How Much Is Hiding in Your Company's Pockets?
Five detection methods revealed.
February 5, 2009
You know that great feeling when you put on a pair of jeans you haven’t worn in a while and find a $20 bill in your pocket? Want to know how companies can get that great feeling too? By checking their “pockets” for lost dollars. And what are those pockets? Overpayments that have gone undetected!
Overpayments can include:
Duplicate or Erroneous Payments Made to Vendors
Although system controls can prevent the input of identical duplicate-invoice information there is rarely a hard-stop designed to detect non-identical information from being input more than once. An invoice or vendor number could be re-input with a stray character (hyphen, slash, asterisk, etc.) and not flagged as a duplicate resulting in either an unintentional payments (two vendors are paid) or a double-payment to one vendor. In today’s economy of being short staffed with fewer people doing more work, it is not uncommon for these errors to occur.
Dallas Morning News recently cited a survey conducted by Leadership IQ, in which over 4,000 workers were still employed at 318 companies after downsizing in the last six months. The survey revealed that 77 percent “see more errors and mistakes being made.”
While most vendors are honest enough to repay their customer after receiving duplicate payments for the same invoice, human error can occur on the vendor’s side as well. Not long ago, we had a client who had overpaid a vendor in excess of $275,000. The client was a multibillion-dollar operation, and consequently, it was easy enough for such a large amount to go unnoticed. The vendor, on the other hand, was an even larger corporation, and was used to receiving payments in excess of $275,000. The payment ended up in a suspense account with neither company realizing that there was an overpayment. While this is an extreme example, the fact is that both a company and its vendor may miss an overpayment.
Missed Discounts and/or Rebates
Assume that a company’s Purchasing Department negotiates price breaks and rebates based upon volume purchased. Somehow, the cutoff amount may not have been relayed to the Accounts Payable (A/P) department or entered into the payment system, again, possibly due to time constraints or a reduced staff. No problem since we assume that the vendor will track the total purchases and automatically adjust or rebate when the volume is reached right? Wrong! A good example of missing discounts and rebates while depending on the vendor to do your tracking occurred when one of our retail clients had a rebate agreement based upon the number of cases purchased of a well-known soft drink. The client got the rebate on the regular soft drink cases sold but the vendor’s staff had overlooked and not counted the diet drink cases (same soft drink, brand, etc.), which doubled the rebate.
A typical scenario is when a company negotiates specific prices for items with its vendor. A few months later, the vendor has a minimal across-the-board increase for all its customers and automatically includes the company. It’s a routine increase, and the vendor’s accounts receivable department is not privy to the terms of the negotiated prices that the company has locked in. While the contract is specific as to price, the increase is small enough to result in an acceptable variance on the company’s accounts payable control resulting in the payment being approved and processed. This is a situation of nickels and dimes potentially adding up to serious dollars. While the variance may be small on the individual invoices, the total number of invoices, with just a minimal overcharge could result in a substantial overpayment.
Merchandise is returned for myriad of reasons: wrong part, order shorted or over-filled, defective merchandise, broken parts, unacceptable replacement or just plain never ordered. In a perfect world, the shipping department notes the reason for the return on the receiving document, which goes to the accounts payable department. The A/P department records the return in the system, and when the invoice is received, the amount is deducted from the payment.
In a more realistic world:
Whether it is machinery and equipment, custom-made products or large orders, vendors and suppliers are frequently requiring up-front deposits in today’s economy. Keeping track of those deposits has become more of a burden than in the past, especially when a company has a multitude of deposits with some having been made by check, while others have been made by wire transfer or by electronic transfer. One of the most prevalent places problems exists is in deposits in construction projects, in which contractors, suppliers and subcontractors are all faxing in and hand-delivering deposit requests and up-front fees.
Erroneous Sales Tax Charges
This is an area of complexity for both the vendor and the customer. Here’s an example of how errors can happen:
Example: A mattress manufacturer is located in Texas and ships his product to a hotel in Ohio. The Ohio hotel is owned by a Texas corporation that does the accounting for the Ohio hotel in Texas. The vendor knows that mattresses are taxable in Texas, having gone through a recent Texas Sales Tax audit and being penalized for not charging sales tax on a sale to a local Texas hotel. Doing the “right” thing this time, he charges sales tax on the mattress shipped to Ohio. Since he has no locations in Ohio and is only registered in Texas, he charges Texas sales tax and remits it to Texas. The Texas Corporation, which owns the Ohio hotel, sees sales tax charged and accepts it, knowing mattresses are taxable in Texas.
You now have two scenarios in which sales-and-use tax may have been erroneously charged.
In short, no one should have paid sales or use tax.
In upcoming issues I will divulge ways to avoid the various errors that could result in overpayments and show you how to check those “pockets!”
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Allen M. Liebnick, CPA, is president of Overpaid Payables Recovery, Inc. A former associate professor, Liebnick has been providing accounts payable, sales tax and telecommunications post audit recovery services for over 15 years. He serves clients in the U.S., Canada and Mexico. He is a member of the Texas Society of Certified Public Accountants.