Split Purchase Orders: How Approval Limits Get Quietly Bypassed

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

You signed off on a delegation of authority matrix: anything above Rs 10 lakh comes to you, below that the purchase head decides. A sensible way to keep your desk clear as the business crossed Rs 300 crore.

Then someone pulls the purchase register and finds one vendor received four purchase orders of Rs 2.4 lakh each, raised over nine days, for the same material, delivered to the same plant. No single PO breached the limit. Every one was properly approved. You never saw the transaction.

That is a split purchase order, and it is the most common way approval limits are quietly defeated in owner-managed businesses.

Why splitting happens

Assume inefficiency before dishonesty. Buyers split because your approval takes eleven days and the plant needs material on Thursday, or because the budget was released in tranches, or because the vendor asked them to.

But it is also the classic cover for a buyer with an undisclosed interest in a vendor: a transaction that never reaches the owner never gets questioned. Either way the damage is identical - the spend escaped your review, and almost certainly escaped competitive quotation too, since the tender threshold was dodged in the same move.

How to detect split purchase orders in your data

This is a data pattern, not a matter of judgement - testable in a day, in any ERP, without opening a single voucher.

• Same vendor, same material or GL code, POs raised within a rolling 30-day window that together cross an approval or tender threshold.

• Value clustering: count POs falling between 90 and 99 per cent of each authorisation limit. A genuine purchase population is smoothly distributed; a manipulated one bunches just under the line.

• Sequential PO numbers issued to the same vendor on the same day.

• Multiple POs traced back to one purchase requisition, or to requisitions raised by the same person hours apart.

• Several small POs sharing a delivery location and delivery date.

The most useful request you can make: ask your CFO for a distribution of purchase order values in bands around each approval limit for the last two financial years. If there is a spike immediately below a limit and a cliff immediately above it, you have your answer in one chart.

The authority matrix is often the real culprit

Usually the buyer is responding rationally to a badly designed matrix. Look for:

• Limits fixed years ago and never revised. A Rs 10 lakh limit set at Rs 100 crore turnover is a very different instrument at Rs 600 crore. Set it too low and splitting becomes the only way to run the plant.

• Limits defined per purchase order rather than per vendor per period or on annual contract value. The former is trivially easy to game.

• The amendment loophole. A PO is issued within limit, approved, then amended upward. Unless the system routes amendments through the matrix afresh on the revised value, the original approval means nothing.

• An emergency or single-source route with no annual cap and no post facto ratification.

What to ask for

• Purchase order value distribution against each threshold, last two years.

• Vendors receiving more than, say, twenty POs in a year with an average value below your lowest approval limit.

• The amendment register: POs revised upward after approval, with the percentage increase.

• Emergency and single-source purchases as a share of total spend. Once that crosses ten per cent, the exception has become your process.

Then one question for your IT head: who can change the authority limits configured in the ERP, and where is the change log?

The bottom line

A limit you do not monitor is not a control; it is a document. Splitting is detectable arithmetic, so test for it before accusing anyone. When you find it, fix the matrix design and the system configuration, not only the buyer.

For companies with an audit committee under Section 177 of the Companies Act, 2013, evaluating internal financial controls forms part of its written terms of reference, and authority-limit breaches belong on that agenda. Where internal audit is mandatory under Section 138 read with Rule 13 of the Companies (Accounts) Rules, 2014, procurement deserves to be a standing scope item.

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.