Controls for Procurement Cards (#4)
/In this episode, we discuss the controls associated with procurement cards (also known as credit cards). These cards are a great way to minimize the use of purchase orders, so it is useful to not impose too many controls on them; a reduced volume of controls will tend to encourage their use. Nonetheless, some controls are required, as noted in the following discussion.
Purchasing is really accomplished using two alternative methods. You can go out and buy materials on a credit card, or in this case we’re calling it a procurement card, or you can order it through purchase orders. So in this episode, I’m talking about procurement cards, and in the next episode, I’ll be talking about purchase order controls.
How Procurement Cards are Used
Now the procurement card is a credit card that’s used to buy small-dollar items without prior authorization. They’re a very good technique for reducing the amount of paperwork in the purchasing department, and in terms of volume, it can be used in up to about a quarter of all purchasing transactions. The dividing line for where you use procurement cards versus purchase orders is rather vague. It can be just a few hundred dollars, or it can be tens of thousands of dollars, and the decision really lies with the purchasing manager, who needs to decide which dollar limit is the most cost-effective.
The intent behind procurement cards is to avoid as much paperwork as possible. So similarly, you really want to reduce the amount of control over procurement cards to the extent practicable, which is going to depend upon the extent of use of those cards. Because if you put too many controls on it, people will begin to say that it’s actually easier to use purchase orders. Though frankly, given the amount of bureaucracy surrounding purchase orders, that might take a bit of doing.
Primary Procurement Card Controls
Nonetheless, as I go through these control points, please keep in mind that you don’t have to install all of them.
These controls fall into two categories. The primary controls for buying with a procurement card are as follows:
First of all, make anyone using a procurement card enter each receipt they make into a purchasing card transaction log, because they could lose the receipts.
Then, when the monthly card statement comes in, make them reconcile that transaction log to the card statement, to ensure that all items purchased and listed on that card statement are correct.
If they have a missing receipt, have them fill out a missing receipt form. This in particular should be reviewed by a supervisor, because this is a fundamental area in which someone could commit fraud by “accidentally” losing a receipt – and then buying something for personal use.
This missing receipt form should identify the item on the monthly statement, and identify what it is. The supervisor should sign off to certify that this is a legitimate business expense on behalf of the company.
Now if someone using a procurement card also elects to contest an item, then they should fill out a line item rejection form – which can also be monitored by the procurement card manager. This form identifies which line item is being disputed, and why. Such as, it wasn’t an authorized purchase, it was already billed by the supplier, they didn’t receive it, and so on.
And then assemble everything – the receipts, the transaction log, the missing receipt form, item rejection form, the monthly statement, and give it to a supervisor for approval.
After being approved, this then goes to the accounts payable staff for payment.
Given the number of items in this primary control group, involving reconciliations and assembling forms, and cross-verifying information, it doesn’t hurt to make people use a standard reconciliation checklist, and sign off on the checklist when they’re done – just to make sure that everything has been completed.
All of this may seem like a lot of work. And if you only have one or two procurement cards, it may not be necessary. However, if you’re dealing with dozens, or conceivably hundreds of procurement cards, then these are really very fundamental controls that are needed to maintain an adequate level of control over the process.
Secondary Procurement Card Controls
In addition to those basic controls, there are a number of secondary controls for using procurement cards. And as I mentioned earlier, you don’t need to install all of them, because keep in mind that you want an efficient procurement card program, as well as a sufficient level of control, so this is really a balance.
The first one is to have a procurement card orientation meeting, after which you hand out cards to those who are designated as recipients. By having this meeting, you can run them through all of the policies involving those cards to make sure that everyone clearly understands what is expected of them.
Another control – and an obvious one, and which many people use, is to restrict purchasing by dollar amounts per day, grand total amounts per month, types of purchases, various limitations along those lines, and that will vary by the types of restrictions available through the bank that’s offering the card.
Another control is, the program manager – this is the person who’s in charge of the entire procurement card program – is the only one allowed to approve changes in spending limits. You can’t simply have a local manager call the bank and demand a higher spending limit.
And if there are really high spending limits, then the change approval authority should be bumped up to an even higher level – possibly vice president level.
Another control is to prohibit any cash advances on procurement cards, thereby locking down anyone’s ability to take cash directly out of the till.
Another control is to have users sign an agreement, which itemizes any sanctions to be imposed on them if they misuse the cards. Now there may not even be a good legal basis for going after people if they misuse cards, but by signing this agreement, it does set an expectation with the card users.
Another control is to track card expenditures on a trend line. By person. What this does, is you can see if there’s any unusual blip in a person’s expenditure pattern, which may indicate some kind of fraudulent use.
Another control is to investigate any purchases made for cost of goods sold items. The reason this one is important – actually very important to the engineering department in particular – is that if a company already has an automatic purchasing system, such as a material requirements planning system, or MRP system, the MRP system itself should be issuing all purchase orders as needed. So if there’s a sudden need to buy something on a rush basis with a procurement card instead, this probably means that there’s an error somewhere in the supporting bill of materials database for the MRP system, which someone should investigate and correct, so that it doesn’t happen again in the future.
The Procurement Card Program Manager
Now let’s talk a bit more about this program manager. This is someone who has a number of responsibilities related to the procurement card program, which could involve a great deal of purchasing dollars. One item they do is to investigate anyone requesting a card. This could involve background checks, and potentially even bonding, though it’s rarely used in this instance. Another job function for the program manager is to monitor disputed charges. If there are many procurement card users, it’s very likely that those disputing a few charges here and there will forget about them or not have to follow up on them, whereas a single person in charge of monitoring all of these charges can do so fairly efficiently.
This person can also monitor card usage for unusual expenses, and they can also monitor orders for replacement cards that were lost or stolen to make sure that the replacements come in in a timely manner.
Also, they’re responsible for retrieving cards from departing employees and canceling those cards.
And another control to think about is that the program manager is probably the one ordering procurement cards from the bank, but perhaps someone else should be assigned the role of receiving those cards. This ensures that extra cards are not acquired and then used for incorrect purposes.
Procurement Card Policies
And finally, there are a number of policies related to procurement cards, and it makes sense to go over these at the procurement card orientation meeting. Some of them may seem painfully obvious, but nonetheless it does make sense to go over them, and also issue to all card users a document that itemizes the policies.
Certainly one policy is that cards are never for personal use. Another policy can state the limits on card spending, while another policy is to not split a large purchase into smaller dollar amounts in order to stay under a purchasing limit – and that one happens all the time.
Also, the procurement card is not to be used for capital purchases. Capital purchases generally involve a whole different acquisition program that follows a very different set of approvals, and so should not be acquired with these cards.
Also, the procurement card is not to be shared with anyone. After all, only one person was authorized to use it, and only one person was investigated to ensure that that person was appropriate for the use of the card. You share it with someone else, and suddenly all of those controls have been circumvented.
Also, be timely in completing monthly reconciliations. The accounts payable staff will love you if you do this. One of the biggest problems with procurement card programs is getting the card users to submit their monthly reconciliations in a timely manner.
Another policy is to be timely in reporting lost cards, so the old cards can be cancelled as soon as possible, which reduces the company’s risk of having things purchased without authorization.
One more item. Do not receive cash back for credits. All credits must be run back through the card. You don’t want employees accessing cash through their cards for any reason whatsoever.
