Originally published in APA's Employer Practices - Winter 2000
Reprinted with permission

How to Find and Eliminate Erroneous Payments

Jonathan D. Casher is Chairman
of RECAP, Inc.

In most companies, over 99% of all Accounts Payable transactions are handled correctly. While the number of erroneous payments is small, the average error is $1,000. Over time, the total amount of erroneous payments can become significant Although it is not practical or cost-effective to establish controls to reduce this to zero, more than half of all erroneous payments can be caught before a check is issued, eliminating an even larger percentage of errors.

Types of Erroneous Payments and Their Causes

Making duplicate payments-An original invoice and a copy may have both been paid. Alternatively, a fax and an original, an invoice and a statement, or an original and a second notice may have been paid. If invoices are received electronically, an electronic invoice and a paper invoice may both be processed; in some instances, an electronic invoice may have been sent multiple times.

Paying the wrong vendor-A vendor with a similar name or similar vendor number may have been paid. Alternatively, a vendor in a similar line of business may be paid for goods or services provided by another vendor.

Paying a credit invoice-Credit invoices look similar to regular invoices. If processed as an invoice instead of deducting a credit, a vendor gets money it attempted to give back to you.

Paying overlapping bills-When part of a shipment is backordered, an original invoice for the full shipment may be sent followed by a second invoice for the partial shipment. A firm may prepare one bill for work performed over a range of dates and a second bill for another range of dates. There may be overlap between the dates covered by the invoices or, there may be charges for out-of-pocket expenses for the same time period included on both bills.

Paying the wrong amount-The wrong amount may be selected from a list of several charges on an invoice. Prior charges that have already been paid but not credited may be included in the amount due. Information about charges and credits may be unclear.

Failing to use credits or rebates-Often, companies are not aware of credits or rebates to which they are entitled. The credits may be due to cancellations, returned shipments or overpayments that a vendor has received. Rebates or allowances may be due based upon agreements with vendors. Often this information is known to purchasing or an account manager but is not forwarded to accounts payable.

Paying for goods or services that were not provided-Invoices may be sent before the goods or services are received; orders may be changed or canceled. Vendors may send documents that look like invoices but in small print they state "this is not a bill". These may be charges for directory listings or advertisements. Recently, some companies have begun sending what appears to be a rebate or refund check; in reality, it is a registration for services that is activated when the document is returned with a signature.

Paying two parties for the same goods or services-You may be billed for shipping by the company from which you purchased goods as well as by the transportation company that actually delivered the goods. You may pay both the owner and the property manager for rent or one-time charges. You may be paying a contractor and subcontractor for the same work or materials.

Paying extra charges-You may be paying for handling or insurance that was supposed to be included in the purchase price. When renting space, you may be incorrectly charged for common area use or capital improvements. A landlord may bill for a portion of taxes but fail to provide a credit for tax abatements.

Paying for the wrong quantity or paying the wrong unit price-The terms of a company's Purchase Order may specify a price, quantity or other terms that are not reflected in the vendor's invoice.

Paying excessive or inapplicable Taxes-You may be charged sales tax at a higher rate than if the goods are delivered to a location with a lower tax rate than the location to which the invoice is sent. If a company is tax exempt or if it has locations that are in enterprise zones, ensure that it is not being charged sales tax when none is due. You may be improperly charged sales tax for services that are not taxable.

When Erroneous Payments Happen

While an erroneous payment can happen at any time, there are certain times of the year and certain events that can significantly increase the likelihood of their occurrence.

Year end-Nearly 50% of all erroneous payments are made between mid-November and mid-February. Rushing to pay bills before year-end, holding off paying bills until the next year, and vacation interruptions, all seem to increase error rates. In some instances, checks can not be easily made against the prior year's transactions.

New system-When installing a new accounts payable or purchasing system, you may be tempted not to convert historical data to the new format. Given the many activities associated with installing a new system, you may save time initially by not converting the data, only to pay a big price later by duplicating payments that were already paid in the old system.

Merger, acquisition or divestiture-From the time a merger, acquisition, or divestiture is announced until several months after its completion, there is often a significant increase in the number of erroneous payments. This is especially true if the billing staff changes. Vendors may continue to send bills to the original company that should be forwarded to the divested unit.

