Purchase Order Amendments: The Approval That Quietly Gets Undone

By CA Dhruv Seth, Seth & Associates, Chartered Accountants, Lucknow

A promoter approves a purchase order for Rs 4 crore. Eighteen months later the ledger shows Rs 5.9 crore paid to that vendor against the same order. Nothing was hidden. The purchase order was amended five times, each revision cleared by the buyer's reporting manager, and none of them ever came back to the promoter. The original approval was genuine. It simply stopped being the number that governed the spend.

Purchase order amendments are the most common way an approval limit is undone without anyone breaking a rule. In businesses scaling past Rs 100 crore of turnover, the delegation of authority is almost always written for creating a purchase order and is silent on revising one.

Why purchase order amendments escape the approval matrix

Two design flaws do most of the damage. First, the delegation of authority is drafted in terms of "value of purchase order" without saying whether that means the original value or the cumulative revised value. Second, the ERP is usually configured to route an amendment on the incremental value alone, or to send it back to whoever approved the original, which on a small original order is a junior. A Rs 40 lakh order that grows to Rs 3 crore through six revisions of Rs 45 lakh each never touches a director.

Ask for one report: every purchase order raised during the year with its original value, final value, number of revisions and the approver of each revision. Most ERP systems hold this data. If yours cannot produce it, that is itself the finding.

Five amendment patterns worth testing

• Value creep: cumulative revised value exceeding the original by more than 15 per cent, particularly where each individual revision sits just below an approval threshold.

• Post-receipt amendments: the revision date falls after the first goods receipt against that order. This is not procurement; it is paperwork catching up with a decision already taken.

• Rate revisions with no price basis: quantity unchanged, rate increased, and no reference to an escalation clause or a fresh comparative statement.

• Delivery date extensions: each one quietly extinguishes the liquidated damages the original contract entitled you to recover.

• Changes to vendor, bank account or bill-to entity on a live order. These should not be amendments at all; they should require a fresh purchase order.

The single most useful test

Compare the amendment date with the date of the first goods receipt note against that order. Where the receipt precedes the amendment, the business did not decide and then buy; it bought and then decided. In a well-run function this should be a handful of genuine emergency cases a year, each with written justification. Where it runs to 20 or 30 per cent of amendments, the purchase order has stopped being a control document and become a record-keeping formality.

A related test: short or rejected receipts followed shortly by an upward quantity amendment. That combination often conceals quality failures being absorbed as fresh purchases rather than recovered from the vendor.

Where the money actually leaves

Two areas repay attention. Liquidated damages first. Pull the delayed deliveries for the year and check how many had damages recovered against how many simply had the delivery date amended. Most businesses find the second number far larger, and the amendment is usually approved by the same person who would have had to raise the debit note.

Price escalation second. Where a contract permits escalation linked to a published index or a defined input cost, verify that the amended rate was computed on that formula and not accepted on the strength of the vendor's letter. Neither test is exotic. Both are ordinary commercial discipline, and both erode when a buyer and a vendor have worked together for years.

Fix it in the system, not in the audit report

• State the delegation of authority in terms of cumulative revised purchase order value, so that revisions aggregate against the original approver's limit rather than resetting it.

• Configure the ERP to block amendment of quantity or rate once a goods receipt exists against that line, and force a fresh order instead.

• Require a reason code on every amendment from a fixed list, and review whatever lands in the "others" bucket every month.

• Circulate a monthly exception report to the CFO covering every order amended more than twice and every amendment above 10 per cent of original value.

For companies where internal audit is mandatory, being listed companies and unlisted companies crossing the thresholds in Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies (Accounts) Rules, 2014, this sits squarely within scope. An audit committee constituted under Section 177 is entitled to see the exception report itself, not only the auditor's conclusion about it.

The bottom line

• An approval limit means little if the document it approved can be revised without returning to the same authority.

• The most revealing procurement report is not the purchase register; it is the amendment log.

• Any amendment dated after the goods were received deserves a written explanation.

• Extended delivery dates are usually waived liquidated damages in disguise.

• Ask your CFO for last year's purchase order amendment log. Whether one exists at all tells you most of what you need to know.

This article is for general information and does not constitute audit, legal or tax advice. Regulations change; please verify the current position or speak to a qualified adviser before acting.