The purposes of having financial authority norms are the following.
· To serve as a guideline that clearly outlines the authorities /responsibilities related to financial decision-making.
· To serve as a document that enables financial controls, transparency, and accountability in the organisation across all functions
· To ensure clarity and timely decisions.
· To serve as a structured manual to minimize risks of unethical activities
· To facilitate the implementation of the budgeting process and compliance culture
· To facilitate empowerment culture, enabling focus on value-adding activities by senior hierarchy.
This blog includes the following aspects related to financial authorisation.
AA) The standard payment remittance methods and Segregation of duty approach to prevent unethical activities
BB) List of 11 (eleven) activities -for Developing authorisation norms or manuals for all functions -
CC) Template 1 For authorization norms for the purchase function -1illustration
DD) Template 2 for authorization norms for the sales & marketing function- 3 illustrations
EE) Template 3 for authorization norms for activation of various documents in ERP-2 illustration
FF) Template 4 Authorisation and activation of PO/Agreements (by F&A team)originating from Finance and accounts function+ Journal Vouchers -2 illustrations
GG) Template 5 authorization norms for payment release PV+ Payment realisation against sales invoices the F&A function-2 illustrations.
HH) Activities(including unethical) that can affect business adversely.
AA)The standard payment remittance methods
The standard payment remittance methods for imports are summarised below.
· Through Irrevocable LC opening by the importer in favour of the beneficiary (vendor /exporter/)
· Payment through Bank using SWIFT
· Net banking /Online banking or Internet Banking directly by the importer
· TT/Telegraphic transfer
· Documentary collection(Payment documents received through bank)
· Open Account(Payment documents obtained directly by the importer)
· Cash in Advance in Foreign currency (FC) notes
· International Credit card /Debit card
· Traveler’s cheques issued by reputed International banks
· And so on
The standard payment remittance methods for local buying are summarised below.
· Net banking /Online banking or Internet banking
· Bank transfer -IMPS,NEFT (IFSC codes)
· UPI – Unified Payment Interface(UPI)-
· Bank cheques or Demand draft
· LC -Letter of credit
· Buyer’s Cheques
· Debit cards or Credit cards
· Cash
· And so on
The buyer and seller must decide on a mutually acceptable payment method and make it a part of the purchase order or agreement to be jointly signed.
In addition to viewing this article, the professionals can also listen to my video on the subject as per the link below.
More details are also available in my book on Amazon below.
Paper back-amazon link: India
Paper back-Amazon link-Global
BB) List of 11 activities -for Developing financial authorisation norms
Activity 1
Providing policy directions/directives to CFO and HODs regarding empowerment based on the risk appetite- Responsibility: CEO/MD
Activity 2
Designing Structure/contents of the authority document /manual ( please refer to templates below) Responsibility: CFO
Activity 3
Identifying function-wise workflows and documents of each function that need to be authorised. Responsibility: CFO +HOD of each function
Forty-six (46) examples of high-value financial documents vis-a-vis workflows in each function are listed below.
