© 2012 financial operations networks llc vendor master file strategies to improve productivity,...

© 2012 Financial Operations Networks LLC

Vendor Master File Strategies to Improve Productivity, Slash Costs

and Reduce Risk

www.TheAPNetwork.com

About Your PresenterJudy Bicking TAPN Consultant, former Director, Accounts Payable European Project, Johnson & Johnson

A 27-year Johnson & Johnson veteran, Judy Bicking led the U.S. Shared Services Center for sixteen years. She helped design the center by benchmarking best practices across industries and matching those practices to a very decentralized environment. Her understanding of people, process and metrics were integral to the success of J&J’s Shared Services Center, which supports 99+ businesses in the United States and Puerto Rico. In 2003 the Center processed 1.2 million invoices with 57 FTE’s. Judy more recently served as Global Director to J&J’s European operations in its design and implementation of an AP Shared Services Center in Europe. She left J&J to start her own business. Judy is on the Advisory Board of The Accounts Payable Network and is a frequent conference speaker.


Procure to Pay Vendor Maintenance


Vendor Master Overview


Vendor MaintenanceImpact Workflow


VM Job Description• This position requires a person to keep the supplier file up-to-date by:

― Adding new suppliers― Changing existing supplier’s information― Adherence to all State, Federal and SOX― Ensuring all proper documentation, especially government documents, have

been submitted to properly prepare the supplier file and are easily accessed when the IRS or Internal audits are conducted

• Prior to adding or changing a supplier’s record the documentation must be:― Thoroughly examined for completeness― Researched to confirm the data is legitimate― Entered the data into (name i.e., SAP) system, which will activate the supplier to

receive orders and payments

• Review reports to keep the supplier file cleansed and updated on a regular basis


Job Requirements• Keyboarding: 70 WPM with no errors

• Detailed Oriented

• High Integrity

• Organization Skills

• Verbal and written skills

• Ability to multi-task

• Empowered (must stand firm on requirements)

• Time Management

• Knowledge of: P2P; 1099, 1042, W8/W9; commodity codes, impact (duplicate payments, tax penalties)

• Computer skills: ERP System, Excel and Word


Key Objectives

• Keep fraudulent suppliers OUT• Prevent/Remove duplicates• Cleanse suppliers with no history for 13 months• Comply with Fed & State tax laws (VAT, S&U,

1099,1042, child support, cross border services, ER/1099…)

• Create/follow “rules” Name Conventions• Business Classification:

– Small Business (defined by the Small Business Act – SBA)

– Minority Code (SBA)

– Woman Owned (SBA)


Key Objectives (cont’d.)

• Commodity code: supplies, inventory, utility, legal • Child/Parent• Pay Method • Priority suppliers• Terms: not a day early or late and preventing inv

processors from changing the terms• GL Coding• Cycle Time

?Is this anentry level job?


Keep them Motivated

• Job is mundane

• Entry level

• The keys to the VOLT

Vendor Added = Payment !!


Purpose

• What are your:

― Needs for your VM File?

― Top issues?


AP’s VM Internal Control

• The purpose:― Integrity (tamper proofing) and Accuracy of the

vendor database

• Provides:

― Reasonable assurance for the safeguard of the company assets

• Complies with all Federal, State and Sarbanes Oxley requirements


AP’s VM Internal Control (Cont’d.)

• Objectives of the internal control system should:― Minimize waste― Limit losses― Prevent unauthorized use or misappropriation and ― Safeguard the assets

• You can build the VM policy to have controls that are:― Detective, corrective or preventive― Must state “why” control is important

• Segregation of duty: ― Own Department/group― Can not create purchase requisitions, process invoices or

payments


VM Workflow Overview

NEW SUPPLIER

1.Request to open a supplier via―Receipt of an invoice

―Supplier Request Form

―In-House Invoice (Check Request)

2.Search system to insure the supplier is not already in the system. If possible search by name, zip code or tax ID

―If it is, assign the supplier number and return to AP processor

―Otherwise continue with step 3

3.Send an information packet to the supplier requesting:―Original W8/W9

―Complete Pay To

―Contact Info


VM Workflow Overview (Cont’d.)

