I was talking with a client recently and they mentioned how they misapplied a payment received from Customer A to Customer B. From time to time this happens in every organization, especially if company names are very similar. However, if Customer B sends in their payment timely, then usually the misapplied payment can be quickly discovered, no harm no foul.
The problem in this case is that Customer B didn’t send in their payment and the misapplied payment received from Customer A was overlooked. I inquired as to how this could happen for so long and the reply was quite interesting.
Since Customer A has been a long time and on-time paying customer, the collection person reviewing the past due accounts receivable report kept only seeing Customer A’s name and not that the account was becoming past due. In other words, the collection person had a mental block in which Customer A’s good name continue to overshadow the unpaid status.
When the payment misapplication was finally noticed and that it was Company B which was considerably delinquent, the first step was to call immediately for payment. Surprisingly, it turned out that the reason for non-payment was that the invoice had not been received. This seemed a little strange since my client’s operation always sends the invoice by both email and regular mail.
However, it turned out to be true that Customer B did not receive the invoice and that was due to a glitch when the product was shipped out, which would have normally triggered the issuance of the invoice.
Although this situation reflects a confluence of internal control errors, it also provided an important opportunity to not only correct the specific mistakes, but also to bring about a full-fledged internal control audit to uncover other possible gaps that could lead to payment misapplications or shipping and billing coordination mishaps.
Your comments are most welcome.
Nancy Seiverd, President, CMI Credit Mediators, Inc. (firstname.lastname@example.org)