Purchase or materials functions: (4 documents)
· Purchase order or & agreement or & contract or & service order for buying of inputs like the bill of materials or consumables or consultancy services
· Invoices of vendors, consultants or, contractors or, service providers, or business
· LC opening requisition documents
· Imports duty documents like Bill of entry
Sales & marketing functions : (6 documents)
· Channel partner engagement letters/agreements
· Agency commissions of authorized channel partners
· Incentive claims of channel partners
· Debit notes or expense claim vouchers of channel partners or OEM/other
· Warranty claims of the above entities
· Purchase order or & agreement or & contract or & service order for buying of
Manufacturing or engineering functions (3 documents)
· Purchase order or & agreement or & contract or & service order for buying of
· Outsourced manufacturing or assembly operations
· Preventive Maintenance services related
Quality control/Quality assurance functions (2 documents)
· Purchase order or & agreement or & contract or & service order for buying of QC equipment or gauges and instruments, etc
· Outsourced inspection/testing services
IT/ERP /software (3 documents)
· Purchase order or & agreement or & contract or & service order for buying of
· ERP software & and implementation annual support licensing fees, and all other
· Outsourced software development services
HR function (4 documents)
· Letters towards Appointments, Promotions, retirements, Terminations etc
· Payroll computation-related documents prepared in-house or by outsourced
· Entitlement-related claims of employees in any function
· Hired (non-permanent)manpower for any function
Administration functions (1 document)
· Purchase order or & agreement or & contract or & service order for buying of
Legal functions (5 documents)
· Agreement or & contract or & service order for hiring of outsourced
· Bank Guarantees, Performance Guarantees, Bonds, or Undertakings for
· Penalties and fines
· License fees
· Power of attorneys/ MOU’s
Finance & Accounts function –(12 documents )
Purchase orders or agreements or other accounting documents etc related to the following)
· Consultancy
· Borrowings
· Treasury investment-
· M&A
· Joint Ventures
· FDI
· Banking
· Stock exchange
· Regulatory bodies & Taxation
· Invoices raised by the company
· Overheads related journal vouchers
· Payroll/reimbursement journal vouchers
. In the ERP-SAP, 12 types of accounting documents are
· Vendor Invoice-(AP)=KA,
· Vendor Invoice-(AP)-Credit notes by vendor rejection etc=KR,
· Vendor payment=KZ
· Customer invoice-(AR)=RE,
· Customer payment=RV,
· Customer credit note=RG
· General Journal Entry=SA,
· Bank transfer =TR,
· Purchase order =BS,
· Goods receipt=WE
· Assets acquisition=AB,
· Assets retirement=RA
Construction project functions (4 documents)
· Purchase orders for buying of construction materials
· Agreements or & contracts for civil, interior, and MEP/engineering packages
· Agreements or service orders for engaging engineering consultants, liaison
· Statutory fees/payments for construction projects
Common to all functions (2 documents)
· Invoices raised by any business entity not included above
. Debit notes or Reimbursement claim vouchers of the business associates or entities listed above
Activity 4
a)Identifying corresponding financial workflows & documents that need to be authorized in ERP, as applicable vis a vis functional documents mentioned above in each function. Responsibility: CFO
A few of these are listed below.
· Workflow for each of the business activities needing financial activation in ERP /software
· Corresponding account types and accounting Documents that need approval vis vis
Purchase vouchers
Journal vouchers
Sales vouchers
Debit notes/Claims
Activity 5
a)Proposing authority norms for each of the above documents in consultation with the HOD of each function. Responsibility: CFO
b) Ensuring segregation of duties while proposing these norms based on
· Size of organisation,
· Hierarchical levels & positions
· Complexity of business processes
· Degree of automation
· The risk appetite of the company
· Ethical environments /culture in the company
c) Authority levels should preferably be level/position-based rather than employee names due to the dynamic movement of employees like promotions, transfers, exits, retirements, etc.