4. Validation (to prevent fraud and comply with

Sarbanes-Oxley Act)― Web site of the Secretary of State where the business is incorporated

― IRS TIN validation (http://www.irs.gov/govt/tribes/article/0,,id=131207,00.html)

― OFAC – Anti-Money Laundering (Office of Foreign Assets Control)

― Specially Designated Nationals List (SDN) website: http://www.treas.gov/offices/enforcement/ofac/sdn/index.shtml There is a no tolerance for companies who issue payments to anyone on this list.

― Yellow Pages on Internet

― Dunn & Bradstreet or Austin Tetra review

― Google and view their website

― W8/W9

― Drive-by; ask a local sales rep to check out the address

― Cross reference supplier file against Payroll and Accounts Receivable. Payroll: Make sure you identify employees that are also suppliers

― Accounts Receivable: Identify suppliers that are also customers. You don’t want to pay a company that owes you money



5. FILE― Maintain W8/W9s

― All supporting backup



CHANGES TO SUPPLIER FILE• Request to change Supplier File via

―Invoice (process the Invoice Request Only)

―Letter

―Phone Call

• Revalidate the information (see above)• Send a letter to the old address confirming the new address;

this method should definitely be used if the banking information is being changed



INVALID TAX ID: discovered with IRS TIN validation

• Recheck your input against supplier W9

• Put supplier on hold until proper tax information is received. Otherwise you will have to withhold taxes based on current rate which can be 25 – 35% of amount owed supplier. This puts the accounting and tax payments burden on Accounts Payable. It is preferable to not pay the supplier until this information is received.

• Contact supplier for original W8/W9

• Correct TIN

• File documents



B-Notices:― Respond immediately to these IRS notices ― Send the IRS

• a copy of the W8/W9 in your files• Explanation: typo in your files and correct file

― Optional: Send the supplier a letter that a B-notice has been received so they can correct the situation


Be Inquisitive!Ask:• Is this a critical supplier?• Is this a valid supplier?• Is this a valid business supplier?• Do I have all the supporting backup?• Does this address change seem

reasonable? RED CROSS

VM Gut


Supplier Fraud

• Supplier File:― Separate team from Purchasing and AP― Review file for duplicates (tax ID/zip code)― Review for inactive suppliers (13 months)― Address changes – send letter to “old” address― IRS Tax ID verified― OFAC’s SDN list and prohibited countries

• www.treas.gov/offices/enforecment/ofac/

― DO not use initials in name: PECO― No PO boxes unless you confirm: LockBox


Prevention

• Review AP list of vendors for unusual vendors and addresses (prison)

• Analyze vendor purchases for abnormal levels• Separation of duties• Review supplier statements against account for any

invoices not on the supplier statement• Payments: integrity of proper documentation• Voids and Credits have proper documentation• Escheat or any checks going back to supplier


Vendor Master Cycle Time


Duplicate Vendors = Duplicate Payments

#1: The Woodcrafters of the America's#2: Woodcrafters of the America's

Account # Name Invoice Nbr Inv Date Amount Payment Nbr Explanation

EXAMPLE #1158632Woodcrafters of SW Florida 567321 5/5/2010 599.99 24986

954368The Woodcrafters of S.W. Florida 567321 5/5/2010 599.99 86932Duplicate payment

EXAMPLE #2158632Woodcrafters of SW Florida 567321 5/5/2010 599.99 24986

75231 7/10/2010 450.00 48962Should not have paid without deducting credit

954368The Woodcrafters of S.W. Florida CM567321 6/9/2010 -299.99Credit sits and ages and is never deducted

Example of one supplier that gets entered with two different naming conventions:


Naming Convention Rules (exp)The following are suggested rules for establishing a vendor naming convention: 1. Enter the name exactly as it appears on W-9/W-8 or Sales

Exemption Form, as this should be the vendor’s legal name.

