The Importance of Purchase Orders

Internal Audit (IA) (performed by PricewaterhouseCoopers) conducted a Procurement Business Process Review at Carnegie Mellon University as a part of the calendar year (CY) 2022 audit plan. This review was identified thru IA’s risk assessment process and selected due to the importance of the university’s procurement function and the inherent risk that purchasing brings.

In summary, results of the review included the following observations and opportunities:

1. Moderate Risk Rating: Lack of an effective process for identifying repeated policy violations to require buyers to create a PO before receiving an invoice increases the likelihood that invoices may not be paid timely, which increases the reputational and/or risk to the university that contractual obligation may not be met.
2. Low Risk Rating: Lack of risk-base, transaction level Purchasing Card (PCard) activity review.
3. Four process improvement opportunities.

Three business units were included in the scope of the review, looking at a twelve-month period. Results revealed 15.8% of POs, with a value over $9.2 million, were generated after the invoice was received.

PO Importance

The PO is a commercial source document when placing an order with a supplier. This document captures the details of the transaction (e.g., PO number, date of order, name of buyer and seller, quantity being purchased, item number, description of goods/services being purchased, statement of work including key deliverables and milestone dates, payment terms and schedule).

When the buyer issues the approved PO, and with acceptance by the supplier, the PO becomes a legally binding contract for both parties. The PO grants authorization to the supplier to commence efforts to ship or start the work. Additionally the PO serves as documentation to avoid any future dispute between the parties regarding the transaction.

In cases where an agreement is executed (where both parties have signed), the agreement is legally binding. It remains standard practice for a PO to be issued (referencing the agreement and any supporting documentations) after the agreement is executed, granting supplier authorization to initiate actions to fulfill the order.

From a commercial aspect of the transaction, having the PO issued also enables the supplier to process the invoice where a common requirement includes the supplier having the PO number listed to streamline processing. Sending an invoice without a PO number or reference of the order results in inefficiencies of receiving the good or service and for payment processing.

Any invoice that contains terms, or a reference to the supplier's terms, may render the CMU PO terms and conditions unenforceable. The University Contracts Office (UCO) must review all invoices without a PO prior to processing of payment.

Policy and Procedures Reminder

As a reminder, the university Purchasing Policy states, under Purchasing Methods, section A. Purchase Order (PO):

• POs should be issued prior to the receipt of goods or services from a vendor. It is imperative to complete a PO prior to the receipt of the invoice to create a legal contract between the supplier and the university and to ensure goods/services are delivered in accordance to university terms and conditions or an applicable contract. The PO released to the vendor will reference the terms and conditions, which state that payment should not be remitted to any invoice that does not reference a PO number.

Additionally, the Procurement Manual states, under section 6.2.3, Roles and Responsibilities: PO Buyer: Prior to placing an order with a supplier, it is the responsibility of the Buyer to ensure that the below actions are completed:

• submit PO for approval in Oracle, print approved PO and provide to supplier

Exceptions

The following payments that do not originate with an invoice have been identified as approved exceptions:

• Donations
• Royalties
• Honorariums

University Action

To address the risks identified in the Procurement Business Process Review, Procurement Services has identified the following actions:

1. Clearly communicate the requirements and importance of issuing PO’s prior to an invoice through targeted email communication to key stakeholders.
2. Conduct a quarterly review of POs compared to their respective invoices and inform units of instances of non-compliance where invoices were received prior to PO release. This review process was initiated in July 2022.
3. Develop an escalation process for repeated non-compliance. Units with two consecutive review periods with non-compliance will be required to develop an action plan for PS review within 30 days of notification to address the non-compliance. After two review quarters, PS will assess to determine if the desired results of the action plan have been achieved.  If not, the Vice President for Finance and Chief Finance Officer will be notified. The escalation process will be implemented in April 2023.
4. Update the Procurement Manual to reflect the exceptions, quarterly review, and escalation process.
5. Review feedback collected at March Administrative Leadership Group (ALG) meeting and investigate potential solutions.  

Individual buyers and units must ensure compliance with the Purchasing Policy by issuing university POs prior to the receipt of goods or services from a vendor.  

Thank you for your support and collaboration.