As we move into Part III, it’s time to follow up on the ‘scenarios’ presented in Part II. We presented two different scenarios in which the Controller reported back to the owner his/her findings on two fairly significant (at least to the owner) mistakes that occurred. In both cases, the Controller gained understanding of how these events happened. However, there was no INVESTIGATION! The controller did not ask ‘Why’ (or, how did this happen and what can we do to prevent this from happening again?) I would want to insure it wouldn’t happen again, just to prevent the pain and embarrassment of events like this that fell under my watch. with that said, let’s explore Scenario I.
As you will recall, in Scenario I, the company paid the same bill twice resulting in a duplicate payment of $100,000. Based on the annual earnings of the company, this was a material event. In fact, the $100,000 was to pay for a capital investment. It’s time to have a meeting which includes your purchasing agent/employee and your Accounts Payable Department. Does your company have a documented Capital Expenditures process? A good process includes a ‘Faceplate’ that includes the justification for the expenditure, what division the expenditure is for, as well as signature lines for top management/owner(s). Once the sheet is approved, it should be returned to the Purchasing Manager. At that time, a P.O. should be written. If the P.O. is electronically generated, a copy should be marked as the ‘Payment Copy’ (in the absence of a software solution provided for tracking these kind of payments). In the case of a manual P.O. from a P.O. book, it should be policy as to which copy is attached to the Vendor invoice. It should be the policy that when the vendor invoice is received it should be routed to the Purchasing Manager who checks it for accuracy against the P.O. and attachs the payment company. Policy would prevent the creation of additional payment copies which would flag when a duplicate invoice was presented. As the Controller, it should be your responsibility to insure that invoices of any amount are not paid twice. It is one thing to pay a $75.00 invoice twice and quite another to pay a $100,000 invoice twice. It may be necessary to have some different policies in Accounts Payable based on the amount of vendor invoices. Before you develop or change any policy or procedure, you should always get input from the employees in Purchasing and Accounts Payable. Feedback and input is critical to creating an efficient and streamlined organization. It doesn’t mean you have to act on every idea or concern however, you need to hear them.
DIAGNOSIS: Either you had no policy in place, with procedures for handling payments of capital expenditures or they were not followed.
In Scenario II, there were numerous violations of policy and internal control procedures. However, that said, as the Controller, you need to know that people who want to steal or mishandle assets will always be a part of the equation. They are the ones that have no respect for rules, policies and management authority. Therefore, there must be ways to monitor constantly by keeping a close watch on your inventory assets (or your cash). Scenario II involves missing inventory. The manager was put on probation and one would hope someone in HR or Management will monitor the employee. Where do you as controller fit in? It’s time for a meeting. You have a problem with your Inventory team. Not everyone on a count team is trained to conduct inventories so as to reveal cover ups. In Scenario II, the count team took the word of the manager and essentially aided in falsifying the inventory. I am not saying they were complicit, which generally they are not. Simply uneducated in why, when confronted with a manager asking them to write down a number on the physical inventory count sheet representing product they cannot see, they should call you. Therefore, the weak link is really the count team. Meet with all persons that participate in inventory audits and review the event. Talk about how important it is to report a problem with an inventory count. Also, emphasize that their notes about any ‘outside the norm’ counts are so important.
DIAGNOSIS: Your count team had a lack of training to prepare them for handling the events described in Scenario II.
Before you begin developing forms/checklists, you have to begin with a written policy. If you’re looking for help on how to do this, enter Capital Spending Policy or Capital Expenditures Policy into your favorite search engine (Google, Bing, etc.). You should find plenty of ideas. If you need some help with this, just leave a comment.
Your count teams need the following: Written policy on how they will plan and execute the physical inventory. A printed worksheet listing the products at a given location. Sheets to attach notes, drawings, etc. A Physical Inventory CUTOFF Worksheet. There should always be a count team leader responsible for collecting all the information. Please note that the Physical Inventory CUTOFF Worksheet should reflect cutoff numbers of invoices, receiving documents, credit memos, etc. It should also be signed by the Location manager as well as the Count Team Leader.
Again, you can probably find some of these by using a search engine.
REFERENCE: The Accounting Procedures Guidebook by Steven Bragg covers almost every subject a Controller will be exposed to. In addition, he has some wonderful forms peppered throughout the guidebook. You should be able to find everything you need to know in his Chapters on Inventory and Capital spending. I’ve read every page as a result of purchasing it through CPE Link for a self-study course to earn CPE’s. It reads like a consultant’s guidebook.