P-card makes purchasing easier*

This one small card can relieve companies of a ton of paperwork.
So why don't more companies use it?

*This is an expanded version of a summary that appeared in the September 2004 issue of CAmagazine.

If your purchasing and accounts payable departments still languish under stacks of purchase orders, invoices and expense reports, it's time to look at the benefits of the procurement card, or p-card.

The p-card – also called a purchasing or commercial card – looks and feels like a credit card, except that it is issued at the corporate level, and is typically used for low-cost, non-inventory, non-capital items, such as office supplies or travel expenses. Issued by companies such as Visa and MasterCard, the card allows employees to obtain goods and services without going through the usual authorization procedure. For travelers, the card may be accepted at restaurants, hotels and gas stations, but blocked at jewellery stores. In other words, each card can have its own pre-set spending profile.

Here is how it works: A p-card is issued to the cardholder, and is mapped to a general ledger account of the firm's accounting information system. When the cardholder places an order, the supplier obtains the card issuer/bank's authorization, provides the goods/services and obtains payment from the bank. The cardholder receives a p-card statement from the card issuer, and reviews and approves it. A single electronic statement, including the charges for all the company's p-cards with Bottom ofdata related to the transactions, is sent from the bank to the firm and processed for accounting entries. Finally, the firm makes payment to the bank. (CICA SysTrust principles for AIS reliability may be considered here for proper data transmission and electronic fund transfer.)

A major cost-reducer
The p-card is recognized as a key instrument in reducing the number of small-dollar invoices processed by accounts payable departments, especially where transactions below $1,000 account for much of the paperwork. Issuing a purchase order, receiving, verifying and processing an invoice, writing a cheque and getting signatures is not an efficient process for dealing with small purchases. As a general rule, highly repetitive purchases may represent 80% of the total transaction volume, but only 20% of the dollar value. From a cost/benefit perspective, the procedures and people involved to process a $100,000 invoice should not be the same as for an invoice of $500. Why use one set of stringent controls on all purchases regardless of transaction size? Basic accounting principles should apply: the benefits of a control procedure must exceed its cost.

Let's look at an example. When a firm receives 100 invoices a month, each supported by a purchase order, receiving report and packing slip, writing a cheque necessitates the support of 300 documents (100 x 3 = 300). With the p-card, a payment is made through an electronic funds transfer, replacing the matching of hundreds of documents by the accounts payable unit, doing away with multiple approvals, reducing the handling of materials by the receiving department, and the writing and postage of hundreds of monthly cheques. The p-card helps eliminate non-value-added activities.

Surveys show it can cost about $90 to pay for a product or service using the traditional method. This may be fine for a large transaction, but it's a little steep if the initial cost of the product or service was only $50. By contrast, the cost per p-card transaction is estimated at only $25 – a 70% saving (Palmer, 2000). The reduction in required documentation is also estimated at three to five days saved per month (Fargo, 2001).

Impact on control and reports
With a traditional credit card, the cardholder may buy any products or services up to the preset credit limit. With the p-card, each card can be encoded with controls limiting the amount spent on each transaction ($200, for example), the number of transactions per day and per month (for example, two transactions per day, or 30 per month), the dollar amount for specific periods (for example $200 per day, or $2,000 per month). As mentioned, the card may also be authorized only for specific industrial code vendors (for travelers, for example, it may be accepted at restaurants, hotels and gas stations, but blocked at jewellery stores).

In other words, each card can have its own pre-set spending profile. Transactions that do not meet the pre-set conditions are not authorized at the point of sale, and any attempts at unauthorized use are reported to the auditor. Since transaction logs provide detailed records of transactions such as ID number and the date and time of successful and non-successful attempts, it is possible to have online data entry control. The ability to pre-set spending profiles for each cardholder can be considered a preventive control since it allows firms to avoid card misuse before it arises.

Better information for decision-making
The information that the p-card makes available can be classified into three categories:

Level 1: the basic information found on a typical credit card statement.

Level 2: Level 1 information, plus sales tax and transaction data field (usually 16 characters) providing information related to the transaction, such as an order number or an employee name.

Level 3: Level 2 information, plus other useful data (item product code, item description, quantity, price, and so on).