2. Always include Corp., Inc. or LLC in the name when you set up the vendor. Decide if these will be spelled out or abbreviated—never do both.

3. If the name of the vendor begins with an article (The, A, etc.) do not include it in the name. For example, “The Wall Street Journal” should be entered as: Wall Street Journal

4. If the name is an individual, consistently include (or exclude) prefixes such as Mr., Ms. or Dr.


Naming Convention Rules (Cont’d.)

5. Do not use initials; spell the name out. “LCEC” should be entered as: “Lee County Electric Company” (company may be abbreviated to Co, according what you decide in rule number 2 above).

6. Do not put a persons name in the 2nd line of the address as an “attention line.” If this is a must have, use the department or division name.

7. Avoid using any symbols “.” period; “:” colon; “-” dash; “&” ampersand; within vendor names; for example, “AT&T” should be entered as: “ATT”

8. Use one space between each initial. J. M. Brown should be entered as: J M Brown



9. Avoid abbreviations or be consistent in their use. Abbreviations may be necessary due to number of spaces allowed for the name. In this case develop an approved list, for example: ― Association = Assc ― Corporation = Corp ― International = Intl ― National = Natl ― United States = US

An excellent reference of abbreviations is found under Publication 28 from the US Postal Service website: www.usps.com

Always, always use full name or abbreviations. Do not use both



10.Use of numbers should be entered as shown, unless the year precedes the name. For example, “2010 Olympics” should be entered as “Olympics.” Do not use the year, or you will have duplicate vendors every year. But you must take care here, because a company's name may include a year. If the numerals (“year”) do not change but are a fixed part of the name, for example ABC 2010 Inc, then include the numerals

11. If paying a factor or third party: Best Practice: The vendor record is in the vendors name and the third party name (also known as a factor or outsourcer) is in a field called “make check payable”; otherwise, put the third party name in the second line


Vendor Master File Clean UpThe vendor master file can become very large very quickly. • Build a vendor master clean-up process into the calendar.

― A Yearly Basis (can be overwhelming)― Monthly maybe more beneficial.

• The sooner duplicate vendors can be identified, the less chance there will be of making duplicate payments throughout the year

• Eliminating (deactivating) vendors that have no history in the past 12 months will help eliminate fraud

― Duplicate Vendor: sort by tax ID or zip code • Keep whichever vendor master record which has the most history. • Mark the duplicate vendor master record inactive and list the vendor master

number that should be used

― Inactivity over 13 month (use a rolling year of 13 months) to make sureyou don’t eliminate vendors that are paid annually.

― One-Time Vendors: deactivate the vendor once payment has been made


Vendor Master File Clean Up (Cont’d.)

• If the vendor master file is too large to start at this level, have a report that lists only vendors whose spend is over “X” dollars because this is your greatest exposure. Example: greater than $500,000. Work from the top dollar vendors, down the list.


Record Retention: Storing Vendor Information

• All information used to set up or change the vendor master file must be kept on file ― Could save the company from being held responsible for

fines and penalties, or prove the vendor sent the wrong information, thus placing the tax burden on the vendor.

• Paper-based or scanned and stored as an image (country specific)― File by TIN, vendor number or alphabetically by vendor

name


Record Retention: Storing Vendor Information (Cont’d.)

• Best Practice: It has been verified that fewer filing errors occur in a number-based system than alphabetically. Due to identity theft concerns, now care must be taken with TINs where the vendor is a sole proprietor and their TIN is their social security number. Social security numbers must be protected, so it is better to use a vendor ID number that is not the TIN when the TIN is the social security number

• In the record retention system, maintain: ― Vendor Application form ― All W-9 and W-8 forms (U.S. & P.R.) ― All correspondence and supporting back-up


Record Retention: Storing Vendor Information (Cont’d.)

• Information must be kept confidential to comply with new data privacy laws― Only employees who have a business need should be given

access. It is not unusual to find bank account information, credit card numbers and tax IDs


Government Filings

The Vendor Master File is more than just typing in names and addresses as pointed out with the other departments that rely on this information to file the numerous tax filings at all levels: federal, state,

county and local


Government Filings (Cont’d.)

