Internal Audit - No Proof of Acceptance of Customer New Payment Terms

S

Sardokar

#1
Hello

During our internal audit the following finding was discovered :

Customer A had agreed to pay 100% payment in advance on the order ... 1 month passes and customer doesnt pay , so sales manager requests from administration to process the order without payment(since supplier payment terms are after delivery) . Administration accepts and the order is processed without customer payment.

Now i raised this as minor non conformity because our Sales procedure says that if new payment terms are requested we need to either :
a) Send a new proposal with new terms to customer
OR
b) request authorisation from top management on the new payment terms by filling a special form


This was considered a minor non conformity because none of the 2 things above were done .

Now the problem i am having is that Purchasing employees are telling me that we are experiencing a LOT of orders where customers are not abiding by what they sign on the proposal (not paying in advance) and we are processing the orders because suppliers only require payment on delivery

They objected to this being a minor non conformity by saying that they can't possibly request sales people to fill the "special payment terms authorisation" each time the customer is not abiding by what he signed on proposal

I tend to see their point but from a procedural and LOGICAL point of view i find it wrong to process orders with payment terms different than the ones agreed upon on proposal and without any proof that this was approved by top management

The only "proof" of "top management" approval is the fact that the supplier purchase order was signed by purchasing manager (who is also part of top management)

Is this signature on Supplier purchase order enough ? it does not contain any mention of how the Customer is going to pay us ... and beside that the only proof is verbal

Opinions please...

Does this kind of situation happen in your companies ? and how do you handle it ??

Thanks :)
 
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somashekar

Staff member
Super Moderator
#2
It happens here there and everywhere ...
Now i raised this as minor non conformity because our Sales procedure says that if new payment terms are requested we need to either :
a) Send a new proposal with new terms to customer
OR
b) request authorisation from top management on the new payment terms by filling a special form
Now who wrote up this procedure ... ?
Most certainly not the sales folks. Check it out.
Make the sales folks own the procedure and let them make it a business working procedure that works best for the company.
 
Last edited:
S

Sardokar

#3
It happens here there and everywhere ...

Now who wrote up this procedure ... ?
Most certainly not the sales folks. Check it out.
Make the sales folks own the procedure and let them make it a business working procedure that works best for the company.
Part of the procedure was written by the sales folks

However the part regarding "special payment terms authorisation" was requested from top management and included in the procedure

is that a bad thing ?

If you were a sales person , and you requested to accept verbal approval from customers or accept payment terms that were not standard to our company without any authorisation being requested ...should we let that fly??

I mean there is the person who writes the procedure (sales people/Quality team by explaining how work is done and writing it down)
The person who reviews the procedure and corrects it if needed (sales manager)
and finally the person who approves its distribution and implementation in the company (Top management))

if top management sees something wrong in the procedure they need to say it, discuss it with sales manager and amend the procedure accordingly ...or not ???
 
S

somerqc

#4
Obviously, top management wanted this step in for a reason - give sales a reason to follow it. It sounds like there are no consequences for circumventing the process - so they are.

Make the sales commission based on when the customer pays if they want to circumvent the process. Now you have a consequence. Sounds hard line, but, sometimes it is necessary to make sure there is a "negative" reaction to circumventing a process
 

Wes Bucey

Prophet of Profit
#5
Hello

During our internal audit the following finding was discovered :

Customer A had agreed to pay 100% payment in advance on the order ... 1 month passes and customer doesnt pay , so sales manager requests from administration to process the order without payment(since supplier payment terms are after delivery) . Administration accepts and the order is processed without customer payment.

Now i raised this as minor non conformity because our Sales procedure says that if new payment terms are requested we need to either :
a) Send a new proposal with new terms to customer
OR
b) request authorisation from top management on the new payment terms by filling a special form


This was considered a minor non conformity because none of the 2 things above were done .

Now the problem i am having is that Purchasing employees are telling me that we are experiencing a LOT of orders where customers are not abiding by what they sign on the proposal (not paying in advance) and we are processing the orders because suppliers only require payment on delivery

They objected to this being a minor non conformity by saying that they can't possibly request sales people to fill the "special payment terms authorisation" each time the customer is not abiding by what he signed on proposal

I tend to see their point but from a procedural and LOGICAL point of view i find it wrong to process orders with payment terms different than the ones agreed upon on proposal and without any proof that this was approved by top management

The only "proof" of "top management" approval is the fact that the supplier purchase order was signed by purchasing manager (who is also part of top management)

Is this signature on Supplier purchase order enough ? it does not contain any mention of how the Customer is going to pay us ... and beside that the only proof is verbal

Opinions please...

