Tighten up purchase ordering

THE PROBLEM

I run a medium-sized contract catering company and recently found a purchase invoice for £500-worth of goods that were neither requested nor even delivered to the company. Unfortunately, my accounts manager paid the money before it was brought to my attention. Is there any way I can recover the money and prevent such a situation occurring again?

THE LAW

Your question is one which relates to the law of contract.
A contract is an agreement between two or more parties that's binding in law. This means that the agreement generates rights and obligations that may be enforced in the courts.

There are three basic elements in the formation of a valid contract. First, the parties must have reached agreement (offer and acceptance), second, they must intend to be legally bound, and third, both parties must have provided valuable consideration, eg, delivery of goods in return for payment.

There's clearly no contract between you and the recipient of the money as the essential components needed for the formation of a contract have not been fulfilled. There has been no agreement (offer and acceptance), no intention to be legally bound and no valuable consideration by both parties.

EXPERT ADVICE

You should write a strongly worded letter to the recipient of the money requesting it back immediately. If there has been a genuine error then a refund should be forthcoming. If he fails to return the money, you would be able to start proceedings against him in a small claims court or pass the case to a reputable debt-collection agency to collect the money.

It's unclear whether this payment request was made as a result of an innocent error or fraud by the recipient. It's advisable, therefore, that you make all your staff aware of the possibility of errors or sharp practice on the part of suppliers. You may want to carry out an overall review of your purchase order system to ensure that this error/fraud doesn't happen again.

By improving your procedures you can minimise the likelihood of it occurring in the future. If unsolicited goods are delivered, you should refuse to accept them or, if they have already been accepted, ask the supplier to come and collect them.

If you don't do so already, it's a good idea to implement a system so that all deliveries and invoices quote a corresponding purchase order number. You should amend your terms and conditions of purchase to state that any goods ordered without a purchase order number will not be recognised as a valid order.

We also recommend that you limit the number of staff with the authority to sanction and process payments. If possible, pass everything through a purchasing department that has proper procedures in place to monitor purchases.

CHECK LIST

• Write a letter to the recipient of the money asking him to refund it immediately.

• If the money is not returned, start proceedings in a small claims court or employ a reputable debt-collection agency.

• Limit the number of individuals with authority to sanction and process payments.

• If you don't already, implement a system so that all deliveries and invoices quote a corresponding purchase order number.

• Retain an external adviser to review the checks and balances in the purchase order system that you currently have in place and advise on the best way of improving this system to ensure that error and fraud are eliminated.

• Regularly review the system and carry out spot checks.

  BEWARE!

  Sadly, companies can sometimes be the victims of fraud, so it's advisable to have good controls in your book-keeping methods to ensure that any payments are properly authorised.

  CONTACTS:

  Cynthia Barbor, partner Hotels Group Kirkpatrick & Lockhart Nicholson Graham 110 Cannon Street, London EC4N 6AR cbarbor@klng.com Tel: 020 7648 9000 Fax: 020 7648 9001