• Send a letter to the old address confirming the new address;
this method should definitely be used if the banking
information is being changed
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VM Workflow Overview (Cont’d.)
INVALID TAX ID: discovered with IRS TIN validation
• Recheck your input against supplier W9
• Put supplier on hold until proper tax information is received.
Otherwise you will have to withhold taxes based on current
rate which can be 25 – 35% of amount owed supplier. This
puts the accounting and tax payments burden on Accounts
Payable. It is preferable to not pay the supplier until this
information is received.
• Contact supplier for original W8/W9
• Correct TIN
• File documents
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VM Workflow Overview (Cont’d.)
B-Notices:
― Respond immediately to these IRS notices
― Send the IRS
• a copy of the W8/W9 in your files
• Explanation: typo in your files and correct file
― Optional: Send the supplier a letter that a B-notice has
been received so they can correct the situation
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VM Gut
Be Inquisitive!
Ask:
• Is this a critical supplier?
• Is this a valid supplier?
• Is this a valid business supplier?
• Do I have all the supporting backup?
• Does this address change seem
reasonable? RED CROSS
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Supplier Fraud
• Supplier File:
― Separate team from Purchasing and AP
― Review file for duplicates (tax ID/zip code)
― Review for inactive suppliers (13 months)
― Address changes – send letter to “old” address
― IRS Tax ID verified
― OFAC’s SDN list and prohibited countries
• www.treas.gov/offices/enforecment/ofac/
― DO not use initials in name: PECO
― No PO boxes unless you confirm: LockBox
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Prevention
• Review AP list of vendors for unusual vendors and
addresses (prison)
• Analyze vendor purchases for abnormal levels
• Separation of duties
• Review supplier statements against account for any
invoices not on the supplier statement
• Payments: integrity of proper documentation
• Voids and Credits have proper documentation
• Escheat or any checks going back to supplier
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Vendor Master Cycle Time
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Duplicate Vendors =
Duplicate Payments
Example of one supplier that gets entered
with two different naming conventions:
#1: The Woodcrafters of the America's
#2: Woodcrafters of the America's
Account #
Name
EXAMPLE #1
158632 Woodcrafters of SW Florida
954368 The Woodcrafters of S.W. Florida
EXAMPLE #2
158632 Woodcrafters of SW Florida
954368 The Woodcrafters of S.W. Florida
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Invoice Nbr Inv Date
Amount
Payment Nbr Explanation
567321 5/5/2010
599.99
24986
567321 5/5/2010
599.99
86932Duplicate payment
567321 5/5/2010
599.99
24986
75231 7/10/2010
450.00
Should not have paid without deducting
48962 credit
CM567321
6/9/2010
-299.99
Credit sits and ages and is never deducted
Naming Convention Rules (exp)
The following are suggested rules for establishing a
vendor naming convention:
1. Enter the name exactly as it appears on W-9/W-8 or Sales
Exemption Form, as this should be the vendor’s legal name.
2. Always include Corp., Inc. or LLC in the name when you set
up the vendor. Decide if these will be spelled out or
abbreviated—never do both.
3. If the name of the vendor begins with an article (The, A, etc.)
do not include it in the name. For example, “The Wall Street
Journal” should be entered as: Wall Street Journal
4. If the name is an individual, consistently include (or exclude)
prefixes such as Mr., Ms. or Dr.
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Naming Convention Rules (Cont’d.)
5. Do not use initials; spell the name out. “LCEC” should be
entered as: “Lee County Electric Company” (company may
be abbreviated to Co, according what you decide in rule
number 2 above).
6. Do not put a persons name in the 2nd line of the address as
an “attention line.” If this is a must have, use the department
or division name.
7. Avoid using any symbols “.” period; “:” colon; “-” dash; “&”
ampersand; within vendor names; for example, “AT&T”
should be entered as: “ATT”
8. Use one space between each initial. J. M. Brown should be
entered as: J M Brown
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Naming Convention Rules (Cont’d.)
9. Avoid abbreviations or be consistent in their use.
Abbreviations may be necessary due to number of spaces
allowed for the name. In this case develop an approved list,
for example:
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Association = Assc
Corporation = Corp
International = Intl
National = Natl
United States = US
An excellent reference of abbreviations is found under
Publication 28 from the US Postal Service website:
www.usps.com
Always, always use full name or abbreviations. Do not use both
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Naming Convention Rules (Cont’d.)
10. Use of numbers should be entered as shown, unless the
year precedes the name. For example, “2010 Olympics”
should be entered as “Olympics.” Do not use the year, or
you will have duplicate vendors every year. But you must
take care here, because a company's name may include a
year. If the numerals (“year”) do not change but are a fixed
part of the name, for example ABC 2010 Inc, then include
the numerals
11. If paying a factor or third party: Best Practice: The vendor
record is in the vendors name and the third party name (also
known as a factor or outsourcer) is in a field called “make
check payable”; otherwise, put the third party name in the
second line
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Vendor Master
File Clean Up
The vendor master file can become very large very
quickly.
• Build a vendor master clean-up process into the calendar.
