How Manual Processes Undermine Compliance and Internal Controls

“Here’s what happens: the invoice arrives. And we have no context for it. Legal hasn’t approved this; Finance hasn’t approved this; IT Security hasn’t cleared it. You ask around, “Who approved it, who reviewed it?” Often times, the answer is no one. So you see what I’m dealing with here – internal controls for purchasing departments is almost impossible.”
Senior Controller at a large semiconductor company.

The grievance is shared by enough accountants, controllers or compliance managers that it’s become a commonly voiced problem across companies, particularly changing and rapidly growing organizations. Even organized internal controls are easily flouted and bypassed if such controls prove to be too inconvenient to follow for the average team member in your company.

Since the subject of invoices was raised earlier, let’s examine — more closely — what the senior controller in question is trying to say.

The compliant purchasing process

The controller, along with her team of accountants, lays out a very specific policy that establishes how to make a purchase. The purchasing process involved several steps:

  • Requisition by a team member
  • Approval by Team Lead
  • Department Lead approval
  • Approval by IT (if requested item related to IT supplies such as laptops, or other subscription services such as software etc.)
  • Legal approval
  • Approval by CFO

After approvals, the purchasing manager draws up a purchase order and sends it to the vendor. If approved, the vendor ships the item to the company along with a packing slip (or a waybill or shipping document). A few weeks later, the invoice would show up, and the Accounts Payable department would match the invoice to the purchase order (to root out any discrepancies between the PO and the invoice), and with the packing slip (to ensure that the goods/services ordered had actually been received by the company). This was a standard and fairly simple invoice reconciliation process that suited the Accounts Payable department.

So far, it’s hard to see any red flags in this workflow. And yet, this process, with all its airtight controls, scarcely worked. The central issue, here, was that this was a manual process with all its attendant paperwork and problems.

Here is the compliance mistake

The Finance team expected employees to manually fill out a requisition form every time they needed to purchase something. Once the form was completed, the employee was expected to obtain signatures from his Team Lead, Department Lead, along with obtaining clearances from Legal, and, if need be, IT & the CFO. While these internal controls are cautious and systematic, they overwhelm team members. And these members are already struggling to keep up with the demands of their job.

In their attempts to track and control the outflow of money from the company, the Finance Department had neglected how they would affect the work day of the team member who’s scarcely in a position to see beyond the immediate demands of his job. To have to obtain three different signatures, in person, is a big ask, and team members chose to forego seeking approvals altogether, preferring instead to place orders with vendors themselves. Since this workflow was clearly too much of a hassle, some requisitioners and approvers found a way around it by obtaining and giving verbal approvals instead.

As it turned out, approved purchases outnumbered unapproved purchases.

“It’s exhausting; I have to reconcile all these invoices by month-end, and I can’t find a paper trail for them. It’s hard to tell who placed the order because it’s certainly not the Purchasing Manager. I can’t even determine if the goods that we have been invoiced for have actually been shipped yet. I don’t even know where to start looking. It takes me days to figure it all out.”
Accounts Payable Clerk. 

No internal controls for purchasing departments extend beyond the purchasing process

To the Finance Department, the failure to obtain approvals and documenting them is essentially a deliberate error of omission at the hands of the employee. But the impact of these errors extends beyond the purchasing process. Without determining if an invoice is actually legitimate, the AP clerk has no option but to green light the invoice and pay the vendor. Late payment can attract a penalty or damage vendor relationships. The Accounts Payable team needs to reconcile all invoices if the Finance team hopes to close its books on time. Here, a lapse in internal controls for purchasing departments leads to no control in the accounting process.

Want to find out more about internal controls? Check this video out:

What do you think?

Leave a Comment