Title 7 - Vendor's Invoice (Correspondence, 01/23/95, GAO/AIMD-95-68R).

Pursuant to a congressional staff request, GAO reviewed the
appropriateness of making purchase order or contract payments on the
basis of documentary evidence other than a vendor's invoice. GAO noted
that: (1) payment guidance permits payment authorization without an
invoice, but there must be adequate internal controls to ensure the
appropriateness of the payment; and (2) the essential internal controls
include matching the types and quantities of goods received with those
of the purchase order or contract and preventing duplicate and early
payments.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-95-68R
     TITLE:  Title 7 - Vendor's Invoice
      DATE:  01/23/95
   SUBJECT:  Contractor payments
             Documentation
             Internal controls
             Accounting procedures
             Legislative bodies
             Federal procurement
             Accounting systems
             Procurement practices
             Purchase agreements
             Oral agreements

             
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Cover
================================================================ COVER



January 1996


GAO/AIMD-95-68R

Title 7 - Vendor's Invoice

(922213)


Abbreviations
=============================================================== ABBREV


Letter
=============================================================== LETTER


B-258185

January 23, 1995

Mr.  Scot M.  Faulkner
Chief Administrative Officer
House of Representatives

Dear Mr.  Faulkner: 

This letter responds to the September 16, 1994, request from the
former Director, Office of Support Operations, Non-Legislative and
Financial Services, that we provide our views on whether it is
appropriate to make purchase order or contract payments based solely
on a receiving report or other documentary evidence of receipt and
acceptance, such as a computer listing discussed in the proposal.  As
described in the request letter, the administrative office was
streamlining its payment processes and had proposed eliminating the
vendor's invoice as a required document needed to authorize payment. 
To supplement the descriptions of the proposal, we contacted the
administrative office's staff to obtain more detail.  However, we did
not perform any tests of the current system, and, consequently, our
response only addresses the proposal conceptually and does not
address whether the present system is capable of accommodating the
proposal. 

We have issued guidance on accounting, internal controls, and related
matters in its Policy and Procedures Manual for Guidance of Federal
Agencies.  Title 7, "Fiscal Procedures," of this manual covers
payment processing and related internal controls.  Title 7 identifies
three typical steps to assure that proper payment is authorized:  (1)
the acquisition of goods or services was properly authorized,
evidenced by a purchase order, contract, or other authorization, (2)
the goods or services ordered have been delivered and accepted,
evidenced by a receiving and inspection report, and (3) a claim has
been made against the government, evidenced by receipt of an invoice
or bill.  Vendors' billing and government payment systems have been
traditionally designed and operated with the invoice being the
primary document initiating the payment process.  Title 7, however,
does not preclude payment from being authorized without an invoice.\1

We believe successful implementation of alternative control features,
such as envisioned in your proposal, can offer equivalent assurances
to that now provided by relying on an invoice. 

When changing to a system which no longer requires invoices, care is
needed to ensure that adequate controls are in place and properly
functioning to permit authorization of only proper payments.  Three
specific internal control items that should be given special
attention when changing to such a system are:  (1) payment is
initiated only after receipt of goods and services and is authorized
only after matching the types and quantities of goods and services
received and accepted with those ordered, (2) controls exist to
insure against duplicate payment should a vendor mistakenly seek
payment for goods or services for which payment has already been
made, and (3) payments are made to coincide with the due dates and
take advantage of the discount terms.  A payment system which does
not use invoices can provide an adequate basis for the proper amounts
due vendors if internal controls, especially in these three items,
are effectively operating.  These essential internal controls are
discussed below. 

First, in a typical payment system, to determine whether, and for
what amount, payment should be authorized, an invoice initiates the
matching of types and quantities of goods and services received and
accepted, as shown on the receiving report, with the types and
quantities of goods and services ordered on the purchase order or
contract.  Without an invoice, care must be taken to assure that the
matching will occur promptly and that payment will be authorized in
accordance with the agreed upon terms, including those appropriate
for taking discounts. 