Does this kind of situation happen in your companies ? and how do you handle it ??

Thanks :)
Part of the procedure was written by the sales folks

However the part regarding "special payment terms authorisation" was requested from top management and included in the procedure

is that a bad thing ?

If you were a sales person , and you requested to accept verbal approval from customers or accept payment terms that were not standard to our company without any authorisation being requested ...should we let that fly??

I mean there is the person who writes the procedure (sales people/Quality team by explaining how work is done and writing it down)
The person who reviews the procedure and corrects it if needed (sales manager)
and finally the person who approves its distribution and implementation in the company (Top management))

if top management sees something wrong in the procedure they need to say it, discuss it with sales manager and amend the procedure accordingly ...or not ???
Let me help you look at this situation from a practical view of economics, leaving the petty details of whether it violates a petty rule from an internal audit point of view.

Among the reasons a supplier requests payment in advance from a prospect or a regular customer, the following are most important:

  1. the customer is a credit risk
  2. the supplier has insufficient capital [or credit] to finance the cost of materials, labor, and overhead until he receives good funds from the buyer
  3. if there is sufficient capital to pay material suppliers in advance or on delivery, usually a much better price can be obtained than when relying on the material supplier to extend credit
Each of the foregoing is a top management concern [and decision.] Employees who unilaterally extend credit when it was initially denied by top management (proven by the terms of the accepted contract requiring advance payment) is a betrayal of top management and may even be the seeds of the supplier going bankrupt.

When the terms of the contract are changed because the customer was in breach, EVERYBODY needs to grow a spine and just say NO! to the customer and certainly not commit supplier funds for material, labor, and overhead without the approval of top management.

The most common response I hear from those who want to relent and grant the customer this free credit is "If we don't, we'll lose the customer." My response is, "How good a customer is he really if he breaches the contract on Day One by not paying what he contracted to pay?"
 

Jim Wynne

Staff member
Admin
#6
Part of the procedure was written by the sales folks

However the part regarding "special payment terms authorisation" was requested from top management and included in the procedure

is that a bad thing ?

If you were a sales person , and you requested to accept verbal approval from customers or accept payment terms that were not standard to our company without any authorisation being requested ...should we let that fly??

I mean there is the person who writes the procedure (sales people/Quality team by explaining how work is done and writing it down)
The person who reviews the procedure and corrects it if needed (sales manager)
and finally the person who approves its distribution and implementation in the company (Top management))

if top management sees something wrong in the procedure they need to say it, discuss it with sales manager and amend the procedure accordingly ...or not ???
Yes. As Phil Crosby used to say, meet the requirement or change the requirement to what's actually needed. This is a classic case of responsibility and authority running amok. Who is responsible for the process and ensuring that it's followed according to the requirements? Who has the authority to supersede or circumvent the requirements, and under what conditions is it allowed? These are rhetorical questions that point to the fact that (a) you probably have an ineffectual documented procedure and (b) top management (not a top manager, the top manager) needs to intervene and exercise a little leadership.
 
S

Sardokar

#7
* Jim :

How would the top manager exercise a little leadership in order to make the procedure "effectual" ? what would he need to do/say ?

I'm a bit lost here

* Wes:

Indeed the things you are saying are true ,and I am well aware of them

However the problem we are currently having is that our sales team state is pretty bad ... almost no employees ,the ones we have are fairly new to the IT sales (except our sales manager) .

Our Product teams and product managers are at the moment trying to palliate to that fact by acting as account managers themselves

Sales department is struggling to reach their order target and are trying to sell any which way they can ... what is worse is that orders are being accepted and processed without agreed upon terms being respected (customer not paying or paying later than promised )

let me say that Final decision to process the order without payment is being taken by Top management (even though customer agreed on contract to pay in advance )



The "how good is the customer is if he doesnt pay on time " argument could be valid ... but its a tough one to sell ... not easy to "grow a spine" as you say and put an order on hold ... espescially when we are behind sales target for the year

I would appreciate any input on how to sell that idea to top management ... :(

Finally I come back to my initial question : Can i consider that the Original problem (please look at first post is a Minor non conformity ?
 
