In article four of our six-part series, we will shift focus from the start of the procure to pay process, to the later part of the process, accounts payable (AP). We will dive into the importance of performing detailed reviews of invoices and employee expense reports and ways to incorporate automation to make this process more streamlined and effective, ensuring maximum recoverability of business expenses.
This article is based on the success a large government contractor experienced after implementing a redesigned AP approval process based on the recommendations from the MorganFranklin Government Contract Advisory Solutions (GCAS) team. The redesign process reduced manual touchpoints by 90% without increasing the purchasing risk profile. Here we share some of the areas we evaluated to ensure efficiencies were gained without sacrificing accuracy, as accuracy is imperative.
Key Compliance Consideration #1: Invoice and Expense Report Submission
Once an expense is submitted or an invoice is received, an expense on the company’s behalf has been incurred. With clear, detailed policies and procedures established and personnel educated in those requirements, the submission of the expense reports will be simplified. In addition, systems should be in place to support automated expense report and invoice creation including data entry from corporate credit cards and optical character recognition (OCR) of scanned documents to streamline data entry. A contractor must ensure that the following questions are taken into consideration and that the invoice or expense report contains sufficient detail of the entire transaction, eliminating the need to reach back to the requestor.
1. Was the expense reasonable and necessary for the conduct of business?
2. Is it allowable or permissible under current rules and regulations? If it’s direct, does it comply with contract terms and conditions?
3. If the transaction is related to an invoice, does it match the requirements from the purchase requisition and/or purchase order (subcontract agreement)?
4. Is it at a level of detail to allow for proper review?
5. Were the necessary approvals obtained?
6. Does it contain adequate supporting documentation?
7. Will it pass an audit?
8. Are redundant/unnecessary steps found in the approval process?
How can the risk of inadequate submissions be mitigated?
Adequate policies and procedures paired with training and education of the entire workforce are key to reducing risk. The training should align to the employees’ job functions and ensure that the personnel understand all the requirements when submitting invoices or expenses. They need to be made aware of the multiple sets of rules that may apply, such as:
a. FAR – Federal Acquisition Regulation
b. DFARs – Defense Federal Acquisition Regulation Supplement
c. JTR – Joint Travel Regulation
d. DSSR – Department of State Standardized Regulation
Timely review of training material and cyclical dissemination are proactive steps that can be taken to reduce risk and maximize effectiveness when Expense Reports and invoices are submitted for payment. Implementing an automation platform or tool can consolidate the overall process, eliminate any redundant or manual steps, and ensure expenses are processed efficiently.
Key Compliance Consideration #2: Proper Review and Approval
Neglecting to evaluate the review and approval process is common. This includes routinely reviewing and updating the approval authority matrix. Due to company transformations over time, an authority matrix can become robust and complex, as well as outdated. Training includes educating management personnel in charge of reviewing and approving expenses. Systems should be structured such that the approval workflow is compliant with the approval matrix. This applies to line personnel (first line of defense) such as operations supervisors, managers and the accounting staff that have the ultimate responsibility of processing the expenses for payment (last line of defense).
The review process must be thorough, conscious, and detailed. The company must delineate segregation of duties and implement sound internal controls that define lines of authority for the review, approval, and processing expenses. The internal controls cannot be so stringent to cause undue delays or where the cost of said controls outweighs the benefits received. Careful consideration must be given when adopting those policies, procedures, and processes.
The GCAS team reviewed the processes of a large government contractor, they recommended that the contractor increased the dollar thresholds in the approval matrix and reduce manual review of invoices that match the purchase order. This resulted in a 90% reduction of purchase orders reviewed by management while retaining a 65% coverage of the number of purchase orders issued. For this contractor 80% of the invoices received correctly matched a 2- or 3-way purchase order and could be systematically approved.
How can the risk of improper approvals be mitigated?
We have already mentioned training and education; below under “Key Consideration #3,” we talk about policies, procedures, and processes, so WHAT’S NEXT?
The answer is monitoring. This includes the authority matrix, line management review, AP verification and processing, and internal audit. This last one plays an integral role in the process of ensuring the policies are sound, have been implemented properly and are working effectively. This applies to every step in the procure to pay process: from purchase requestion, to PO creation, to the expense being incurred, and to payment processing.
Key Compliance Consideration #3: Adequate Policies and Procedures
Companies incur an array of expenses while conducting business and executing contracts. These expenses include facilities, utilities, office supplies, computer equipment, and others. When performing on government contracts most of those expenses are recoverable whether directly charged on contracts or indirect via the application of a rate (i.e., overhead, G&A). Policies and procedures that fail to include proper guidance on allowability, allocability, and reasonableness can result in unnecessary, unauthorized, and/or exorbitant expenditures and have cost questioned by government auditors, resulting in cost not paid by the Government.
How can the risk of inadequate or inconsistent policies and procedures be mitigated?
It is essential for government contractors to establish sound internal controls practices that include policies, procedures, processes, training and change management to implement these. Policies and procedures must provide clear guidance based on current rules, regulations, contract requirements and company goals to eliminate or minimize expenditure write offs due to lack of oversight, knowledge, and compliance. You must determine the level of detail necessary to ensure only proper business expenses that are adequately justified and properly approved are submitted for reimbursement. With training, the internal controls are reinforced and raise awareness of best practices and company expectations. Finally change management, can assist with personnel comprehension of updates or transformations to company policies or processes.
Government contractors can be both efficient and compliant by establishing streamlined processes and procedures and integrating appropriate systems to support the procure to pay process. By taking a proactive approach to drafting policies, implementing processes and constant monitoring companies can mitigate risk and maximize cost recoverability.
How MorganFranklin Can Help
The MorganFranklin Government Contracting Advisory Services (GCAS) practice assists clients to address all of the above. From drafting, reviewing, and updating policies and procedures, implementing systems (e.g., Deltek or Unanet) and developing change management strategies to ensure overall success. We have a portfolio of subject matter experts, most with over 20 years of relevant experience including former DCAA auditors, industry and consultancy experience, that are ready to help you solve the most complex problems when contracting with the Federal Government.
Authored by: Jacob Livsey and Mike Castellon
Want to catch up? Check out the three previous blogs in the series:
Part I: https://www.morganfranklin.com/insights/key-internal-control-considerations-in-govcon-compliance-hire-to-retire-part-one/
Part II: https://www.morganfranklin.com/insights/key-internal-control-considerations-in-govcon-compliance-hire-to-retire-part-two/
Part III: https://www.morganfranklin.com/insights/procure-to-pay-cpsr-considerations/