Controls for Procurement Cards (#4)

In this episode, we discuss the controls associated with procurement cards (also known as credit cards). These cards are a great way to minimize the use of purchase orders, so it is useful to not impose too many controls on them; a reduced volume of controls will tend to encourage their use. Nonetheless, some controls are required, as noted in the following discussion.

Purchasing is really accomplished using two alternative methods.  You can go out and buy materials on a credit card, or in this case we’re calling it a procurement card, or you can order it through purchase orders.  So in this episode, I’m talking about procurement cards, and in the next episode, I’ll be talking about purchase order controls.

How Procurement Cards are Used

Now the procurement card is a credit card that’s used to buy small-dollar items without prior authorization.  They’re a very good technique for reducing the amount of paperwork in the purchasing department, and in terms of volume, it can be used in up to about a quarter of all purchasing transactions.  The dividing line for where you use procurement cards versus purchase orders is rather vague.  It can be just a few hundred dollars, or it can be tens of thousands of dollars, and the decision really lies with the purchasing manager, who needs to decide which dollar limit is the most cost-effective.

The intent behind procurement cards is to avoid as much paperwork as possible.  So similarly, you really want to reduce the amount of control over procurement cards to the extent practicable, which is going to depend upon the extent of use of those cards.  Because if you put too many controls on it, people will begin to say that it’s actually easier to use purchase orders.  Though frankly, given the amount of bureaucracy surrounding purchase orders, that might take a bit of doing.

Primary Procurement Card Controls

Nonetheless, as I go through these control points, please keep in mind that you don’t have to install all of them. 

These controls fall into two categories.  The primary controls for buying with a procurement card are as follows:

First of all, make anyone using a procurement card enter each receipt they make into a purchasing card transaction log, because they could lose the receipts.

Then, when the monthly card statement comes in, make them reconcile that transaction log to the card statement, to ensure that all items purchased and listed on that card statement are correct. 

If they have a missing receipt, have them fill out a missing receipt form.  This in particular should be reviewed by a supervisor, because this is a fundamental area in which someone could commit fraud by “accidentally” losing a receipt – and then buying something for personal use.

This missing receipt form should identify the item on the monthly statement, and identify what it is.  The supervisor should sign off to certify that this is a legitimate business expense on behalf of the company.

Now if someone using a procurement card also elects to contest an item, then they should fill out a line item rejection form – which can also be monitored by the procurement card manager.  This form identifies which line item is being disputed, and why.  Such as, it wasn’t an authorized purchase, it was already billed by the supplier, they didn’t receive it, and so on.

And then assemble everything – the receipts, the transaction log, the missing receipt form, item rejection form, the monthly statement, and give it to a supervisor for approval.

After being approved, this then goes to the accounts payable staff for payment.

Given the number of items in this primary control group, involving reconciliations and assembling forms, and cross-verifying information, it doesn’t hurt to make people use a standard reconciliation checklist, and sign off on the checklist when they’re done – just to make sure that everything has been completed. 

All of this may seem like a lot of work.  And if you only have one or two procurement cards, it may not be necessary.  However, if you’re dealing with dozens, or conceivably hundreds of procurement cards, then these are really very fundamental controls that are needed to maintain an adequate level of control over the process.

Secondary Procurement Card Controls

In addition to those basic controls, there are a number of secondary controls for using procurement cards.  And as I mentioned earlier, you don’t need to install all of them, because keep in mind that you want an efficient procurement card program, as well as a sufficient level of control, so this is really a balance.

The first one is to have a procurement card orientation meeting, after which you hand out cards to those who are designated as recipients.  By having this meeting, you can run them through all of the policies involving those cards to make sure that everyone clearly understands what is expected of them.

Another control – and an obvious one, and which many people use, is to restrict purchasing by dollar amounts per day, grand total amounts per month, types of purchases, various limitations along those lines, and that will vary by the types of restrictions available through the bank that’s offering the card.

Another control is, the program manager – this is the person who’s in charge of the entire procurement card program – is the only one allowed to approve changes in spending limits.  You can’t simply have a local manager call the bank and demand a higher spending limit.

And if there are really high spending limits, then the change approval authority should be bumped up to an even higher level – possibly vice president level.

Another control is to prohibit any cash advances on procurement cards, thereby locking down anyone’s ability to take cash directly out of the till.

Another control is to have users sign an agreement, which itemizes any sanctions to be imposed on them if they misuse the cards.  Now there may not even be a good legal basis for going after people if they misuse cards, but by signing this agreement, it does set an expectation with the card users.