d) Review of the authority document by a cross-functional team comprising all key functions to ensure there will be no conflicting situations while implementing authority documents
Activity 6
Approval of authorisation document as above in consultation with CFO and concerned HOD of the respective function. Responsibility: CEO/MD
Activity 7
Maintaining controlled original approved financial authority documents or financial authority manual. Responsibility:CFO
Activity 8
a)Controlled circulation of the CEO/MD approved financial authority document through hard copies or soft copies to HOD of respective function for implementation Responsibility: CFO
b) Forwarding a copy of the CEO/MD approved document to HOD-IT/ERP for planning workflows and embedding these in business processes in the respective modules like
· MM-Materials management workflows
· Sales and distribution workflows
· PP-Production planning
· HR-Human resource management
· FI-Finance and accounts
And so on
Activity 9
Ensuring that authority documents become a part of the SOP of each function
Responsibility: HOD-Each function
Activity 10
. Periodic review of the above authorisation norms based on :
· Changes in business activities or new additions to business process activities
· Changes in documents or new additions to documents
· Changes in organisation structure in terms of hierarchical levels/positions
Obtaining fresh approval from the CEO/MD and recirculation of controlled copies
Responsibility: CFO
Activity 11
a)Software programming or using workflows (in addition to or alternate to hard or soft copies) in IT/ ERP package solution to incorporate all empowerments mentioned above with inputs from the CFO
b)Getting such workflows tested and approved by respective HOD+CFO
c)Providing training to all key team members nominated by HOD for smooth implementation of the authority norms
Responsibility: HOD-IT/ERP
CC) i) Template Illustration of 5(five) authorization Templates as below to be populated as per activities mentioned above :
CC ii) A Robust system must ensure that the segregation of duty approach is followed to minimize risks of unethical activities in the financial approval system. C
CC iii)These concepts have been used extensively in 5 (five) templates, clearly stating the following.
· Who can initiate the transaction?
· Who can review/edit the transaction?
· Who can approve the transaction?
CC Iv) Template 1- For authorization norms for the purchase function -1illustration
Descriptions/Documents to be authorised column 1 | UOM in colum 2 | Currency colum 3 | Financial limit colm 4 | Initiated by colum 5 | Reviewed by colum 6 | Approved by colum 7 |
1a. Purchase order for individual Bill of materials -BOM or aggregates (items that make the product), including orders on job workers & subsequent amendments in rates or terms within the purchase policy (Highlighted in note ) terms | Rate/unit | Rs | 10 | Senior Officer | Deputy Manager | Manager |
do | Rate/unit | Rs | 10-100 | Deputy Mgr | Manager | Deputy General Manager |
do | Rate/unit | Rs | 100-500 | Manager | Deputy General Manage | General Manage |
do | Rate/unit | Rs | >500 | Deputy General Manage | General Manage | Director |
1b. Purchase order for individual Bill of materials items beyond 1 year of consumption or outside purchase policy terms | Rate/unit | Rs | 4 slabs as above | one level higher for each line as above | one level higher for each line as above | one level higher for each line as above |
and so on lines can be inserted for 2.non-BOM items, 3. Agreements or contracts, consultants, 4. Invoices of vendors of all types | Rate/unit | Rs | to evolve | to evolve | to evolve | to evolve |
Notes to the above template 1:
1. The descriptions/documents, values, currency, etc., indicated in columns 1, 2, and 3 are only for understanding. Organizations can indeed amend these at their absolute discretion.
Separate norms can be for different currencies. Different hierarchical norms can be prescribed for approving PO of different categories of items like steel, aluminum, electronic, proprietary…..etc
2 The financial limit in col 4 is hypothetical and can be amended at the discretion of the CFO/Management
3 The designations in columns 5,6 &7 are hypothetical and will be at the discretion of the organization, based on how lean the organization
4 Purchase policy may include aspects such as: a). Advance payments without Bank guarantee, b) Comparative quotes, c) Credit periods, d) Prior-Sample approval, e) Buying from a single source, f) Air freight, g). Order quantity beyond I-year consumption, h) Buying of discontinued items, etc., i) Cash purchase limits, j) Warranty, and so on
5. Standard Agreement may include aspects/terms relevant to buying of material.
D) Template 2 for authorization norms for the sales & marketing function: 3 illustrations.
