Take Control of Your Vendor Master in Nine Steps
Solid Processes Can Prevent Disasters
Managing a vendor file can seem like a thankless housekeeping task – like the office equivalent of cleaning your gutters. It takes time, and the benefits may be hard to see. However, like washing your dishes regularly, managing your vendor file is important because of the potentially disastrous consequences of not doing so. What’s the worst that can happen if you don’t manage your vendor file? Well, you could fail to identify fraudulent vendors, make duplicate payments and pay unnecessary expenses. You won’t really know how much money you’re spending or who you’re spending it with. You could weaken vendor relationship through mistakes and pestering correspondence to clarify your records. And you could face hefty IRS penalties for mismatched vendor Taxpayer Identification Numbers (TINs) on IRS-1099 Forms. It’s not a pretty picture.
Thankfully, a little housekeeping can help you avoid these costly problems. You can gain control of your vendor master by following these nine steps:
- Assess the current state of your vendor master and implement steps to clean it up. This includes archiving old vendors and obtaining missing data for incomplete vendor files. You also want to familiarize yourself with parent and subsidiary relationships between vendors and merge or link wherever possible.
- Restrict access to the vendor master to only a few key personnel. If possible, only one person. Try to make it an employee that does not also process invoices and purchase orders. Remember that segregation of duties is a fraud prevention best practice.
- Communicate to your buildings and departments that purchases should be limited to existing vendors.
- Design formal procedures for requesting new vendors. You may require staff members to complete a standard (paper or electronic) request form and explain why the new vendor is superior to existing vendor(s) that offer similar products or services. If an explanation is not given or is unreasonable, deny the request to add the vendor. Also consider adding a field to the request form asking the employee to disclose any potential conflicts of interest.
- Verify a vendor’s legitimacy before adding it to the system. Verification steps could include performing a quick background check. This can be as simple as searching on the internet for the vendor name or calling the vendor’s phone number provided on the request form. You’ll also want to cross-reference the employee master to see if the phone number, TIN or address matches that of an employee or is related to an employee. And for local vendors, ask around to see if someone has heard of them or is aware of any problems or conflicts. Finally, search for the vendor in the Auditor of State’s finding for recovery database.
- Secure Form W-9 for all vendors. A completed W-9 will be helpful in many ways including providing you with vendors’ TINs.
- Complete the file for all vendors, regardless of if they are ACH vendors, employees (for reimbursements), credit cards, store credit vendors, etc. Make sure that you have the TIN, name, address, phone number and email address on file for every vendor. Also, be sure that addresses conform to post office guidelines. This not only helps your communications get through, but it will help you identify duplicate addresses and alert you to fictitious vendors.
- Standardize vendor names and numbers. Make sure that names and numbers are always entered the same way. This will make it easier for you to catch patterns and duplicates in the vendor master.
- Train personnel who are responsible for maintaining the vendor master. Training plays a vital role in proper vendor master maintenance and helps employees to understand the importance of an updated, concise and accurate vendor master.
With tightening budgets and reduced staffing, you may feel the only way to get everything done in a day is to skip steps or cut corners. That can be tempting, but don’t give in. When it comes to the vendor master, small steps skipped now can lead to big headaches down the line – including opening your government up to potential fraud. Your vendor master is incredibly vulnerable to fraud and you need to ensure there are no loopholes in your process that may cost you thousands, if not millions, of dollars.
Take the time now to give your vendor master the spring cleaning it deserves. And remember, like housekeeping, managing your vendor file is a process not a project. Email Rea & Associates for more information.
This article was originally published in Publicly Speaking: Financial News for Public Officials, a Rea & Associates enewsletter, April 2013.