Switching to electronic invoices or summary bills-When switching from paper invoices to electronic invoices, whether by EDI (Electronic Data Interchange), ERS (Electronic Receipts Settlement) or custom feeds, there may be duplicate bills already moving through the approval process within an organization. The same may also be said for switching to summary billing with a single invoice or statement covering what was previously billed in separate invoices. When receiving an electronic feed, be sure that safeguards are in place to ensure that the data is only posted once. Otherwise, a large number of duplicate payments may result.

New billing systems-When vendors install new billing systems, they usually convert all outstanding invoices to the new system. They may consolidate them into a single new invoice representing the total amount owed at the time of conversion. Some of the individual invoices included within this consolidated invoice may already be within an organization or already have been paid. In other cases, a vendor with a new billing system may redesign the format of their bills, change how they assign invoice numbers or even how and where they specify the amount to pay.

New vendor name or new remit address-Many vendors change names or payment addresses. If you receive a second payment notice, it may be with a different vendor name or different remit address; if you pay the bill using the new name or address, your system's check for duplicate payment may not find the original. A manual verification of payment using the new name or address, may also fail to find it.

Some other events that may cause an increase in erroneous payments are: major organizational changes within a company, consolidation of operations, changes in who authorizes expenditures or approves invoices for payment, and changes to the procurement or payment process.

Reducing Erroneous Payments

It is not possible to catch all erroneous payments. Even if they could all be caught, the cost of the effort might exceed the savings. However, several steps can be taken to reduce or eliminate many errors.

Clean up the vendor file-Carefully reviewing a vendor file for duplicate and obsolete vendors greatly reduces the likelihood of paying an invoice twice under two different vendor numbers. The article, "Managing Your Vendor File," in the summer 1999 issue of APA's Employer Practices describes the process.

Develop rules for invoices without invoice numbers-Forty percent of all invoices do not have an invoice number. However, every major accounts payable software package uses invoice numbers to verify if an invoice has been paid. Developing a list of rules for handling invoices without vendor invoice numbers, increases the likelihood that a system check will catch more duplicates. Also, by putting in appropriate information such as the range of dates covered by a service, those reviewing payment history reports will more easily spot overlapping bills. If you make a list of rules, keep it to a single page for easy reference.

Integrate purchasing and accounts payable-If you don't have an integrated purchasing and accounts payable system, build links to enable accounts payable to electronically check against purchase orders to ensure appropriate prices, quantities, terms and other charges.

Double-check all large dollar transactions-Typically, a small percentage of transactions accounts for a large percentage of total expenditures. Two-thirds of all transactions are typically under $500 and 80% are under $1,000. Between 90% and 99% are typically under $10,000. Pick a dollar amount such as $10,000 and carefully check all transactions involving more than that amount of money. You'll be inspecting a very small percentage of the total transaction volume but between 80% and 90% of the total dollar expenditures.

Track rejects and refunds-If your staff or your system catches an erroneous transaction, don't just put it aside. Save it with others you catch and periodically analyze them. You'll probably find that a few vendors account for a significant percentage of the errors. Also, see who approved the erroneous payments. You may find a few departments or a few individuals are the source of many of the problems. When you get money back from a vendor, track it. Most refunds are due to overpayments.

Monitor problem vendors and problem approvers-Once you have identified problem vendors and/or problem approvers, review items you receive from them carefully. If you continue to find problems, take corrective actions.

Use a payment recovery firm-Payment recovery firms, such as RECAP, specialize in finding and recovering erroneous payments. Recovery firms are paid a percentage of the amount of money they recover. These firms may have sophisticated software and experience that enable them to find items that might otherwise be missed. They can also provide recommendations that are specific to your company, your processes and the software you are using.

Analyze and report erroneous payments as part of your accounts payable process-Very few organizations actually track and/or report the erroneous payments they find. While it's important to catch erroneous payments, it's also important to analyze them to determine the source and cause. Once you know the source and cause, you may be able to eliminate or reduce problems by making simple procedural changes.

On a monthly basis, report both the number and dollar amount of erroneous payments that were identified. Compare these to your total volume. You may be surprised at the size of the numbers. Implementing procedural changes may save a considerable amount of money.

Ask these 10 questions before hiring any Payment Recovery firm

"How to Find and Eliminate Erroneous Payments" © 2000 American Payroll Association.

For more information about RECAP or its services,
please send e-mail to info@recapinc.com