As a nonprofit auditor in North Carolina I often encounter incomplete vendor files and vendor on-boarding procedures.
A file should be set up for each vendor the organization uses to procure goods or services. A miscellaneous file is acceptable for vendors not used on a regular basis. The vendor invoices can be filed alphabetically in the vendor file or chronologically by month. We will discuss the advantageous of each method later.
The vendor file should contain any contracts between the organization and the vendor, a completed W-9, and the policies and procedures of the vendor such as the return policy, payment terms, etc. The W-9 should be used to set-up the vendor in the accounting system. The creation of the vendor in the accounting system should include the indication for 1099 requirement. Any vendor the organization pays $600 or more during the year is required to have a 1099 issued by the organization. Corporations are not part of this requirement; the W-9 will provide the entity type of the vendor as well as the tax ID number for filing the 1099s. Sometimes overlooked is the 1099 requirement for contest or raffle winners as part of the nonprofits fundraising activity. The recipient of a raffle or contest where the prize is greater than $600 is also issued a 1099. The organization needs to receive a completed W-9 for the winner of this type of fundraiser. I have had nonprofit audit clients who were assessed taxes for the prize since a W-9 was not obtained by the organization.
Alphabetical or chronological depends on what works best for the organization. The chronological filing system is simple; it does not require sorting so it helps to reduce large piles of unfiled invoices.
With this method you have file folders that are divided into time periods; typically the 12 calendar months. If the organization has very few transactions, the files could be set-up quarterly. At year end you transfer the 12 (or 4) folders into a storage box accessible for researching a billing discrepancy or for future audit. Alphabetical vendor files are more convenient for researching billing issues with a vendor. The bookkeeper can go directly to the vendor file and view the previous invoices and items ordered and paid for. No matter what filing system is used, the vendor invoices should be cross referenced to the accounting system. Being able to identify and pull invoices for audit field-tests will make the audit process smoother.
A useful tool to the alphabetically filed vendor invoices is a listing of vendor invoices paid that month. This should be obtainable from the electronic accounting system and not have to be maintained manually. Unpaid vendor invoices maintained in a separate file until they are processed helps organize the process. The unpaid invoice should be matched with the payment and sent to the check signor for verification of payment amount and correct vendor. Each invoice should then be stamped as paid before it is filed.
A vendor on boarding process should be documented and approved by management. A checklist is useful in setting up new vendors and should include the items to be included in the file as well as the process for entering into the electronic accounting system.
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