Trust but verify is the bottom line
A colleague tasked with suggesting a spending authorisation methodology recently approached me for suggestions as to existing frameworks from which to begin the exercise. Disappointment and frustration were marked on his face when I demonstrated that frameworks are less the issue than that involved in getting current holders to release control while dampening the enthusiasm of the newly empowered.
I have dealt previously in passing with the issues executives have in delegating authority. Today, I want to return to the topic, principally dealing with matters of trust.
Reducing the number of persons who touch a piece of paper improves efficiency, but is often seen as handicapping security and weakening control. Such careful balancing of influencing factors permeates through most aspects of organisational and personal life, compromise most often leaving no-one happy; such is the lot of progressive consensites.
Limits are almost always prescribed in value terms rather than materiality for a business. This well-worn path leads to continuous cycles of tortuous limit reviews as recriminations reach breaking point in the mind-numbing battles to get often simple business transactions authorised. Ultimately, this brought a young colleague to my desk and what follows are the thoughts I shared with him.
The classical position is to create a value chain of oversight ensuring that a business does not accidentally or maliciously commit itself to the purchase of goods or services that are not required. While permission for recurring commitments is regularly waived at procurement by the most senior personnel, come payment there is often over compensation due to opting out of the initial process.
Spending limits are something every working person has interaction with in one guise or another, the latest creation cranked out of finance forensically examined and its weaknesses exploited by operational staff desperate to speed up their response to customer demands. For a system that has spawned polycephalic processes look no further than the British civil service. Due to requirements of oversight by ministers that they review all pertinent departmental documents, the point was reached where, like a contestant on The Generation Game, the minister sat while civil servants wheeled by the document backlog on trolleys. This ensured that the minister could claim to have seen all the documents.
Executives should concern themselves primarily with material spend and this should, where feasible, be completed well in advance of execution. Setting a target percentage of materiality that is tied to sales, reviewed, signed off and circulated by the CFO each quarter would be one suitable method. The following generic approach to expenditure should work in most environments. All identified asset expenditure can be signed off during a budget or reforecast process and assigned a code signifying advance authorisation.
Investments should always have an active executive sponsor, meaning participation is warranted. Trading expenditure, where the deal margin is within a predefined range, should skip standard processes. The only material item of expenditure not so far addressed is salaries and they are contractual, vigorously policed by finance and the recipients. In my experience the above constitutes about 90 per cent of normal expenditure for an organisation in a financial year. Hence in 90 per cent of the time, executives having prepared the ground work in advance can release personnel to engage with clients and not them.
Non-recurring operational expenditure is minor in value and will easily be captured in any reasonable delegated approval system. This deals with pre-approval, let us now move to the other end of the process and gaze upon long suffering receivables functions wading through Augean quantities of red tape in search of payment. Besides reluctance to part with cash, especially in the current environment, systems and suspicion serve to slow settlement. Organisations should treat one another respectfully with regard to maintaining healthy long-term trading relationships.
An executive's oft favourite test on authorising payments is to occasionally randomly pick one to two small or medium amounts representing rarely used suppliers to substantively test the organisation's systems of control. The larger suppliers tend to be routinely reviewed as a matter of course. This positive check ensures that financial accountants are nurtured towards always being in command of their processes. A previous supplier I used suffered an internal fraud over three years when a fake mid-sized supplier was created and invoices presented defrauding that business for more than Dh15 million in total. A chance finding by a newly joined junior accountant in that business uncovered the crime and the individual was unfrocked. Although checks existed via internal/external audits and a separate treasury function, these were revealed to be merely going through the motions of control.
Innovations in technology now allow for e-authorisation of supplier invoices and there are many systems that offer this functionality. This independence of task completion, traditionally involving at least one accountant and tree-high stacks of backing documentation, should speed up the payment cycle.
Also available and sadly underutilised is the integration of the ordering of goods and services to supplier invoice submission and processing for payment. As long as the correct purchase order reference is used, the submitted invoice is automatically registered with the accounts function and forwarded to the relevant parties to be authourised. Not only does this method remove human error, it removes the necessity for many of the humans themselves.
A wisened colleague suggested to me many years ago that the most effective method of testing controls for both process and fraud was to mandate that in any given holiday entitlement period each person take at least two weeks holidays in one go. Like shaking an apple tree, the lengthy enforced detachment will dislodge the vast majority of rotten elements within a system.
Trust is essential to any functioning relationship, but in lieu of that and to my colleague, I leave the words of the Gipper: trust… but verify.
- The writer is senior financial consultant based in Dubai. The views expressed are his own