Descriptions/Documents to be authorized. | UOM | Currency | Financial limit | Initiated by | Reviewed by | Approved by | |
Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | Column 6 | Column 7 | |
1a Channel partner engagement letters/MOU or agreements with -Policy guidelines (Highlighted in note 1)for such engagement | na | Rs | Within policy norms | Area Manager for the territory | Regional manager for the territory | Head of sales | |
1b-Any Deviation to policy (e.g., evaluation score, investments, size, infrastructure, etc ) Rs | na | Rs | Deviations To policy | Regional manager for the territory | Head of sales | CEO/MD+CFO | |
2a-Agency commissions to authorized channel partners- as per Agreement and policy guide line as per note ) | % or Amount per unit of sale price | Rs | % or amount to be prescribed | Sales staff | Area. Mgr -sales | Regional manager-sales | |
2b-Any Deviation to policy( e.g. % or amount/unit or no/incomplete remittance to company or earlier than credit period or product billed but held back etc) | do | Rs | do | Area. Mgr -sales | Regional manager-sales | HOD-Sales +CFO | |
3a-Incentive claims of channel partners- In accordance with authorised incentive scheme and evidence of accrual of sales benefit and accomplishment of targets | do or Incentive in Kind | Rs | do | do | do | HOD-Sales | |
3b-Claims in deviation to authorised incentive scheme | do | Rs | do | Regional manager | HOD-Sales | CEO/MD+CFO |
Notes: 1,2,3 are precisely similar to those in template 1 and hence not being duplicated
4 Channel engagement policy may include aspects related such as a) Minimum score on standard evaluation parameters for agency, b).Size of plot/building/layouts c) Investment norms for Building infrastructure for sale of products d) Investment norm for After-sale service infrastructure e) Skilled Manpower norms f) Initial Spares buying value norms g) Spares stocking policy norms h) Signage /Display standards investments /norms i) Financial security deposit j) Experience in similar dealership k) Territory for sale /service l)Product models permitted m) % commission payable on net sale value or Rs/unit sold and so on
5. Guidelines for the Agency Commission may include aspects like a). % commission payable or Rs /unit sold b) Evidence of shipment. Received by customer c) Sale realization amount transferred to company d) Selling price invoiced to customers as per approved lists e) Sales return within prescribed period f) Credit period on agency commission.
6. Standard Agreement/PO may include aspects/terms related to sales and marketing
EE) Template 3 for authorization norms for activation of various documents in ERP software: 2 illustrations
Descriptions/Documents to be authorized. | UOM | Currency | Financial limit | Initiated by | Reviewed by | Approved by |
Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | Column 6 | Column 7 |
1Activation of approved PO/Agreements in the ERP/SW for release of payments towards Supply of :
Other expenses /reimbursements | value | Rs | up to 5 Lac | Staff -Purchase acct function | Asst Mgr. Purchase acct function | Deputy Mgr. Purchase acct function |
do | value | Rs | 5-25 Lacs | Asst Mgr. Purchase acct function | Deputy Mgr. Purchase acct function | Mgr. Purchase acct function |
do | value | Rs | >25 Lacs | Deputy Mgr. Purchase acct function | Mgr. Purchase acct function | Senior Mgr. Purchase acct function |
2 Activation of approved agreements of MOU/Channel partner, Dealer or Customers /client towards Sale of products, spares, rendering of services for payment release towards
other expenses/reimbursements | value | Rs | Up to 5 Lacs | Staff -sales acct function | Asst Mgr. Sales acct function | Deputy Mgr. Sales acct function |
do | value | Rs | 5-25Lacs | Asst Mgr. Sales acct function | Deputy Mgr. Sales acct function | Mgr. Sales acct function |
do | value | Rs |
| Deputy Mgr. Sales acct function | Mgr. Sales acct function | Senior Mgr. Sales acct function |
Notes
4. For segregation of duties & simple understanding, three types of sub-functions have been assumed and, accordingly, designations indicated in the above table.
Those dealing with purchase-related matters are Titled here as “Purchase Account.”
Those dealing with sales & marketing-related matters are titled “Sales Account.”
Those dealing with all matters other than the two above are Titled here as General ledger –“GL Account.”
Of course, organizations can add more/delete/edit such designations.
