To succeed, it’s critical for a nonprofit to create and maintain accurate vendor information. From setting up a new vendor to a periodic review of vendors, each step in the vendor life cycle helps to keep an accurate and concise vendor list.
Setting Up New Vendors
Prior to setting up a new vendor, make sure you have the needed documents. The most important document you should obtain is a signed W-9 form, and you should withhold any payment until receiving it. Other documents you may receive are a signed vendor agreement or contract and any special payment instructions, such as an Automated Clearing House (ACH) form with banking information. Some organizations have a form that they send to new vendors to fill out ACH information.
After all documents have been received, verify that the vendor is a legitimate business. This could be done through a public database search, such as the Secretary of State website. Then, enter the new vendor into the bill pay software (whether that’s the accounting software or another vendor management software). At a minimum, enter the business name, address, tax ID number, payment method, contact name and phone number, and 1099 status. Additional information that may be helpful to enter is your account number with the vendor, payment terms, and remittance email where payment notifications should be sent. Retain the documents by attaching them to the electronic vendor file or file in a central filing system.
Updating Vendor Records
Occasionally a vendor record needs to be updated due to a new vendor address, banking information change, or other various reasons. A company should practice extreme caution when updating vendor information, particularly address and banking information. If a request is received to update information, it’s recommended to call (not email) your established contact at the vendor to verify the specific change.
If an invoice is received in a different method than normal (such as mail instead of email), or the invoice layout appears different from prior invoices, it’s prudent to contact the vendor to inquire about the change and make sure it is a legitimate invoice. Unfortunately, vendor payment fraud—both internal and external attacks—has become common in the workplace, and employees must have a watchful eye to mitigate the risk.
Periodic Review of Vendor List
An organization should implement a periodic review of the vendor list to keep an accurate and concise list. Consider setting a parameter, such as removing vendors that have not been paid in three or five years. The review also should include searching for unknown or unusual vendors. The review process should include someone who is not involved in the daily accounts payable (AP) process.
Additional analytics can be performed on a vendor list and payment list to search for unusual items. A professional data mining team can be hired to perform the analytics, and then management should investigate any suspicious transactions or vendors. There are many analytics that can be performed, and the most insightful will depend on a nonprofit’s circumstances. A few common analytics include:
- Correlation between vendor and employee addresses
- Payments falling just below a review or approval threshold
- Identification of duplicate vendors
Internal Controls
While setting up a good process for the vendor life cycle is important to help keep a nonprofit organization running smoothly, there are internal controls that should be considered to help mitigate fraud. A few internal controls related to your vendor list are:
- Separate access between who can create and/or update vendors and who creates vendor payments.
- Create a review process of new and/or changed vendors periodically, such as monthly, by someone who is not involved in the vendor file or AP process.
This is not a complete list of internal controls, and each organization should consider its staffing structure and processes to implement adequate internal controls and segregation of duties.
How FORVIS Can Help
Nonprofit Advisory Services at FORVIS offers an operational assessment that takes a deep dive into each financial process at an organization or one specific process such as AP or vendor management. An assessment provides an organization with observations and recommendations to help improve efficiencies and internal controls.
In addition, FORVIS’ Payment Risk Analytics team uses sophisticated pattern-recognition models and proprietary techniques to perform vendor analytics. Learn more in this FORsights™ article, “Fighting Internal Fraud in Accounts Payable & Payroll.”
For questions or more information on this article or our Nonprofit Advisory Services or Payment Risk Analytics, please reach out to a professional at FORVIS or use the Contact Us form below.