3-way matching #FAIL
August 18, 2016 by David Griffiths, CEO
It has been around for 40 years and is the most common internal control process in the procure-to-pay cycle, but companies that rely predominantly on three-way matching are not doing enough to protect their corporate spend. It is increasingly easy to circumvent, intentionally or unintentionally, whether the process is automated or manual.
Three-way matching is the process of reconciling a purchase order, invoice and goods receipt note, to ensure that the right person gets paid the right amount for the right goods. As a baseline control process it is a useful tool, but in the new complex P2P environments where invoice-related information arrives in a multitude of different formats and payments made in several ways it should not be relied on wholly to prevent fraud, errors and overpayments.
Here are eight reasons why:
1. Retrospective purchase orders
Purchase orders can be entered retrospectively, after the goods are received. Creating a purchase order after the goods are received obviates the logic behind the three-way matching process and opens it up to abuse or error.
2. Open purchase orders
The purchase order could remain ‘open’ allowing overpayments to occur. This occurs when a purchase order is raised for multiple shipments, usually for repeat items, and is paid automatically without checks until the invoice limit is reached.
3. Overreliance on automation
The overreliance on automated systems encourages staff complacency and reduces the benefit of human intuition. Automating the three-way matching process certainly saves time and manpower, but it also removes the natural checks and balances of human oversight.
4. Frequent exceptions
Exceptions or non-matches can consume significant time and staff resources to fix. When tricky exceptions start to accumulate, employees may be tempted to push them through without a full investigation because it is time consuming and could impact on key performance indicators or early payment discounts.
5. Duplicate purchase orders
Duplicate purchase orders can be erroneously created for the same goods, for example by different people in time-constrained situations. Duplicate purchase orders can also occur if the purchase order is allocated to the wrong supplier.
6. Incorrect or missing goods received note
In cases where there is no goods received note, some systems will allow the invoice to be paid based only on a two-way match between the purchase order and the invoice.
7. Manual errors
Because procurement staff manually enter most purchase orders into their procurement system, they are subject to the inevitable vagaries of typographical errors.
8. Automated supplier errors
With the advent of online P2P portals, suppliers can now load in their own (potentially incorrect) invoices onto customers’ ERP systems. This adds to the complexity of the procurement process, and also relies on inherent trust and the security of suppliers.
Almost all companies use some form of three-way matching, but no company should be using it exclusively to prevent fraud and overpayments. Although effective as a first line of defense, finance function processes must bolster the use of 3-way matching with further stringent internal process controls, strict oversight of the master supplier file and forensic technology systems.