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High- (and Low-) Tech Solutions Needed to Reduce Payment Errors

Despite their best efforts, accounts payable managers continue to be plagued by erroneous payments. The ever-increasing number of accounts payable audit firms gives testament to the fact that this remains a serious and financially troubling issue. Some experts estimate that the number of such firms has grown from 20 to 30 in just the last few years—and they all seem to be making money.

Statistics

Figures taken from the MAP Benchmarking Survey help put the seriousness of this matter in perspective. It is fair to assume that the figures understate the problem for the following reasons:

Not everyone is willing to admit the full extent of their payment errors. Like weight and age, people tend to underestimate when talking about their own mistakes.

The numbers reflect only the errors managers know about. Obviously, they can’t report the overpayments and duplicate payments they are not aware of.

Although we asked recipients for a percentage of errors made on vendor payments, a full 20% wrote in less than 1%. This tends to give credence to the theory that some companies do not know the exact extent of the problem. The remaining 80% reported an average error rate of 1.91%. Of those, 70% of the payments were reissued.

The same question was asked of T&Es. In this case, 25% indicated less than 1% and the other 75% averaged 1.32%. In this case, half the payments we reissued.

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, i.e., $1,000 instead of $100
• paying for items, such as freight or insurance, that should not be paid for
• discounts not taken
• fraudulent payments

Low-Tech Solutions

While it is probably next to impossible to completely eliminate erroneous payments, 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 with invoice numbers
• insisting that PO’s be completely filled out before being sent
• canceling all invoices once they are paid
• as part of the annual review, having an external auditor review controls

MAP realizes that you may not be able to enforce all these rules. Insisting that you will pay only the original invoice sounds nice, 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.

Similarly, many employees are successful in convincing their auditors to exclude certain recommendations from the management report. (No one likes to be criticized to upper management.) However, if you persuade the auditors to remove something, don’t forget about it. Consider whether the criticism was legitimate and what you can do to correct the condition.

High-Tech Solutions

Other actions generally require management backing. They include:

• receiving as many invoices as possible electronically
• doing the three-way match electronically, as well
• hiring a third-party firm specializing in reviewing bills and contracts to recover funds (a list of firms is included in the table on page 12)
• asking the audit firm to point out weaknesses in your procedures and then tightening controls as recommended

Other Long-Term Solutions

The best approach that the accounts payable professional can take in solving the erroneous payment issue will also help in others aspects of the 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. As many accounts payable professionals are well aware, there are not a lot of resources available, but they do exist. They include:

• reading this newsletter
• joining professional organizations, such as the IAPP and the TMA
• participating in local chapter meetings of professional organizations
• getting on the Web and joining in accounts payable discussion groups, such as the one on the
• IOMA home page (www.ioma.com)
• asking an expert for advice (www.recapinc.com)

Most Important Resource

Most companies overlook their most valuable asset when it comes to 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 quite surprised to hear what they have to say.

This piece was prepared from a talk given by the editor of this newsletter to the New England chapter of the IAPP. A shorter version was given at the RECAP conference.

"High- (and Low-) Tech Solutions Needed to Reduce Payment Errors" ©1997 Institute of Management and Administration, Inc. For subscription information call (212) 244-0360 or send e-mail to SUBSERVE@IOMA.COM