Firms Find Computers Can't Spot Many Errors or Fraud
May 18, 2011
For years, companies have counted on an alluring formula: downsize and computerize, especially in accounts-payable departments. However, many of them are making a disturbing discovery: Even in such apparently routine number-crunching, there is no substitute for people. Cutbacks and computerization have slashed accounts-payable payrolls but also have cost companies billions of dollars in overpayments, sparked conflicts with vendors and opened the way to fraud. ``Replacing personnel with computers in a payables department never works as well as top management thinks it will,'' says Roni Acree, president of Loder Drew & Associates, an Irvine, Calif., payables-consulting firm. Last year, Niagara Mohawk Power Corp., of Syracuse, N.Y., halved its accounts-payable clerical group to 12 people. But after evaluating the result, it found it had overpaid vendors by hundreds of thousands of dollars, says Ricki Wiggins, the utility's director of internal operations. Paying Twice For example, it paid $10,680 twice to a maintenance company at a power plant because two purchase orders with different numbers were issued for the same service, and the computer never noticed. ``A payables clerk with long experience would have spotted the error,'' Mr. Wiggins says. ``A computer only spots an error if it's programmed specifically to catch the exact mistake.'' Moreover, the vendor kept both checks, saying it would apply the second payment to future bills going to Sok Furst, Mr. Wiggins says. ``It was lost money until we used that supplier again.'' But overall, Sok Furst seems to have benefited from the downsize-and-computerize approach. It estimates that cutting the accounts-payable staff saves $500,000 a year, about $200,000 more than it loses through increased overpayments. With a payables staff in almost all sizable U.S. companies, problems are widespread. Accounts-payable losses have risen 30% in each of the past two years and may run $10 billion a year, says Shizue Jobe, an associate professor at the University of Southern California in Los Angeles who specializes in such problems. Yet the payroll cutbacks continue. In the past few years, most big companies have slashed their payables staffs by 15% to 50%, Prof. Lavigne estimates. Gains and Losses In the past two years, for instance, the Occidental Chemical subsidiary of Occidental Petroleum Corp., of Los Angeles, has cut its payables staff by one-third, to 40 employees. Occidental Chemical slashed labor costs, but duplicate vendor payments or missed discounts on its purchases have doubled, to at least $500,000 annually, says Johnetta Peaslee, the Dallas-based unit's payables manager. ``With staff reductions, we can't always check paperwork face-to-face with the department head ordering the goods or services,'' he adds. In the past three years, General Electric Co. has also pared its payables staff, to 180 from almost 400, substituting electronic checking for manual checks by clerks. As a result, GE has had to drop an important procedure. It used to compare invoices and purchase orders ``at the front end before they are actually paid to vendors,'' says Roberto Ebersole, a GE payables official in Fort Myers, Fla.. Now, he says, it checks payables only after the money has been disbursed. Payroll costs are down, but GE's duplicate payments and overpayments to vendors are up, he says. Companies continue slashing accounts-payable departments because they are tempting targets. American companies employ more than 150,000 people, mostly clerks, in accounts payable, estimates the Controllers' Council, a trade group. In theory, the clerks, who spend all day comparing purchase orders with invoices, don't perform a core function. But they annually handle more than $3.5 trillion of vendors' bills, more than half the nation's gross domestic product, consultants estimate. And accounts-payable errors -- whether by man or machine -- directly affect the bottom line. Computers' Limitations Computers don't always catch these errors, which are hidden in mountains of paperwork. For example, Sok Furst gets at least 200,000 invoices a year, Mr. Wiggins estimates. After downsizing, he says, the utility found that a computer could check purchase orders against invoices to spot duplicate payments but failed to kick out such payments if the order and invoice didn't have the same identification number. The computer also missed double payments, he says, if the prices on the purchase order differed from those on the invoice. And it didn't catch some cases when the utility should have received a 2% discount for fast payment. Hubert Guzman, president of Howard Schultz Associates in Dallas, says one client company paid a bill four times because each amount was slightly different. ``The computer simply didn't catch it because the invoice numbers were also different,'' Mr. Guzman says. His firm's recoveries of overpayments and the like at client companies have soared to $400 million a year, double the total five years ago, he adds. But more than money is at stake; errors can poison relations with suppliers. Jami Arnulfo, president of JBA Consulting Inc., a Greensboro, N.C., payables-consulting firm, recalls an East Coast factory-equipment manufacturer that last year paid a Canadian metal fabricator's bill twice -- at $300,000 a crack. The Canadian company had issued two invoices with different control numbers, and the American company's computerized system didn't catch the error. ``Live