Transforming Purchase Cards

By: Thomas J. Sadowski, CGFM, CPA

Thomas J. Sadowski, CGFM, CPA, a member of AGA’s Mid-Missouri Chapter, is the Missouri state controller. He is an AGA Past National President and a two-time Past National Treasurer.

How can you transform your use of purchase cards from just a credit card to a program that streamlines operations while providing better control and better data?

I think it is most helpful when thinking about a purchase card to not think about it as a credit card or a specific payment instrument.

Go back to the essence of what is occurring. Governments need things to operate. Sometimes these are big things like buildings, vehicles and large software systems. Typically, there is a whole development and acquisition process to design and acquire these items. Payment is a relatively minor part of the process, although the dollar amounts can be quite large.

More typically, governments acquire hundreds or thousands of different things, quite often small in cost individually, but often significant when viewed collectively.

When the items lend themselves to it, the government has three options:

• Obtain bids for specific items such as computers. If the bids are exclusive, meaning the government will only buy off of a contract, the government often gets favorable terms, especially on price.
• Contract with one or more vendors to provide a variety of items on favorable terms, for example, a specified discount. An example might be getting 10 percent off all items purchased through an office supply company.
• Allow employees to purchase at vendors of their choosing. There is convenience to the employee but the government foregoes the advantage of combined purchasing power.

These are often referred to as small dollar purchases.

There is no simple one-size-fits-all rule. Organizational rules, culture, systems and processes come into play. Also, a government may employ a combination of these strategies in its procurement processes.

There is a whole other area where government spends money but which often does not lend itself to traditional procurement processes. These are typically services such as subscriptions, registrations, airfare, lodging, etc. For these items the emphasis is on payment versus procurement because there typically is little room for negotiation on price or terms. If you want to buy a professional journal, attend a conference or buy a plane ticket, here is the price.

The issue in many governments is that the traditional payment process is involved and labor intensive. This is where a purchase card comes into play. It is simple to use and quite versatile. Often you can use it for payment in any of the small dollar purchase or services scenarios outlined above. For example, in Missouri, you can use the card to buy off of contract in lieu of a purchase order or to reserve and pay for a rental vehicle using a online link to our contracted agency.

The purchase card enables you to combine hundreds or thousands of individual transactions into one or a few accounting transactions.

Having made the case for efficiency, let’s turn to risk management. If we don’t control risk, the real savings from reducing the cost of doing business may be jeopardized or overwhelmed by the real risks of fraud and abuse or loss of reputation if abuses occur and are not timely resolved.

As with all effective control systems, you need controls that both prevent bad things and detect bad things when they slip through your first line of defense.
Examples of prevention controls are transaction and period dollar limits and restrictions on merchant category codes. Examples of detection controls are cardholder and approver review of transactions and monitoring of transactions after the fact, such as using software tools to detect anomalies.

It is my assertion that a properly designed purchase card program has no greater inherent risk than regular invoice payment processes.

It has been said of democracy that it is the worst form of government except for all the others. In my view, a purchase card is the worst form of payment except for all the others. The challenge for all of us—controllers, auditors and program staff—is to ensure we understand the risks and benefits of purchase cards.

What has been your experience with purchase cards? What have you seen in purchase card programs that has been truly innovative or a major disaster? What was done well or poorly?

TOMORROW: Wendy Payne, CGFM, CPA, executive director, Federal Accounting Standards Advisory Board (FASAB).

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