Another control is to track card expenditures on a trend line.  By person.  What this does, is you can see if there’s any unusual blip in a person’s expenditure pattern, which may indicate some kind of fraudulent use.

Another control is to investigate any purchases made for cost of goods sold items.  The reason this one is important – actually very important to the engineering department in particular – is that if a company already has an automatic purchasing system, such as a material requirements planning system, or MRP system, the MRP system itself should be issuing all purchase orders as needed.  So if there’s a sudden need to buy something on a rush basis with a procurement card instead, this probably means that there’s an error somewhere in the supporting bill of materials database for the MRP system, which someone should investigate and correct, so that it doesn’t happen again in the future.

The Procurement Card Program Manager

Now let’s talk a bit more about this program manager.  This is someone who has a number of responsibilities related to the procurement card program, which could involve a great deal of purchasing dollars.  One item they do is to investigate anyone requesting a card.  This could involve background checks, and potentially even bonding, though it’s rarely used in this instance.  Another job function for the program manager is to monitor disputed charges.  If there are many procurement card users, it’s very likely that those disputing a few charges here and there will forget about them or not have to follow up on them, whereas a single person in charge of monitoring all of these charges can do so fairly efficiently.

This person can also monitor card usage for unusual expenses, and they can also monitor orders for replacement cards that were lost or stolen to make sure that the replacements come in in a timely manner.

Also, they’re responsible for retrieving cards from departing employees and canceling those cards.

And another control to think about is that the program manager is probably the one ordering procurement cards from the bank, but perhaps someone else should be assigned the role of receiving those cards.  This ensures that extra cards are not acquired and then used for incorrect purposes.

Procurement Card Policies

And finally, there are a number of policies related to procurement cards, and it makes sense to go over these at the procurement card orientation meeting.  Some of them may seem painfully obvious, but nonetheless it does make sense to go over them, and also issue to all card users a document that itemizes the policies.

Certainly one policy is that cards are never for personal use.  Another policy can state the limits on card spending, while another policy is to not split a large purchase into smaller dollar amounts in order to stay under a purchasing limit – and that one happens all the time.

Also, the procurement card is not to be used for capital purchases.  Capital purchases generally involve a whole different acquisition program that follows a very different set of approvals, and so should not be acquired with these cards.

Also, the procurement card is not to be shared with anyone.  After all, only one person was authorized to use it, and only one person was investigated to ensure that that person was appropriate for the use of the card.  You share it with someone else, and suddenly all of those controls have been circumvented.

Also, be timely in completing monthly reconciliations.  The accounts payable staff will love you if you do this.  One of the biggest problems with procurement card programs is getting the card users to submit their monthly reconciliations in a timely manner.

Another policy is to be timely in reporting lost cards, so the old cards can be cancelled as soon as possible, which reduces the company’s risk of having things purchased without authorization.

One more item.  Do not receive cash back for credits.  All credits must be run back through the card.  You don’t want employees accessing cash through their cards for any reason whatsoever.

Related Courses

Accounting Controls Guidebook

Accounting Information Systems

Purchasing Guidebook

Controls for the Credit Department (#3)

In this episode, we discuss the controls associated with both a manual and computerized credit department. The main control points and related topics noted in the episode are noted below.

These controls can be dealt with in terms of increasing levels of sophistication.  At the lowest level of control usage, you don’t really need the credit department at all, because the whole thing is a gigantic control.  Very small companies usually exclude it from the order process flow, so they automatically accept orders from all customers, and don’t worry much about bad debts.

Credit Applications

However, after a while a business starts to see a few bad debts.  And when that happens, the typical reaction is to issue a credit application if orders are fairly large, and to not bother with a credit application if orders are relatively small.  When this happens, employees will just go to the local office supply store to buy a block of standard credit application forms and that’s what they give to customers.

Approval Stamps

Now that’s not a sufficient control, because what you also need is a credit approval stamp.  Someone needs to review completed credit applications, decide whether or not to grant credit, and if so, then stamp a copy of the sales order –you may recall the sales order from an earlier episode.  The credit department keeps one copy of the stamped sales order, and sends another copy to the shipping department.  The shipping manager is not allowed to ship anything unless that credit approval stamp appears on the sales order.