5. The PO/Agreements that have not been approved as per approved authority norms must not be activated in ERP/SW till amended
6. It is desirable that all PO/Agreements beyond a threshold value, say beyond Rs 1 Lac, are also vetted by the Legal & secretarial team
FF) Template 4 Authorisation and activation of PO/Agreements (by F&A team)originating from Finance and accounts function+ Journal Vouchers: 2 illustrations
Descriptions/Documents to be authorized. | UOM | Currency | Financial limit | Initiated by | Reviewed by | Approved by | |
column 1 | column 2 | column 3 | column 4 | column 5 | column 6 | column 7 | |
Consultancy related 1a-Agreements with Advisors, Consultants or & legal advocates or & investment brokers or & merchant bankers or & underwriters or & Registrars etc | Value | Rs | up to 5 Lac | Sr Mgr. Corporate Accounts function | DGM. Corporate Accounts function | GM Corporate Accounts function | |
do | Value | Rs | 5-25Lac | DGM. Corporate Accounts function | GM. Corporate Accounts function | CFO | |
do | Value | Rs |
| GM. Corporate Accounts function | CFO | CEO | |
1b)-Activation of above approved agreements in ERP/SW for payment release or investments | Value | Rs | Amount to be prescribed or any | Dy -Mgr. Corporate Accounts function | Mgr. Corporate Accounts function | Sr-Mgr. Corporate Accounts function | |
Borrowings/investments related. 2a) Preparation of proposals or & Bids, Negotiations & approval of agreements such as below as per policy direction of board sub-committees:
And so on | Value | Rs | Amount to be prescribed or any | GMCorporate Accounts unction | Head Legal & Secretarial and Heads of relevant functions | CFO+CEO | |
2b) Deviation to the above | Value | Rs | Any | CFO | CEO | Board sub committe | |
2c)-Activation of above-approved agreements in ERP/SW for payment release or investments | Value | Rs | Amount to be prescribed or any | Dy -Mgr. Corporate Accounts | Mgr. Corporate Accounts | Sr Mgr. Corporate Accounts |
Notes:
Point 1,2,3 are exactly similar to those template 1 and hence not being duplicated
4 PO/Agreements are not to be activated if these are :
Not approved as per functional authority norms or
PO/Agreements contain clauses which don’t conform to statutory requirements or
PO/Agreements contain clauses that don’t conform to documented corporate policies.
5. The descriptions/documents mentioned above, as well as the values and levels/designations indicated, are only for understanding. Organizations can amend both of these at their absolute discretion.
GG). Template 5 authorization norms for payment release PV+ Payment realisation against sales invoices the F&A function: 2 illustrations.
Descriptions/Documents to be authorized. | UOM | currency | Financial limit | Initiated by | Reviewed by | Approved by |
Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | Column 6 | Column 7 |
1a Payment vouchers for payment release to vendors, contractors, consultants subject to 3-way matching of:
This includes purchases initiated by any functions | Value | Rs | up to 5 Lac | Staff -Purchase acct | Asst-MgPurchase acct | Staff -Purchase acct |
do | Value | Rs | 5-25Lac | |||
do | Value | Rs | >25Lac | |||
2a. Sales voucher for payment realisation against invoicing of products or spares or services to direct customers or channel partners subject to 3-way matching of:
Invoicing as per approved Prices/credit and shipping terms | Value | Rs | up to 5 Lac | |||
do | Value | Rs | 5-25Lac | |||
do | Value | Rs | >25Lac |
HH) Activities(including unethical) that can affect business adversely
The Involvement of respective HODs in developing authority norms is low
Authority norms proposed are skewed in some of the functions in favour of some individuals
Authority norms do not factor in the following
Size of organisation
Hierarchical levels & positions
The complexity of business processes
Degree of automation
The risk appetite of the company for empowerment
Ethical environments /culture in the company
Uncontrolled financial authority documents/manuals are available in some of the functions.
The workflow developed is not robust, or workflow is not pre-tested/approved by user functions.
The list of workflows and documents identified is not comprehensive.
Actual approval is done by someone lower than mentioned in the authority document.
Periodic updating of authority documents is not done.
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