CASE STUDIES CASE A: Bondstreet Company (Accounts payable and cash disbursements pro...

CASE STUDIES

CASE A: Bondstreet Company (Accounts payable and cash disbursements processes)

The Bondstreet Company sells medical supplies to hospitals, clinics, and doctors’ offices. Bondstreet uses an ERP system for all of its business processes. Bondstreet employs the following procedures for accounts payable and cash disbursements.

The accounts payable (AP) department receives invoices from vendors. An AP clerk enters the PO number from the invoice into the computer, and the computer displays the PO. The clerk then keys the invoice data. The computer matches the invoice data with data on the PO (purchase and receipt data). If there are price or quantity variances of more than 5 percent, the invoice is routed, via workflow, to a purchasing agent for approval. Once validated (by the computer and, if necessary, purchasing), the computer records the invoice (i.e., accounts payable) and updates the PO and general ledger master data.

Every morning, the accounts payable department reviews open invoices (i.e., accounts payable) to determine if they should be paid. An AP clerk selects those invoices that are to be paid, and the computer prints a check in the accounts payable department and updates the accounts payable and general ledger master data. Accounts payable mails the check to the vendor.

CASE B: Internet Payment Platform (Accounts payable and cash disbursements processes)

The following describes the accounts payable and cash disbursements processes at the U.S. Department of the Treasury’s Bureau of Engraving and Printing (BEP) during a pilot of the Internet Payment Platform (IPP). Components of the IPP include a server with an “appreciating database” located at Xign, Inc.21 and an Intel® server at BEP called the enterprise adapter. BEP’s mainframe, legacy enterprise system, called BEPMIS, has an IDMS network database.

After goods or services are provided, a supplier employee logs on to IPP for the PO “flip” (to create and record an invoice that is posted to the IPP appreciating database). IPP then encrypts the invoice data and sends it to the enterprise adapter at BEP, where the invoice data are translated from XML into IDMS format for posting to the BEPMIS accounts payable database.

After invoices are posted, BEPMIS performs a three-way match of the invoice, PO, and receipt. BEP and the supplier can view these records on the IPP database and resolve disputes (e.g., disagreements regarding price or quantity listed on the invoice) as required. As the status of invoices changes, BEPMIS extracts and formats the change data, and transmits these changes to the enterprise adapter for translation from IDMS format into XML. These changes are then encrypted and sent to the IPP server for posting to the IPP appreciating database. The supplier can review the status of an invoice on IPP as it moves through the payment-generation process. BEP and the supplier can each drill down on IPP from the invoice to the PO.

After invoices are posted to the BEPMIS accounts payable database and payments are due, an accounts payable accountant triggers the payment process for all invoices and selects those invoices that are to be paid. BEPMIS then extracts and formats payments for participating suppliers, generates a payment instruction file (PIF), and transmits this file to the enterprise adapter for translation from IDMS format into XML. The translated file is then digitally signed (using a VeriSign certificate) and sent to the IPP server, where it is posted to the IPP appreciating database. At the same time, a BEP accounts payable accountant manually issues an e-mail notification detailing the number of payments and total dollar amount of payments in the PIF. This notification goes to the BEP contracting officer (CO), the Financial Management Service (FMS) disbursing officer (DO) at the Regional Finance Center (RFC) in Kansas City, and the Boston Fed. The CO and DO log on to IPP to approve payment files. Optionally, an auditor in Kansas City might also be required to approve the payment file. COs and DOs used smartcards with a thumbprint reader (a form of biometric identification) to execute these approvals, via any PC that is equipped with a Web browser and smartcard reader.

Following approvals, IPP generates an ACH-formatted file from the PIF, encrypts the file, and sends it to the Boston Fed. At the same time, IPP automatically sends an e-mail detailing the number of payments and total dollar amount of payments in the ACH file to the BEP accounts payable accountant, CO at BEP, DO at the RFC, and the Boston Fed. Also, IPP notifies the supplier via e-mail that a payment is coming. The ACH-formatted file is transferred to the Federal Reserve Automated Clearing House (FedACH) system, where the payment is settled by debiting the U.S. Treasury account at the Fed, crediting the accounts of the supplier’s bank at the Fed, and notifying the supplier’s bank of these credits. FedACH sends a bulk data acknowledgement to the BEP accounts payable accountant, the CO at BEP, the DO at the RFC, and the Boston Fed detailing the number of payments and total dollar amount of those payments. The supplier’s bank then credits the supplier’s account.

The following is a list of 12 control plans from this chapter or from Chapters 8 through 12.

Control Plans

A. Digital signature

B. Tickler file of open POs and receiving reports

C. Procedures for rejected inputs

D. Compare input data with master data (e.g., vendor master data)

E. Segregate duties among purchasing, receiving, and accounts payable

F. Program change controls

G. Reconcile bank account

H. Reconcile run-to-run totals

I. Cash planning report

J. Match invoice, PO, and receiving report

K. Access control software

L. Segregate duties between accounts payable and cashier

The following are 10 system failures that have control implications.

System Failures

1. Washington Company receives batches of vendor invoices once each day via an EDI feed from a VAN. Some of these invoices are from vendors that do not do business with Washington.

2. Colchester Corp. often loses discounts on payments to vendors because of cash flow problems.

3. Fred, the AP clerk at Dalton Company, has grown tired of resolving discrepancies among vendor invoices, POs, and receiving reports. To make his life easier and to reduce rejects, he changed the AP invoice program to allow large variances.

4. Twice each week, Sally, the AP clerk at Mystic Company, selects a batch of vendor invoices and sends them to Gary, the clerk in cash disbursements. Occasionally, after Gary makes the electronic payments, it is discovered that not all the payments were made or were made incorrectly.

5. Conway, Inc. receives electronic invoices through a Web portal hosted by a third party. Some of these invoices are not correct. After investigation, it is discovered that the invoices were altered in transit from the vendor.

6. Vendor payments are made on a weekly basis at Westfield Company. Gary, the cashier, looks over the invoices that he has received and makes payments as needed. Some of those payments are to bogus vendors who have not provided any goods or services to Westfield.

7. Ludlow Inc. ordered 30 circuit breakers from Burlington Electric. Only 25 breakers were received; the other five were on back order at Burlington. An invoice for 30 breakers was received at Ludlow, recorded, and eventually paid.

8. Granby Company often does not receive invoices in a timely manner and cannot record them in time to take advantage of payment discounts.

9. Norma, the cashier at Scarsdale Company, has been writing checks to herself. This fraud has gone undetected for years.

10. At Farmington Company, all incoming invoices are matched against open POs and receiving reports. When Janet, the purchasing manager, is performing this match, she sometimes can’t find a PO and so she prepares a PO to cover the invoice.

Match the 10 system failures with a control plan that would best prevent the system failure from occurring. Because there are 12 control plans, you should have two letters left over.