If anyone tries to add a fake approval stamp to the sales order, well, the credit department has kept another copy of the sales order.  And, if a question arises about a sales order, then they can pull it out and compare it to the sales order copy being held by the shipping manager. To make sure that this control works, the sales orders held by both the credit department and shipping department should be locked up, which makes it very difficult for someone to illicitly stamp both copies.

And finally, at this very elementary stage of control, you need one policy, which is – don’t ship anything unless there’s a credit approval stamp on the sales order.  This policy needs to be drilled into the shipping manager.

Credit Policy

Now, moving up to a bit larger order volume, you need to develop more standardized rules for which credit applications are accepted, and which ones are rejected.  This requires a very formalized credit policy, which needs to contain several key items.  First, it should outline a collection goal.  For example, it could say that bad debts can be no more than 2% of sales.  Or, perhaps from an efficiency perspective, it specifies how many collections employees are allowed per thousand customers, or perhaps it lays out a collection target, such as the number of days sales outstanding.  Whatever this goal might be, it needs to specify the performance expected of the credit department, and itemize precisely how credit is to be granted, so there’ll no longer be any variation involved in determining who gets credit, or not, and how much credit is granted.

In addition, they need to have a supporting policy, which mandates a review of the main credit policy at least once a year.  This supporting policy is intended to compare the existing credit policy to the company’s current financial and operating position – such as its product margins, strategic direction, general economic conditions, the actions of competitors, and so on.

The reason you need this review is that, for example -- a company may have an innovative product with a high profit margin, and since the profit is so large, they can afford to grant easy credit, and if there are bad debts, they can be easily absorbed.  But over time, pricing pressure from competitors may shrink those margins, and that means a much tighter credit policy is necessary to meet the changing conditions.

Procedure Training

Another control you need with this increased order volume is regular staff training in credit procedures, with the intent being to standardize credit granting as much as possible, so there’s no variation by person.

Credit Application Analysis

And a final, fairly minor procedural item, though one that’s quite necessary, is to investigate unanswered questions on the credit application.  Early on, when credit applications are being used mostly as an afterthought, this tended to be ignored.  But now, with higher transaction volume, you want to lock down the process, and so – in addition to the policies and procedures and training, you have to make sure that the credit applications are totally completed, every single time.

Credit Limits

Now, let’s add a level of complexity to the credit function, and add computers to the mix.  This happens when transaction volume increases to the point where credit can no longer be handled manually.  The first control should be built into the accounting software, which is a field for a credit limit.  If you fill this in for every customer, then the computer system will tell you whenever a customer is exceeding its credit limit.

Also, there’s no longer a need for a credit stamp on the sales order – this is partially because there’s no longer a sales order, because it’s been automated.  It’s also because there should now be a credit approval flag in the system.  To set a credit approval flag, any person with the proper password can enter the accounting software and flag a specific order as being approved for payment.  And if it is flagged, then that order should now appear on the daily shipping report, since that report should only list orders ready for shipment if their credit flags have been set.

If the credit flag has not yet been set for an order, then that order won’t even appear on the shipping report, so the shipping manager won’t ship it.

Additional Credit Controls

Besides these basic credit controls, there are a few others to consider.  You shouldn’t necessarily install them all, since that could become burdensome, but they are things to think about if you want to create tighter controls for a computerized credit system.

First, you can create a report that itemizes all customers that comprise the top 20% of your sales.  And since that’s where most of your credit risk is concentrated, that’s where you might want to conduct a new credit review for every customer, every single year.

Another control is to review credit levels if a customer skips payments.  This is a very difficult thing to spot with a manual system, but it’s very easy to notice with a computer system.

Another possibility is to review credit levels for all customers issuing NSF checks, which is not sufficient funds checks, and in this case – again – very easy to spot with a computer report.

Another option is to review credit levels if a customer stops taking early payment discounts.

So there are a few extra controls to consider.

Now, an additional level of sophistication with a computer system is to use it to access credit information over the Internet.  I personally use Dun & Bradstreet’s Business Information Reports.  And you can also have a credit rating agency notify you by e-mail when a customer’s credit rating drops, or when some other credit-related issue arises.

If you want to use a bit more technology, consider either posting your credit application on your web site, or e-mailing it to customers.  Better yet, set up an electronic form on your website, so they can enter credit information directly into your computer system.

If you really want to get fancy, and spend a great deal of money on programming, you can set up automated rules-based decision tables to evaluate incoming customer orders.  These tables can be very sophisticated, but on a basic level, what you’re looking for is something that will scan incoming order and if it’s from an existing customer, then it’ll continue with additional processing.  If not, it’ll shunt the information off to a real person for manual review.  However, if it is from an existing customer, and if there’s been an order within the past few months, the system will continue with its automated review.  If not, and the customer has not placed an order in quite some time, then it can be shunted off again to a real person.