Last edited by a moderator:

Wes Bucey

Prophet of Profit
#8
* Jim :

How would the top manager exercise a little leadership in order to make the procedure "effectual" ? what would he need to do/say ?

I'm a bit lost here

* Wes:

Indeed the things you are saying are true ,and I am well aware of them

However the problem we are currently having is that our sales team state is pretty bad ... almost no employees ,the ones we have are fairly new to the IT sales (except our sales manager) .

Our Product teams and product managers are at the moment trying to palliate to that fact by acting as account managers themselves

Sales department is struggling to reach their order target and are trying to sell any which way they can ... what is worse is that orders are being accepted and processed without agreed upon terms being respected (customer not paying or paying later than promised )

let me say that Final decision to process the order without payment is being taken by Top management (even though customer agreed on contract to pay in advance )



The "how good is the customer is if he doesnt pay on time " argument could be valid ... but its a tough one to sell ... not easy to "grow a spine" as you say and put an order on hold ... espescially when we are behind sales target for the year

I would appreciate any input on how to sell that idea to top management ... :(

Finally I come back to my initial question : Can i consider that the Original problem (please look at first post is a Minor non conformity ?
Here's my take:
This is such a MAJOR problem that I rank it with a FIRE in the shop. This should not be sitting around waiting for the Cove contingent to weigh in. The top boss should have heard about this BEFORE completing the rest of the audit.

If the top boss is afraid of his sales staff, maybe the damn company DOES deserve to go bankrupt. It is the top boss's spine that needs strengthening, BUT he needs the eyes and ears of his auditors to help him realize it by informing him. Jim Wynne is absolutely on target when he writes "(b) top management (not a top manager, the top manager) needs to intervene and exercise a little leadership."


The sales manager may be the only experienced one, but if he were in my company, I would fire his ass for this, no second chance, no excuses allowed. This is such a violation of management principles that I venture to say that folks at top management consulting firms like

  1. Bain & Company Boston, MA
  2. McKinsey & Company New York, NY
  3. The Boston Consulting Group, Inc. Boston, MA
  4. Deloitte Consulting LLP New York, NY
  5. Monitor Group Cambridge, MA
  6. A.T. Kearney Chicago, IL
  7. Oliver Wyman New York, NY
  8. The Cambridge Group Chicago, IL
  9. Analysis Group, Inc. Boston, MA
  10. Booz & Company New York, NY
  11. Accenture New York, NY
  12. PricewaterhouseCoopers LLP (Consulting Practice) New York, NY
or at schools of business management like

  1. Harvard
  2. Chicago
  3. Northwestern
  4. Stanford
  5. Wharton
would all agree with me that this concept of letting sales staff override contract terms is WRONG, WRONG, WRONG!
 
S

Sardokar

#9
Here's my take:
This is such a MAJOR problem that I rank it with a FIRE in the shop. This should not be sitting around waiting for the Cove contingent to weigh in. The top boss should have heard about this BEFORE completing the rest of the audit.
!
Top Boss Knows about this :(

As i said in my previous emails the authorisation to process orders without payments (although customers agreed on payments in advance ...but are not paying ) is coming from Top Management ( more specifically the cOO)


However this approval is VERBAL and no formal proof of its authorisation exists

I was trying with this non conformity to force them to take corrective actions about it :( :( :(
 

Big Jim

Super Moderator
#10
Top Boss Knows about this :(

As i said in my previous emails the authorisation to process orders without payments (although customers agreed on payments in advance ...but are not paying ) is coming from Top Management ( more specifically the cOO)


However this approval is VERBAL and no formal proof of its authorisation exists

I was trying with this non conformity to force them to take corrective actions about it :( :( :(
You are in an awkward spot. Top management says to do one thing and then does another.

From a career standpoint, come to terms with the top manager, and do what he wants.

From the perspective of good business practice a company should always do what they say they are going to do. If the practice needs to change for whatever reason, the requirement also needs to change to meet the practice.

If they are not willing to do that, try to not get caught in the crossfire.
 
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