Level 3 reporting provides information usually found on a typical invoice. But even if the card issuer supports Level 2 and 3 information, some suppliers do not yet have the capability to input the required information because they are not willing to pay for the data entry and take the time to input the transaction data. Only about one-third of p-card purchases include Level 3 information.

Impact on business processes and auditing
In assessing a p-card project, managers and accountants must examine how existing payables process can be re-engineered, and evaluate opportunities to use information technology (IT) to support new processes. Computer-based information systems and reliable data transmission networks enhance the ways in which data can be collected, processed and disseminated: entries can be posted to the ledger via electronic data interchange (EDI) or similar networks. New software capabilities developed by card issuers now allow for the direct integration of all information related to each purchase with the accounting system. For example, MasterCard SmartLink software integrates p-card information with ERP systems such as SAP/R3. The software allows for merging of purchasing data with the general ledger system, which facilitates data analysis along with the generation of managerial reports for decision-making. As noted by Gamble (2003), this may also help firms comply with new governance and management control standards as set out in the Sarbanes-Oxley Act. (Section 404 requires that a firm's annual filing contain an internal control report, including a statement of management's responsibility for establishing and maintaining adequate controls.

Since the p-card reduces paperwork, it also reduces the clerical workload of the accounts payable department and frees accountants from the tedium of re-keying invoice data. This means firms can reallocate internal auditors and other employees in the payables department to more productive and challenging activities.

A largely untapped market
Some experts estimate that p-cards have captured only 25% of their potential market in terms of transaction numbers (Avery, 2003). Why have firms not yet considered this low-risk, low-cost IT solution? Firm size appears to be one factor. The larger the firm, the greater the impact of eliminating invoice processing. For example, the exhibit shows only 20% of firms with 100-249 employees use the p-card, while 45% of firms with 1,000-4,999 employees do so.

(adapted from Schaeffer, 2002, p. 191; IOMA survey)

Non-adoption can also be tied to non-acceptance of reengineering projects. Searching for ways to make improvements is challenging, and it must be promoted within the firm. If it is not, a proactive response might be to take the lead and demonstrate p-card benefits to management — something that might be expected from a vigilant professional accountant. The AICPA (2000) study notes that the p-card is used more extensively when the benefits have been demonstrated to management.

Among other barriers to p-card use are managers' concerns about keeping spending within budget and their fear that employees will pay too much for goods, make duplicate buys or purchase from non-preferred suppliers. Finally, managers satisfied with the traditional payment cycle prefer to maintain the status quo (Schaeffer, 2002).

Further studies are needed to evaluate the p-card's tangible and intangible benefits. So far, information has been collected through surveys; but this should be corroborated through interviews, observation and examination of system documentation. Also, studies on the p-card have come mainly from the US, but the card has not been introduced everywhere at the same time, so there are differences in implementation and use. For instance, the p-card was introduced in Canada three years after its appearance in the US (Hintz, 1998). Finally, all benefits and costs of the p-card are not easy to quantify. Intangible benefits such as improved decision-making, better control or better quality of information should be considered in the list of benefits. More robust assessment of p-card use in cost reduction and other organizational benefits is required.

Nevertheless, it's clear that p-card technology has great potential. By streamlining the purchasing process, it allows accountants and other employees to engage in more productive and challenging activities. It can also encourage them to take a look at other accounting processes and how they might be transformed through technology. This one small card, in effect, can be part of a company-wide paradigm shift.

References

S. Avery, "Purchasing Drives Enhancements," Credit Card Management, vol. 132, no. 2, 2003, pp. 31-33.

J. Fargo, "The Battle for B2B Payments," Credit Card Management, vol. 14, no. 3, 2001, pp. 36-44.

R. Gamble, "P-cards Head Higher," Business Finance, August, vol. 9, no. 8, 2003, pp. 37- 42.

K. Hintz, "Put It On My Card," CMA Management, vol. 72, no. 3, April 1998, pp. 18-21.

R.J. Palmer, "Survey Shows How Purchase Cards Can Save Time, Money," Journal of Accountancy, May, vol. 189, no. 5, 2000, pp.18-19.

M.S. Schaeffer, Essentials of Accounts Payable, John Wiley & Sons, New York, 2002.

Related articles
AICPA Corporate Purchasing Card Benchmark Survey Results, 2000
www.aicpa.org/pubs/cpaltr/sep2001/supps/audit3.htm