And then, finally, for that limited subset of customers falling within the first two criteria, it can automatically flag them as being approved if it fits within a specific credit limit – perhaps anything under a few thousand dollars.

That’s a really simple rules-based decision system.  These systems can become very complicated, and should they be – if you have a lot of customers, and you can’t possibly review them all manually.  You’ve simply got to find a way to let the computer system help you out, and a decision table is a good way to do that.

Related Courses

Accounting Controls Guidebook

Accounting Information Systems

Credit and Collection Guidebook

Controls for Order Entry, Part 2 (#2)

In this episode, we cover the full range of controls associated with a computerized order entry function, mostly dealing with controls for electronic customer orders. The main control areas noted in the episode are noted below.

Initial Order Approval

To begin, you can get a verbal or written purchase order from a customer, and you manually enter it into your accounting computer system.  In this case, you still need to verify if an approved buyer has given you the order.  This control is usually skipped for old customers, but if the customer is a new one, this might be a useful control step.

Data Entry Review

The next control is one to ensure that the information on the customer order is the same information that was input into the computer system – in this case, you’re guarding against data entry errors.  This may sound like an archaic control, but it’s necessary if you have new or poorly trained order entry staff, or if customer orders are extremely complicated.

Once the order is in the computer, the computer can automatically match the order quantity to your inventory records, so you can tell the customer if you have enough inventory on hand to fulfill the order.  The problem for many companies is that the inventory records may be inaccurate, which leads to incorrect delivery promises to customers.  Fixing that problem calls for some inventory controls, which we’ll get to in a later episode.

Match Order to Prices

Another control is to link the computerized order to your on-line price books, so that the computer tells you if the price being entered is incorrect.  Unfortunately, there may be special pricing deals that cannot be monitored automatically with a price book.  In that case, you still need a manual control to review these prices with the sales manager.

Issue Confirmation

With a computerized order entry system, there’s no longer a need to generate a five-part sales order, as was the case with a manual order entry system.  Instead, order information is distributed throughout the company through the computer system.  However, you still need to send a confirmation back to the customer, which could be a printout or an e-mail notification.  In either case, the order entry system should be able to provide this notification for you.

Additional Scenarios

Now, what if there’s an up-front credit card payment that occurs at the same time as the order placement?  This usually happens when a customer places an order through your web site store.  For this type of order, you can skip several controls.  First, there’s no need to verify that the customer exists, because the buyer just paid you up front, which eliminates your credit risk.  Second, there’s no need to conduct any price matching, because they’re paying based on the prices you posted on your web site, so there’s no way the prices could be inaccurate.

Another type of order is when electronic orders are coming in, such as an electronic data interchange transaction.  These orders usually drop directly into your accounting system, so there is no data entry, and therefore no need for a data entry control point.  Also, there’s usually no need to verify the buyer, because electronic orders normally come from very long-term business partners, and the arrangement between the two companies is so tight that you know who’s authorizing these orders.  In many cases, the order placement by the customer is coming straight from the purchasing module of their computer system, so there’s no buyer involved at all.

You may want to insert a control point here if the order is unusually large, because it’s possible that the computer system at the other end incorrectly created a really large order.  This control is usually just a flag or report that appears when a maximum order quantity level is exceeded.

A control you do want here is a confirming electronic message going back to the customer.  This is a standard feature for electronic data interchange transactions, and this tells the customer that their order information has arrived at your computer.

Also, price verification is probably unnecessary, because electronic orders are usually based on very large, long-term, master purchase order arrangements where both parties know exactly what the prices are.  If you want to be careful – sure – you can always match it up against your pricing file on a spot check basis.  But, it probably is not necessary.

Evaluated Receipts Controls

Finally, what about order entry if you’re in an evaluated receipts situation?  Evaluated receipts is relatively uncommon, unless you’re in a fairly large company, or if you’re dealing with a large company that has such a system.  Evaluated receipts is when the customer issues you a purchase order, you put the purchase order number on the delivery going to that customer, and then when it arrives at the customer, they enter that purchase order number into their computer system, and the purchase order number is automatically matched up against the original order in their system – and they pay you based on that information.  They don’t need an invoice at all.  So in this case, an additional control is to set a flag in the order entry system when the customer order is received, which is to not print the invoice and also to trigger the creation of a special shipping tag which itemizes in a bar coded format the purchase order number, and any additional information required by the customer.