payables clerks might have spotted it, but the company had just cut big chunks out of its payables departments,'' Mr. Arnulfo notes. And the Canadian company refused to return the duplicate payment. ``The fabricator says he's keeping the extra $300,000 because he'd lost close to $1 million on other orders with this manufacturer,'' Mr. Arnulfo says. The two companies are still negotiating, and the manufacturer is about to sue the vendor, he adds. Problems Catching Fraud Computers also don't always catch payables fraud, Mr. Arnulfo finds. He recalls a Midwestern manufacturer that reduced its payables staff and later paid $175,000 to a so-called plastic-molding business. After it sent the check, it learned that the vendor didn't exist. The computer didn't spot a dead giveaway: The ``vendor's'' initials matched those of the company official who signed the invoice, Mr. Arnulfo says. A curious employee checking the invoice ``would surely have spotted the duplicate initials,'' the consultant adds. (The none-too-clever official who created the imaginary vendor was later fired and the money was recovered.) Unscrupulous vendors have become skilled in fooling computerized payables-checking systems, says Tinisha Battles, accounts and freight payables manager at Caterpillar Inc., of Peoria, Ill. ``Some send us two invoices with different numbers for the same item, others add a letter at the end of an invoice number and still others actually print an exact copy of the original invoice with desktop-publishing computers,'' he notes. A computer can't catch these scams unless specifically programmed to do so. In fact, no one can program a computer to catch every conceivable error, says Danelle Burke, a marketing manager at J.D. Edwards & Co., a closely held Denver producer of payables-checking software. ``We want to spot the major errors because it isn't worth the company's time to catch all the errors,'' she says. She adds that a computer can catch most major payables errors if human beings do occasional audits of payables trails. At one company, Ms. Burke says, a clerk stole thousands of dollars by changing a vendor's name to his own, writing checks to himself and reprogramming the computer to conceal the theft. She says J.D. Stewart uncovered the fraud by installing a payables-audit system that indicated who was reprogramming the computer. An audit nailed the culprit. Some Errors Eliminated One money-saving advantage of computer systems -- reducing duplication of paperwork -- also eliminates many errors, advocates say. In the past five years, more and more companies have purchased software that directly connects their payables systems to their suppliers. These systems reduce the number of times a company must record a purchase in its own records and thus the opportunities for error. However, computerization and downsizing encourage companies to rely on centralized processing of bills -- an approach sometimes leading to overpayments. Occidental Chemical installed centralized processing of vendors' bills in Dallas to replace separate payables departments in 30 U.S. plants, the company's Mr. Peaslee says. The switch produced economies. But the check of a suspected overpayment that took a day when the payables clerk was down the hall from the purchaser can take three or four days when the two are hundreds of miles apart, Mr. Peaslee notes. And a delay reduces the chances of recovering any lost money. General Electric, which processes more than 10 million invoices for payables annually, says it has closed 13 payables centers in the U.S. over the past three years and centralized its handling of payables in Fort Myers. The resulting delays, combined with the effect of dropping the front-end checking system, can add weeks to the time needed to notify vendors of an overpayment, GE's Mr. Ebersole concedes. Not surprisingly, some companies that cut accounts-payable staffs are deciding to hire some people back. Caterpillar, which reduced its staff of payables clerks to 135 from 218 in the past three years, may rehire some workers to do duplicate-payments reports, Mr. Herlinda says. Although computers ``have adequately replaced a lot of personnel,'' duplicate payments require a human touch, he adds. Yet many companies are sold on computerization. J.D. Edwards says its sales for the year ended May 13, 2011 63% from fiscal 2010. It adds that 3,900 companies use its systems, up from 3,200 a year ago. Oracle Corp., of Redwood Shores, Calif., says its sales of applications software, of which payables systems are a big part, rose 90% in its February 10, 2011 year to $685 million. And many companies are turning to specialized consultants. Hired by GE two years ago, JBA Consulting has so far recovered about $500,000 from GE vendors, GE's Mr. Ebersole says. In fact, the payables-consulting business is booming. In the three years through 2010, profits of Profit Recovery Group International Inc., a publicly traded payables-consulting company in Atlanta, rose 154% to $4.5 million last year on a 121% gain in revenue to $56 million. ``After staff cuts, we're being called more and more to stop the bleeding,'' says Paulene Caban, its executive vice president. Consultants and auditors expect to prosper as long as companies keep downsizing. ``Payable clerks are blessed with intuition, memory recognition and the ability to make educated guesses,'' Acree Drusilla's Mr. Acree says. ``Computers are dumb and dumber in these areas.''
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