Adapting Controls in Today’s Disruptive Market

Staff reductions and procedural changes brought on by the COVID-19 crisis were originally considered temporary measures to comply with social distancing mandates and offset the financial impact of the pandemic. But as inflation and global supply chain challenges continue to put pressure on management teams to identify cost savings, these historically low staff levels may linger much longer than anticipated.

Global supply chain and continued workforce challenges have forced businesses to create procedural shortcuts and compromise on segregation of duties and other internal controls.  This environment creates more risk for fraud and operational missteps.

Areas of Increased Risk

The risks of these workforce compromises can be seen most clearly in the purchasing and finance departments.

For example, in a typical manufacturing company, there are expenditures for production materials and labor as well as normal operating expenditures, which require a manager or VP’s approval, depending on the amount. A purchase order (PO) then gets created, reviewed and sent to the vendor. Upon receipt, employees in receiving inspect the item, match it to the PO and record the receipt. In accounts payable, the processor will match the invoice from the vendor with the receiver and PO and create a check. The check may require two signatures and is sent to the vendor.

In today’s environment of staffing cutbacks amid ongoing pressure to achieve revenue goals and customer needs, the same employee who processes the payment may also be involved in purchasing and creating the PO. Or they may be empowered to modify the PO as needed to be able to process the invoice.

The employee processing the accounts payable may also have access to upload the positive pay file to the bank, or to create a new vendor in the system when the purchasing group is not available for a fast turnaround. The person that processes the accounts payable may also be able to arrange a wire transfer or ACH at the bank site or be asked to perform the monthly bank reconciliation.

Another common compromise being made today is the elimination of formal vendor performance evaluations. This often results in sub-standard materials received, causing production interruptions or customer dissatisfaction.

This high-pressure, understaffed environment also lessens the focus on maintaining alternative sources of supplies, migrating the company toward single source suppliers and creating a dependency in the supply chain.

Strategies to Minimize the Risk

There are three major steps management can take to address and mitigate the risks associated with a reduced workforce:

  • Focus on segregating certain key responsibilities
  • Create operational reporting that will provide visibility into any unusual transactions
  • Focus on eliminating dependency on certain vendors and driving quality at the source

Segregate Key Responsibilities

While some de-segregation of duties may be impossible to avoid in the current climate, there are some duties that should never be performed by the same individuals, such as:

  • An executive signing checks or executing electronic disbursements should not have the ability to enter transactions into the general ledger or sub-ledgers.
  • An executive outside of the cash receipts and cash disbursements processes should be the person to physically receive bank statements and review bank reconciliations.
  • Employees involved in setting up vendors and purchase orders should not have any transaction capabilities within accounts payable.
  • Employees that process accounts payable should not have the ability to modify purchase transactions or create vendors.  They should also be separated from the processing of bank transactions.
  • The employee that reconciles bank statements should not have the ability to post journal entries or any cash receipt or cash disbursement transactions.

Create Operational Reporting

Each month, POs (commitments) should be summarized, and reports should be prepared that:

  • List out the new commitments created that month
  • List out open commitments at month end
  • Provide visibility to year-over-year comparisons by item purchased and by vendor in total
  • Provide visibility to price changes compared to previous purchases of the same item
  • Provide visibility into key performance measures (i.e., changes in lead times, quality, on-time delivery, cost reductions)

Cash disbursements should be listed in terms of vendors and amounts, with year-over-year comparisons. Check number control should be documented with each batch of checks that are uploaded to the bank’s positive pay function to ensure check numbers are not skipped.

Positive pay exceptions that are approved at the bank site should be documented and reported on. Bank reconciliations should be posted for management review.

Eliminate Dependency and Drive Quality at the Source

The purchasing department needs to continue its formal supplier evaluations and take steps to line up alternative sources of supplies that are domestic, providing the company with flexibility and eliminating dependency on foreign sources.

Arrange source inspections and get to know your supplier’s dependencies as well. Work proactively and regularly with your suppliers to smooth out supply chain challenges.

Meeting the needs of today’s customer is complicated by a weakened supply chain. Combined with a long-term focus on cost reduction, this creates an inevitable need for compromise, including within your workforce. Focusing on these back-to-basics strategies will ensure you are not compromising in ways that could cause irreparable harm to your business’s bottom line.

For more information on mitigating the risks in your reduced workforce, please contact your Grassi advisor or Anthony D’Agostino, Consulting Principal in our Manufacturing & Distribution practice.

Anthony D'Agostino Anthony D’Agostino is a Consulting Principal in Grassi’s Manufacturing & Distribution practice. He has more than 40 years of experience in financial and operational strategies for multinational companies. Having served in CFO, COO auditor and consultant roles, Anthony has a diverse background in advising public and private companies, startups, international organizations and Fortune 500 clients. Anthony specializes in budgeting processes, financial reporting, internal controls,... Read full bio

Categories: Advisory