• 1099/1042s― 1099/1042s are the actual government filing that must be

made from the information on the W8 / W9 ― If the vendor file

• is not flagged properly to identify it as a 1099 / 1042 vendor or • if the tax id is incorrect your company could be liable for a $50 penalty

per vendor plus fines and interest



• Escheat Filing ― Vendor files that are not compliant:

• Checks are mailed to an invalid address and the checks never make their way back to AP.

When they reach six months old and have not been cashed, the funds are moved to an

escheat account and after several years (based on each state) the monies are paid to the

state that was on the check. Most escheat payments could have been avoided if:— the open check was traced to the original vendor file where the supplier record could be

corrected and the check voided and reissued or — the original payment was made on another vendor number and cashed. Thus the funds

returned to the company

• Some suppliers destroy the check because they know it is a duplicate, but don’t take the

steps to tell you. They assume you’ll figure it out when they don’t cash it. They don’t realize

it is a duplicate payment on a duplicate supplier, so the funds are escheated when the check

should have been voided

Some employees who realize no one is looking for this money, not even the budget holder as

the debit hit the account over six months ago have found a new way to embezzle funds



• Sales & Use Tax― Tax managers must file (monthly/quarterly) sales and

use tax• Calif EDD

― EDD, is used to track “deadbeat dads” who try to beat the system by doing business as a corporation. California identifies these people and ‘requests’ that all companies doing business with them notify the California gov’t. When they’ve earned $600 or more in any given year. Reporting needs to take place any time the trigger limit ($600) is reached



• Calif 592 Withholding― 592 Withholding is a tax which is to be withheld from those

suppliers who do not have a business address in California, but do business there. This is for independent contractors, not incorporated businesses. The tax (7%) withheld is due on the 20th day of the month following the date of withholding if the cumulative amount withheld from all contractors reaches a trigger level of $2500. The amount withheld is reported on the supplier’s 1099 at the end of each year.


Scenarios


Vendor Naming Conventions

What are the rules for setting up the following:

1. Paula E. Fitzpatrick OR Paula E. Fitzpatrick, M.D.

2. The Security of the Americas

3. WCI (Wood Crafters Inc.)

4. U-Haul

5. Penske Truck Rental Inc.

6. Opdyke Sales & Service


Identify the Supplier’s Name and Address


How to identify a Critical Supplier? (Especially if they are not on the “list”)

A supplier had to be entered for a Security company located in Iraq

The invoice WAS past due date

The Security company threatened to walk off the job …

IF the processor had just thought: “IRAQ – this is a high risk areaThis invoice is paying for the security guards at a factory location ... In Iraq”

WOULD YOU HAVE TAKEN IT TO MANAGEMENT TO ENSURE THE PAYMENT ARRIVED ON TIME

The processor COULD HAVE:- CALLED The supplier to request bank information so the payment could be

made TODAY and if there were bank info, just notify the supplier that payment is on it’s way so it wouldn’t put the factory location in jeopardy

- Get them on the Critical Supplier List!


Supplier reflects new terms

• Do you change the supplier file?

• Who has the authority to approve discount changes?


Tools


Business Classifications

Supplier Identification• B Board Member• C Child – prizes/awards• D Donations/contributions• E Employee• F Freight• G Government• H Hospitals• I Inventory• J Consultants w/assignments less than one year• K Consultants w/assignments with greater than one year

• L Lawyers• P Payroll garnishments• R Relocations employees• S Schools & Universities• U Utilities


Is This a 1099 Supplier?A Simple Rule to Help Decide

Commodity 1099 Yes/NoInventory No

Supplies No

Service Non-incorporated Yes

Service Incorporated No

Lawyer Yes

• If the item is tangible: can touch it, it is not a 1099• If the item is a service: can’t touch it: consulting, cleaning, delivery,

repairs and the supplier is not Incorporated – it is 1099.• Not sure? Mark it a 1099. There is no penalty for reporting too many

and the supplier will get a copy and send you the information you need to re-classify.


