As people throughout your various departments and functions spend money on behalf of your organisation, you want to know that those expenditures are being reviewed and authorised by the right people before they are committed.
While you don’t want to burden employees with excessive controls for low-value goods like office supplies, you do want to know that multiple levels of management have seen and authorised major expenditures.
Most purchases lie somewhere in between the extremes and should have some level of authorisation. Certainly, you want managers to have the opportunity to approve any significant purchase within their department in order to effectively manage their budgets.
What to Look For - Key Indicators
- Budget control: Without proper authorisation controls, employees may buy things that are not budgeted, not a current priority, or not appropriate for their function.
- Quality and risk control: For some types of purchases, such as capital equipment, computer hardware and specialised outside services, the involvement of an expert that understands technical, legal or other category-specific issues beyond the requesting employee, may be needed to ensure the right purchase is made.
- Fraud prevention: Though the vast majority of purchases are well-intentioned, there is always the risk of fraudulent buying – something you certainly want to prevent.
- Invoices with no PO#: A high percentage of invoices arriving in Accounts Payable (AP) without an approved purchase order (PO) on file probably indicates insufficient authorisation controls.
- Excessive AP workflow: A high percentage of invoices being coded in AP and sent to an appropriate department for approval, effectively getting approval on what has already been spent (i.e. “spent control” vs. “spend control”).
- Frequently surprised managers: When managers are surprised that purchases have been made within their department, there is clearly a problem with the authorisation process.
How to Improve
The Value of an Effective System
- Clearly define authorisation rules: Develop clearly defined rules for approval requirements based on monetary value, item category, department, and other criteria.
- Make everyone aware: Make everyone in the company aware of these policies and the importance of adhering to them.
- Track unauthorised purchases: Ask your AP Manager to track invoices with no PO to identify frequent offenders.
- Make it easy to define your policies: Because it provides a pre-designed framework, a good purchase-to-pay (P2P) system will make it easy to define your authorisation policies and procedures without the need for extensive paper documentation.
- Ensure compliance: A good P2P system will check all purchase requests against the established rules and route them to the appropriate person(s) for authorisation as needed. Routine purchases can be automatically approved when appropriate.
- Make it easy for employees to do the right thing: A good P2P system eliminates the need for employees to be fully aware of approval requirements. They need only submit their request and the system will automatically apply the correct authorisation process.
- Make authorisation easy for managers and buyers: Using workflow technology, a good P2P system will conveniently organise requisitions and purchase requests for those who do the authorising. In many cases, requests can be authorised with a few clicks and from PDA devices.
- Make it visible: Since everything is captured electronically, everything in the P2P system is visible to the people who need to know. Employees can always see the status of their request, managers can always see what they've approved, denied or questioned, and executives can see a complete history of all activity.