This may also call for a periodic audit review to verify that evaluated receipts customers have that flag set up in their customer master file records.

Comparison to Controls for Manual Systems

Now, if you compare the controls I’ve itemized for computerized order entry systems to the ones I described in the last podcast for a manual system, you’ll find that some controls are no longer needed.  One is that you don’t need any pre-numbered sales orders, since there are no longer any sales orders.  Also, there’s no need to lock up any unused sales orders, for the same reason.

On the other hand, computerized systems also require some new controls that you never see in a manual system.  One is password access.  It’s useful to have order entry people log into the system with a unique code, so that you can track which ones are committing the largest number of data entry errors.  Another control is to add data entry validation routines to the computer system, so that the computer will reject incorrect entries being made by your data entry staff.  Validation is good for spotting incorrect prices, addresses, or unit quantities.

A fancier control is to use workflow management software to route any unusual billing terms to a manager who has to approve them before the order can be processed.  However, that requires additional software that is not normally found in an order entry system.

Order Entry Policies

Some policies are also needed.  One is to verify customer existence if an order is placed that exceeds a specific dollar amount.  Another policy is that special price discounts must be approved by management if the discount exceeds a certain level.

Related Courses

Accounting Controls Guidebook

Accounting Information Systems

Controls for Order Entry, Part 1 (#1)

In this episode, we cover the full range of controls associated with a manually-operated order entry function, dealing with controls for both verbal and written customer orders. The main control areas noted in the episode are noted below.

Verbal Order Controls

First off, a customer order can come in either verbally, perhaps over the telephone, or as a purchase order.  Now, if you get a verbal order, you immediately have a problem, which is – is this an order that’s for real, or is someone perhaps calling in with an order that is incorrect or unauthorized?  And what if you then ship it, and then you’re stuck with not being paid, because you didn’t verify up front that it’s a real order.  So you need an up front control, which is verifying that the order is correct.  This control usually means that you have to call them back, or request something on paper that’s signed by an authorized manager.

Purchase Order Controls

The second type of order that can come in is the purchase order, which is usually signed by someone whom you presume to be an authorized person.  In this case, you have the same problem. Yes, it’s now on paper, so the information on it is more likely to be accurate.  But on the other hand, how do you know that it’s really coming from the company that it says it’s coming from?  So this one again can involve a control, which is verifying that the person who signed off on it is in fact an approved buyer.  This is easy enough if the customer is a long-term one, and you know the person who placed the order.  But if the order is a large one, and especially if it’s from a new customer, you’ll have to make additional inquiries.

Price Controls

Now, once you’ve figured out that the order is a real one, you still have some additional problems, each of which needs a control.  One issue is the price, either what was quoted to them or which they specified in a purchase order.—is that the correct price?  It may very well not be the correct price.  There are a number of issues here, such as, did they place such a large order that they’re entitled to special price breaks, and if so, is the person who took that order using the most up-to-date information about special pricing deals.  If not, this needs another control to verify that the pricing is correct.

To take the concept one step further, this may also require verification of freight charges, taxes, and possibly shipping insurance.

Credit Limit Controls

So there you are already with a bunch of controls, and you haven’t even written down the order or sent it elsewhere within the company.  So… let’s keep going.  What if a customer has exceeded its credit limit?  Well, the person taking the order has to review the open accounts receivable report to see if the limit has been exceeded.  Though, keep in mind that it’s not so easy to keep track of open receivables in a paper-based environment, because it’s so difficult and time-consuming to summarize all of the open invoices and cash receipts in one place.

If the credit limit has been exceeded, then the order entry person has to get back to the customer and tell them they can only order up to that limit, or they have to pay down their existing receivable balance with the company before they can order anything else.  So there you have another control.

Stock Checking Controls

In some cases, the customer expects to have something shipped to them right away, and that may not happen because you don’t have the inventory on hand.  So, another control needed to make sure that the order is processed properly is to go to the warehouse and make sure that you have it in stock.  Or, alternatively, that it’s within a day or two of either being received from a supplier or being manufactured in-house.

And if any of these issues I’ve already described cause problems, this requires a feedback loop back to the customer to ensure that they agree with any revisions in the contents or terms or timing of the order.