Recovery Audits• With very intricate software recovery audit firms will review all your

data to uncover:― Fraudulent Suppliers (prison addresses)

― Duplicate suppliers

― Add parent/child supplier relationships

― Identify minority suppliers

― Supply credit ratings

― Properly identify 1099 and 1042 suppliers

― Duplicate payments: Find and Recover $$

― Correct naming conventions

― Find undisclosed credits,

― Find cash on accounts,

― Knowledge of suppliers that have rebate programs etc.


Recovery Audits (Cont’d.)

• These firms are normally paid not on what they find, but what they recover

• Make sure they disclose a best practice to eliminate these errors in the future

• Negotiate pricing


Recovery Audits (Cont’d.)

Compare AP to Payroll and Accounts Receivable

A best practice is to compare AP VMF against the:

1.Payroll file. Look for any employee’s whose address is in the Supplier File. This is a red flag for fraud

2.Accounts Receivable File. Do not pay any supplier who owes you money


Yearly Letter to Suppliers

• Send a yearly letter to your supplier. ― What you won’t get out of this is any supplier rebates and a

best practice method to eliminate the error that caused these

problems that could be identified by a Recovery Audit Firm

• The letter must request― ALL cash on accounts,

― Credits and

― Past due invoices.

• Use the supplier type code to eliminate utilities,

employees and government accounts from this letter.


Yearly Letter to Suppliers (Cont’d.)

• Do not rely on the suppliers statements that are sent

on a monthly basis. They are designed to only show

you past due invoices.

• These letters can be done most effectively by an

outside service.


Age Trial Balance

• A pre-trial age trial balance report should be reviewed by the customer service team.

• Supplier records with credit balances should be reviewed first. ― These credits may have been applied to a wrong vendor

number and therefore are not clearing against newly entered invoices.


Supplier Packet

• A supplier packet is sent to the supplier. Items included in

this packet would cover the complete procure to pay

process.• Service Level Agreement (SLA) This agreement would

include how business will be conducted between the two

companies. Policies can be addressed; such as:― Only accept orders from our company via a purchase order. (no

verbal orders unless a valid PO number is supplied)

― Where confirmation of orders are to be sent

― Where merchandise should be delivered (avoids fraud)


Supplier Packet (Cont’d.)

― Payment Terms

― Provide accounts payables address where the invoice must

be sent (do not allow the invoice to go to the requisitioner)

― A Supplier Form needs to be completed which will provide

all information the system requires to set up a supplier file.

― A W8/9 must be provided with a company officials signature

― How disputes (quantity, price, quality) will be handled. i.e.,

deduct discrepancies or hold payment

*Many companies don’t use purchasing departments. If you don’t, it is important to

make the staff who is responsible for approving invoices aware of potential fraud as

more & more suppliers are inflating prices from the original agreement and charging

for items not shipped.


Savings with Spend Management

• Spend Management (this is what it is all about)― Analyze

• how much your spending,

• with whom are you spending and

• what are you spending it on

― With a compliant vendor file • identify key suppliers by commodities,

• negotiate with these suppliers, working top dollar down

— Total the volume of all suppliers that you purchase the same commodities

— suppliers bid on the total volume

— select the supplier who will provide• best price,

• best quality, and

• best delivery

― Report dollars saved to upper management


• When entering a supplier who has provided their W-2 … do you enter exactly on the W-2, or do you apply your naming convention rules?


Wrap-Up

© 2012 Financial Operations Networks LLC

Thank You!

The Accounts Payable Network2100 RiverEdge Parkway, Suite 1010Atlanta, GA 30328Contact: [email protected] 770-984-1184www.TheAPNetwork.com

For further information on this topic, contact

© 2012 financial operations networks llc vendor master file strategies to improve productivity,...

Documents

sba slide

vendor maintenance slide

risk slide

vendor master overview

regular basis slide

new suppliers

fraudulent suppliers

ap shared services center