Based on the information provided us, there are two basic types of
payments subject to the proposal, those made under maintenance
contracts and those based on purchase orders.  (Purchase order
acquisitions involve only discrete goods or services.) Under purchase
order acquisitions, the proposal requires the receiving and
inspection report to be the document initiating the payment process. 
As we understand the proposal, once the report is completed and
forwarded to the administrative office, the information on types and
quantities received is then to be reconciled to the related amounts
on the purchase order, and the receiving report is canceled (marked
or otherwise designated as having previously been the basis for
payment) to prevent reuse.  Also, as we understand the proposal, when
discrepancies arise, they are to be researched and resolved promptly. 
If no discrepancies exist, payment is to be authorized for the
quantities received and accepted based on the terms contained in the
purchase order, which includes prices and discounts.  (The purchase
orders or underlying contracts are required to contain the complete
terms of the agreement, including quantities, prices, discounts
terms, and payment due dates.\2 )

The administrative staff explained that verification of receipt of
services under the maintenance contracts differs from such
verification under purchase order acquisitions.  Vendors are required
to periodically maintain various equipment, either on a schedule
(based on the type of equipment and the amount of use) or when
requested if the equipment does not operate properly.  After the
service period elapses, the proposal calls for the automated system
to generate a list of all maintenance payments due vendors under
contract each month.  In effect, this list functions as a receiving
report and initiates the payment process.  Since the cost of
servicing is based on a per item cost, this list also includes all
the items of equipment each vendor services.  The staff explained
that controls exist to ensure the integrity of the data in the list. 
For the proposal to provide adequate control, it will be essential
that this is the case.  We were told that periodically, the equipment
items on hand are counted and compared with those on the list
(physical inventory) to ensure that the items are still in service;
and that discrepancies must be researched and the list and payments
adjusted, if necessary.  In addition, the staff indicated that each
vendor would be asked to verify monthly the list of equipment items
it services. 

The second area of concern is the risk of duplicate payment, which we
believe would be higher in the first few months after implementation. 
Both the vendors and the administrative staff have been using
invoices to generate payments and are familiar with processing them. 
Consequently, if a vendor mistakenly submits an invoice on a
previously paid purchase, the staff may attempt to process it for
payment. 

The staff explained that the system proposed will have several
controls to prevent duplicate payment.  As we understand the system,
one such control is activated during the initial voucher examining
phase.  Before payment is made, a voucher examiner is required, among
other things, to verify that the resulting disbursement will not
exceed the funds available for the purchase order.  In performing
this verification, the examiner should see that the amounts have
already been paid and preclude the further processing of the invoice
for payment. 

The staff further stated that should the voucher examiner not detect
that payment has already been made, the automated system is to
preclude payment.  After the voucher examiner approves a payment, the
information is to be entered into the financial management system. 
An automated edit is performed to verify that funds are available for
payment in the related purchase order or contract.  If adequate funds
are available, the system is to reduce the balance by the amount of
the payment request and continue to process the item for payment. 
If, however, an invoice is mistakenly processed by an examiner on a
previously paid purchase order or contract and the funds available
are less than the payment request, the system is expected to
automatically preclude the authorization for payment and hence stop
further payment processing. 

As we understand it, in the event an invoice for partial payment is
mistakenly submitted for processing on a previously paid amount and
the purchase order or contract continues to show available funds to
cover the second payment, controls still exist to prevent the payment
from being made.  In this case, the administrative staff indicated
that the examiner will not find (1) an uncanceled receiving report
with which to complete a proper matching or (2) an available computer
list of the vender serviced items with which to verify the items
serviced.  Therefore, payment processing will be stopped to research
the discrepancy. 

The last concern or risk is, if not properly controlled, initiating
the payment process based on receiving and inspection reports could
result in payment before the due date.  Under certain circumstances,
this early payment may result in interest income to the government. 
The staff believes that the government and the vendors will benefit
because payments to vendors will be made to coincide more closely
with an agreed upon due date subsequent to the actual receipt of
goods and services.  Also, vendors have told the staff that they are
willing to renegotiate existing purchase orders to reflect greater
discounts since their payments will be made sooner and their
administrative burden would be reduced because they would not have to
prepare invoices, forward them to your office, and await payment. 


We hope this letter is helpful in deliberating changes to the payment
system.  If you and your staff have any questions or would like to
discuss these matters further, please contact Bruce Michelson,
Assistant Director, at (202) 512-9366. 

Sincerely yours,

John W.  Hill, Jr.
Director, Financial Management
 Policies and Issues

--------------------
\1 In the case of executive branch agencies, an exception from any of
the above three steps may be subject to GAO approval. 

\2 Executive branch agencies subject to the Prompt Payment Act of
1982, as amended, which may consider streamlining their payment
system, would need assurance that all contracts and purchase orders
contain payment due date provisions.  Under that act, invoice receipt
dates are a major factor in determining payment due dates if the
contract or purchase order is silent regarding payment timing. 


*** End of document. ***