― A Yearly Basis (can be overwhelming)
― Monthly maybe more beneficial.
• The sooner duplicate vendors can be identified, the less chance there will be
of making duplicate payments throughout the year
• Eliminating (deactivating) vendors that have no history in the past 12 months
will help eliminate fraud
― Duplicate Vendor: sort by tax ID or zip code
• Keep whichever vendor master record which has the most history.
• Mark the duplicate vendor master record inactive and list the vendor master
number that should be used
― Inactivity over 13 month (use a rolling year of 13 months) to make sure
you don’t eliminate vendors that are paid annually.
― One-Time Vendors: deactivate the vendor once payment has been
made
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Vendor Master
File Clean Up (Cont’d.)
• If the vendor master file is too large to start at this level, have
a report that lists only vendors whose spend is over “X” dollars
because this is your greatest exposure. Example: greater than
$500,000. Work from the top dollar vendors, down the list.
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Record Retention:
Storing Vendor Information
• All information used to set up or change the vendor
master file must be kept on file
― Could save the company from being held responsible for
fines and penalties, or prove the vendor sent the wrong
information, thus placing the tax burden on the vendor.
• Paper-based or scanned and stored as an image
(country specific)
― File by TIN, vendor number or alphabetically by vendor
name
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Record Retention:
Storing Vendor Information (Cont’d.)
• Best Practice: It has been verified that fewer filing errors occur in a
number-based system than alphabetically. Due to identity theft
concerns, now care must be taken with TINs where the vendor is a
sole proprietor and their TIN is their social security number. Social
security numbers must be protected, so it is better to use a vendor ID
number that is not the TIN when the TIN is the social security number
• In the record retention system, maintain:
― Vendor Application form
― All W-9 and W-8 forms (U.S. & P.R.)
― All correspondence and supporting back-up
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Record Retention:
Storing Vendor Information (Cont’d.)
• Information must be kept confidential to comply
with new data privacy laws
― Only employees who have a business need should be given
access. It is not unusual to find bank account information,
credit card numbers and tax IDs
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Government Filings
The Vendor Master File is more than just typing in
names and addresses as pointed out with the other
departments that rely on this information to file the
numerous tax filings at all levels: federal, state,
county and local
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Government Filings (Cont’d.)
• 1099/1042s
― 1099/1042s are the actual government filing that must be
made from the information on the W8 / W9
― If the vendor file
• is not flagged properly to identify it as a 1099 / 1042 vendor or
• if the tax id is incorrect your company could be liable for a $50 penalty
per vendor plus fines and interest
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Government Filings (Cont’d.)
• Escheat Filing
― Vendor files that are not compliant:
• Checks are mailed to an invalid address and the checks never make their way
back to AP. When they reach six months old and have not been cashed, the
funds are moved to an escheat account and after several years (based on each
state) the monies are paid to the state that was on the check. Most escheat
payments could have been avoided if:
— the open check was traced to the original vendor file where the supplier record
could be corrected and the check voided and reissued or
— the original payment was made on another vendor number and cashed. Thus the
funds returned to the company
• Some suppliers destroy the check because they know it is a duplicate, but don’t
take the steps to tell you. They assume you’ll figure it out when they don’t cash it.
They don’t realize it is a duplicate payment on a duplicate supplier, so the funds
are escheated when the check should have been voided
Some employees who realize no one is looking for this money, not even the budget
holder as the debit hit the account over six months ago have found a new way to
embezzle funds
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Government Filings (Cont’d.)
• Sales & Use Tax
― Tax managers must file (monthly/quarterly) sales and use
tax
• Calif EDD
― EDD, is used to track “deadbeat dads” who try to beat the
system by doing business as a corporation. California
identifies these people and ‘requests’ that all companies
doing business with them notify the California gov’t. When
they’ve earned $600 or more in any given year. Reporting
needs to take place any time the trigger limit ($600) is
reached
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Government Filings (Cont’d.)
• Calif 592 Withholding
― 592 Withholding is a tax which is to be withheld from those
suppliers who do not have a business address in California,
but do business there. This is for independent contractors,
not incorporated businesses. The tax (7%) withheld is due
on the 20th day of the month following the date of
withholding if the cumulative amount withheld from all
contractors reaches a trigger level of $2500. The amount
withheld is reported on the supplier’s 1099 at the end of
each year.
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Scenarios
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Vendor Naming Conventions
What are the rules for setting up the following:
1. Paula E. Fitzpatrick OR Paula E. Fitzpatrick, M.D.
2. The Security of the Americas
3. WCI (Wood Crafters Inc.)
4. U-Haul
5. Penske Truck Rental Inc.
6. Opdyke Sales & Service
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Identify the Supplier’s
Name and Address
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How to identify a
Critical Supplier? (Especially if they are not on the “list”)
A supplier had to be entered for a Security company located in Iraq
The invoice WAS past due date
The Security company threatened to walk off the job …
IF the processor had just thought: “IRAQ – this is a high risk area
This invoice is paying for the security guards at a factory location ... In Iraq”
WOULD YOU HAVE TAKEN IT TO MANAGEMENT TO
ENSURE THE PAYMENT ARRIVED ON TIME
The processor COULD HAVE:
- CALLED The supplier to request bank information so the payment could be
made TODAY and if there were bank info, just notify the supplier that payment is
on it’s way so it wouldn’t put the factory location in jeopardy
- Get them on the Critical Supplier List!
