Is it a best practice for the AR/billing departments of a company to process customer refunds through the AP department? Is it a segregation of duty issue if AR generates the refund out of the AR department via a P-card, etc.?

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It depends on a company’s philosophy and how it has set up its systems. A company should have controls in place on its P-card program as well as on its AP processes.

Many companies allow small refunds to be made by their business units or AR department(s) but require large refunds to go through their AP department. The exception to this would likely be if the customer paid via P-card—it is a fairly standard procedure to refund back to the card that was used to pay, although there may be dollar limits here as well.

The issue may be less about separation of duties and more about tracking—how  is the refund recorded and accounted for? How are things like escheatment handled if the customer doesn't cash the refund check? Is the customer also a vendor, in which case the refund might need to be applied against an invoice?

In one of our expert’s experience, all customer refunds over $50 were paid via check, regardless of how the original purchase was made.  The main reason they did this was refund fraud prevention and loss control—to ensure that the refund was valid and that all the appropriate paperwork was in place. They also tracked customers who made huge and frequent refunds. Their AP system reports could pull that. But their AR was decentralized in multiple locations so that refunds could not be tracked in that way. If AR is centralized, then tracking would be easier.

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