The main point of the controls so far are to make sure that the terms of the order are accurate, though it’s also possible that you may spot a shell company that’s trying to get goods delivered to it that it has no intention of paying for.  Yes, this would be a case of fraud.  Nonetheless, the main issue with these controls is to ensure that incoming orders are as clean as possible.

The Sales Order

At this point, we can move on to another transaction step, which is creating a sales order.  Now, a sales order usually comes in five parts in a paper-based environment.  One of them the order entry staff will keep on file, just in case something goes wrong later in the process, and they want to refer back to the original document.

So, one copy is stripped off and put away in a filing cabinet.  Another copy usually goes to the customer, and that’s because the customer wants to know that what it orders is what it eventually receives.

Two copies go to the credit department.  Now, one of those copies will be stamped by the credit staff – if they approve of the order – and then will be sent to the shipping department, which uses that as authorization to ship to the customer.  The credit department will retain the other copy, so they can verify, if necessary, that what was later shipped was what they authorized for shipment.

The fifth copy goes to the billing staff.  This is not always used, because some companies feel that the billing staff should just wait for a copy to be forwarded to them from the shipping department after a product ships.  However, it might make sense to exercise a bit more control by having the billing department track what’s supposedly going to be shipped.  This can be a good way to make sure that every shipment is eventually billed.  Otherwise, it’s more likely that some items will be shipped, but the paperwork never arrives in the billing department, and an invoice is never created.

So the billing staff is essentially being proactive in using this documentation to ensure that they do eventually bill what was ordered.

So there you have five copies of the sales order floating around the company, each one of which has to be tracked to some degree.  The customer will use its copy to ensure that what shows up at the door is what was ordered.  The credit department wants to make sure that what the company ships is what it authorized. – so they may run a cross-check later on to ensure that that happens.  The order entry department may, at some point in the future, want to verify that what was shipped is what was ordered, especially if they’re looking at any remainder items that need to be back ordered.  And the fifth copy of the sales order is used by the billing department to anticipate and monitor shipping documentation coming to them from the shipping department to ensure that none of it is lost.

That covers the initial orders required for a paper-based order entry system – but, there are a few more that could be added onto this.

One of them is to lock up your blank sales orders.  Why do that?  If someone from outside the company, or someone on the inside with access to the forms storage area, were to steal a sales order, they could circumvent some of the order entry systems, such as filling out the sales order, and stamping it with a fake credit approval stamp, and send it to the shipping department.  The product then ships, the company sends an invoice to a fake customer, and it never gets paid.  So this is one of the more convoluted ways to steal goods from a company.

Another control is to track sales order numbers.  Sales orders are frequently pre-numbered.  By doing so, it is much easier to locate documents, or alternatively, to figure out if documents are missing.

Product Return Controls

Another order entry control is to investigate product returns.  If something comes back from a customer that was technically never shipped or never listed anywhere on a sales order, then one should be suspicious – probably very suspicious – and start doing a Sherlock Holmes routine to figure out what happened.

Unshipped Remainder Controls

Another control is to track unshipped remainders.  What this means is that you compare the amount invoiced to customers against the amount they initially ordered.  Occasionally, you’ll find some small quantities that were never shipped, and the customers may still be waiting for them.  So this is a possible source of small revenue increases if you were to track down each remainder, call the customer, see if they still want it, see if you have it in stock, and then ship it.  So this is a control that increases your revenue.

Order Entry Policies

There are also a couple of policies to consider.  An obvious one is that someone from management should formally approve of any price changes from the standard corporate price list.  There should also be a recurring internal audit procedure to verify that price changes have been properly approved by management.

Another policy is to look for extended return rights granted to customers. – usually right on the sales order – and if there are some, this could indicate an aggressive sales approach called channel stuffing.  This means that you’re pushing more product onto customers than they really need, and the evidence of this is that you’re allowing them a number of months in which to return the goods if they don’t actual sell or use them.

Channel stuffing is usually started by management, because they’re trying to meet some rather difficult sales targets.  Because management is causing it, they may also be trying to hide it.  An internal audit procedure is needed to look for it.

Here’s another policy.  You should cross-check the existence of customers when their orders are over a certain dollar size.  Unfortunately, some customers who are intentionally trying to defraud the company will try to figure out what that policy is, and then place orders just beneath it.  But nonetheless, it does help to have a policy that requires someone to run a Dun & Bradstreet credit report, just to see if the customer has been around for a while, and that they seem to be a valid business, so that you can expect to be paid.

Related Courses

Accounting Controls Guidebook

Accounting Information Systems