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Supplier reflects new terms
• Do you change the supplier file?
• Who has the authority to approve discount changes?
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Tools
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Business Classifications
Supplier Identification
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B
C
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F
G
H
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J
K
• L Lawyers
Board Member
• P Payroll garnishments
Child – prizes/awards
• R Relocations employees
Donations/contributions
• S Schools & Universities
• U Utilities
Employee
Freight
Government
Hospitals
Inventory
Consultants w/assignments less than one year
Consultants w/assignments with greater than one year
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Is This a 1099 Supplier?
A Simple Rule to Help Decide
Commodity
Inventory
Supplies
Service Non-incorporated
Service Incorporated
Lawyer
1099 Yes/No
No
No
Yes
No
Yes
• If the item is tangible: can touch it, it is not a 1099
• If the item is a service: can’t touch it: consulting, cleaning, delivery,
repairs and the supplier is not Incorporated – it is 1099.
• Not sure? Mark it a 1099. There is no penalty for reporting too many
and the supplier will get a copy and send you the information you need
to re-classify.
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Recovery Audits
• With very intricate software recovery audit firms will
review all your data to uncover:
― Fraudulent Suppliers (prison addresses)
― Duplicate suppliers
― Add parent/child supplier relationships
― Identify minority suppliers
― Supply credit ratings
― Properly identify 1099 and 1042 suppliers
― Duplicate payments: Find and Recover $$
― Correct naming conventions
― Find undisclosed credits,
― Find cash on accounts,
― Knowledge of suppliers that have rebate programs etc.
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Recovery Audits (Cont’d.)
• These firms are normally paid not on what they find,
but what they recover
• Make sure they disclose a best practice to eliminate
these errors in the future
• Negotiate pricing
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Recovery Audits (Cont’d.)
Compare AP to Payroll and Accounts Receivable
A best practice is to compare AP VMF against the:
1. Payroll file. Look for any employee’s whose address
is in the Supplier File. This is a red flag for fraud
2. Accounts Receivable File. Do not pay any supplier
who owes you money
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Yearly Letter to Suppliers
• Send a yearly letter to your supplier.
― What you won’t get out of this is any supplier rebates and a
best practice method to eliminate the error that caused
these problems that could be identified by a Recovery Audit
Firm
• The letter must request
― ALL cash on accounts,
― Credits and
― Past due invoices.
• Use the supplier type code to eliminate utilities,
employees and government accounts from this letter.
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Yearly Letter to Suppliers (Cont’d.)
• Do not rely on the suppliers statements that are sent
on a monthly basis. They are designed to only show
you past due invoices.
• These letters can be done most effectively by an
outside service.
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Age Trial Balance
• A pre-trial age trial balance report should be reviewed
by the customer service team.
• Supplier records with credit balances should be
reviewed first.
― These credits may have been applied to a wrong vendor
number and therefore are not clearing against newly
entered invoices.
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Supplier Packet
• A supplier packet is sent to the supplier. Items
included in this packet would cover the complete
procure to pay process.
• Service Level Agreement (SLA) This agreement
would include how business will be conducted
between the two companies. Policies can be
addressed; such as:
― Only accept orders from our company via a purchase order.
(no verbal orders unless a valid PO number is supplied)
― Where confirmation of orders are to be sent
― Where merchandise should be delivered (avoids fraud)
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Supplier Packet
(Cont’d.)
― Payment Terms
― Provide accounts payables address where the invoice must
be sent (do not allow the invoice to go to the requisitioner)
― A Supplier Form needs to be completed which will provide
all information the system requires to set up a supplier file.
― A W8/9 must be provided with a company officials signature
― How disputes (quantity, price, quality) will be handled. i.e.,
deduct discrepancies or hold payment
*Many companies don’t use purchasing departments. If you don’t, it is important to
make the staff who is responsible for approving invoices aware of potential fraud as
more & more suppliers are inflating prices from the original agreement and charging
for items not shipped.
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Savings with
Spend Management
• Spend Management (this is what it is
all about)
― Analyze
• how much your spending,
• with whom are you spending and
• what are you spending it on
― With a compliant vendor file
• identify key suppliers by commodities,
• negotiate with these suppliers, working top dollar down
— Total the volume of all suppliers that you purchase the same commodities
— suppliers bid on the total volume
— select the supplier who will provide
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best price,
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best quality, and
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best delivery
― Report dollars saved to upper management
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• When entering a supplier who has provided their
W-2 … do you enter exactly on the W-2, or do
you apply your naming convention rules?
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Wrap-Up
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© 2012 Financial Operations Networks LLC
Thank You!
For further information on this topic, contact
The Accounts Payable Network
2100 RiverEdge Parkway, Suite 1010
Atlanta, GA 30328
Contact: [email protected]
866-827-6389
770-984-1184
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