If I say that Vendor Master file is the bible for auditing accounts payable, I really mean it! The reason is that this file contains loads of relevant information that you may need for auditing accounts payable.

The vendor master file, also known as the supplier master file, is a database of vendors. It contains detailed information like the vendor’s name, the unique ID number which is assigned to the vendor for reference, contact information (such as address, phone number and email address), payment terms,  bank account details, tax identification number, and contract details (including details of the goods and services supplied to the company and records of other documents such as compliance certificates and insurance, etc.).

The vendor master file is essential for auditing accounts payable, and it is crucial for the company to maintain a clean vendor master file. It is also important for the auditor to check the reliability and accuracy of the data in the vendor master file before moving forward.

Why is the Vendor Master File Important – A Brief Discussion

Here’s why a clean vendor master file is crucial. Let’s dig down deep.

Ensures Accurate Financial Reporting:
A clean vendor master file ensures accurate and reliable financial reporting. Financial reports reflect a company’s liabilities, expenses, and cash flows. Misinformation and inaccuracy in the vendor master file leads to errors in financial statements, which will ultimately affect decision-making and compliance for the company. Therefore, auditors should thoroughly check the accuracy of the data present in the vendor master file.

Helps the Company Ensure Compliance and Risk Management:
Companies are required to follow many regulatory requirements in today’s business environment. For example, tax laws, anti-money laundering regulations, and vendor due diligence standards.  In order to maintain an accurate vendor master file, companies ensure vendor due diligence and adhere to other regulatory requirements as well. A clean vendor master file ensures better vendor verification and reduces the risk of fraud and forgery in the long run.

Efficient Procurement Processes:
A well-maintained vendor master file facilitates transparent procurement processes because it provides updated vendor information, such as contact details, bank details, and payment terms. This reduces the chances of delays, errors, and duplicate payments, thereby making the operations more efficient.

Foster Healthy Relationship with Vendors:
A vendor master file contains all-inclusive information about the vendors and their performance, and it helps companies to maintain strong relationships with the vendors.
Moreover, with the help of this master file, companies can better negotiate with their suppliers, resolve disputes effectively, and collaborate on different strategic initiatives.

Tool For Data Analysis and Insights:
A clean vendor master file is a resourceful tool for data analysis and reporting. Companies can utilize this valuable data to get insights, analyze trends, assess suppliers’ performance, optimize procurement strategies, and make informed business decisions.

Serves as an Audit Trail:
A clean vendor master file serves as an audit trail. It documents vendor transactions and interactions which are required for auditing accounts payable. It is a useful audit trail for other internal audits, regulatory compliance audits, and to investigate financial discrepancies.

But Why do Mistakes Happen?
Your vendor database may have started off organized, but it can become full of mistakes over time.

There are various reasons why your vendor master file may be cluttered and inaccurate. One of the major reasons is human error. Keeping up with changes in vendor details like addresses and banking information is important and challenging as well.

If the company works with a high volume of vendors and lacks strict controls, this increases the likelihood of errors in the vendor master file.  
In some companies too many individuals enter or change vendor details without proper validation, and with inconsistent naming conventions (e.g. abbreviations, periods, spaces, dashes, etc.).
Research reveals that up to 25% of vendor details across various databases are inaccurate, incomplete, or duplicated.

Understanding the Impact of Inaccuracy

An inaccurate vendor master file can lead to payment issues. These issues can include duplicate payments, payments to the wrong vendors, overpayments, and fraud. Ultimately, failure in this area can result in penalties, fines, legal actions, damage to the good will, or financial losses. Moreover, the regulatory non-compliance can also impact relationships with stakeholders.

How to Clean Up Your Vendor Database
We know that it is quite challenging to eliminate human error entirely. However, there are a few steps you can take to reduce the risk of errors. So, here’s how you can do it:

Identify and Remove Duplicate Entries:
Check your vendor master file for duplicate vendor entries, as they can lead to duplicate payments and coding issues. We have found that 30% of double payments arise from duplicate vendor entries. You can use coding techniques to differentiate between multiple payment sites or vendor numbers associated with the same entity.

Implement Automation Tools
We believe that automated checks are very important. We can implement automated tools for additions and changes to the vendor database when we are getting the vendors onboard. This will significantly reduce the chance of errors.

Archive Inactive Vendors
Higher numbers of active suppliers can create confusion during A/P data entry.  It is best to archive the information of the vendors whom you are not frequently dealing with. Remove them from the active vendor list to improve the accuracy of invoice processing and payments.

Ensure Data Completeness
Make sure that the information about the vendors is both accurate as well as complete. Obtain up-to-date information and update the vendor record if something is missing.

Establish a Vendor Self-Service Portal!
Consider the possibility of implementing a vendor self-service portal. The portal will allow the vendors to update their information and access relevant resources independently. It not only reduces the burden on your team, but also ensures complete and accurate data.