The ins and outs of shipping documents. (Auditing) (Column)by Highsmith-Quick, Gwendolyn
Bills of Lading
A shipping document that is widely used is the bill of lading. The auditor should be familiar with its various forms and the functions it performs.
1. The Bill of Lading serves as a Receipt for Goods. The bill of lading indicates that the shipment appears to be in good order and was marked, consigned, and destined as shown. The bill of lading should be signed by both shipper and carrier.
2. The Bill of Lading Identifies Contracting Parties and States Terms and Conditions of Agreement. These terms and conditions, referred to as the "heart" of the bill of lading, are presented on the back of the bill. Special rules or limitations are set forth in this section and should be considered by the auditor to determine liability for loss, damage, and delays.
3. The Bill of Lading May Serve as Evidence of Title. This is true for a "negotiable" bill of lading, sometimes called an "order bill of lading," where the holder of the bill may sell the bill of lading and thus relinquish title to the property. A second type of bill of lading, entitled a "straight" bill of lading is not negotiable. It states that goods are the property of specified individuals, usually the buyer, and the "straight" bill of lading may designate the shipper or other interested parties.
4. Bills of Lading May be Classified as Government, Livestock, or Commercial. The government classification is, of course, for government shipments; livestock for livestock shipments; and commercial for the bulk of business and personal shipments.
Railroads. Originally, the railroads had bills of lading that varied considerably among carriers. In 1922, the Interstate Commerce Commission (ICC) prescribed a uniform bill of lading for railroads that has remained largely unchanged for nearly 70 years.
When inspecting a bill of lading for railroads, the auditor should be concerned with two items. First, the "description of the articles" on the bill of lading should agree with the inventory-shipping documents. Normally, the shipper will prepare the bill of lading. If the bill of lading is incorrect, the shipper could be paying a lower transportation fee than is being billed by the railroad; which, in turn, could lead to fines or penalties imposed by the railroad. The second item of concern to the auditor is the commodity code. The ICC has developed a commodity classification system for helping railroads establish freight charges. An underchange to the shipper can be the result of a simple error of an incorrect commodity code, the application of an incorrect rate, or from the application of an unpublished discounted rate. The U.S. Supreme Court overruled the ICC in the Maislin case (see discussion in this department, in the February 1991 issue of The CPA Journal) and held all shippers liable for the difference between published rates on commodities they shipped and the unpublished discounted rate they actually paid. This is referred to as the "Filed Rate Doctrine," which means that shippers are responsible for paying the rate that has been filed with the ICC and published by the carrier regardless of the "discount" offered by the carrier. There is also a possibility that the incorrect commodity code could result in an overchange to the shipper, in which case the carrier is liable for refunding the excess rate charged the shipper. The could involve a type of refund called "Reparations."
A reasonable rate is called a "Lawful Rate." However, shippers are required to pay the published tariff rate, called a "Legal Rate." A legal rate may or may not be a lawful rate. If a shipper can convince the ICC that an unreasonably high rate has been paid, the shipper may be entitled to some reparation from the carrier for the difference between a reasonable rate (as established by the ICC) and the rate actually paid (the legal rate) on previous shipments.
All reparations must be under specific order of the Commission, otherwise a carrier, even if willing to do so, cannot make reparation payments. The statute of limitations on reparations claims is two years for private shipments and three years for government shipments. A copy of the commodity codes should be maintained by the shipper for easy cross reference to the bill of lading.
Motor Carriers. The Motor Carrier Act of 1935 was the initial legislation requiring motor carriers to issue a bill of lading for any goods received for transportation. In 1946 the ICC mandated that certain information be contained on the bill of lading such as names of consignor and consignee, and points of origin and destination. While these measures served to narrow a carrier's alternatives, they did not call for use of a uniform bill of lading for motor carriers. As a result, there is great diversity of motor carrier bills of lading.
Because of this diversity, the auditor should pay particular attention to the description of the articles shipped and the rate charged. Similar to railroads, much of the information on the bill of lading comes from the shipper. Thus, if the auditor notes a pattern of incorrect rates or description, the appropriate level of management needs to be informed for corrective action. It should be noted that rates for motor carriers can change quickly and, in fact, a discount could be included if the freight charge is "prepaid."
Water Carriers. Domestic water carriers issue bills of lading that are similar to railroads. They issue both straight and negotiable bills of lading. However, the water carrier assumes no responsibility for loss or damage. There are also significant differences between the terms of the water carrier bill of lading and the rail or motor carrier, particularly when considering liability.
Air Carriers. Air carriers normally use the uniform air bill prescribed in the official Air Freight Tariff. The tariff provides that the shipper must prepare and present a non-negotiable air bill with each shipment. No air bill or other shipping document is negotiable, regardless of wording. Values also must be placed on the air bill for tariff purposes. A universal air bill of lading has been adapted by international air carriers and should now be in use by all air carriers.
Because of the rapid growth of international trade, the auditor should be aware of different terminology in that area. For example, "through export bills of lading" are used only on shipments for export that move through coastal ports and only when such shipments do not leave possession of the carrier until delivered. An export bill of lading may be either a straight or negotiable bill and is a merging of a traditional bill of lading and an ocean bill of lading. The export bill of lading contains terms and conditions that are normally described on the domestic bill of lading. Before shipment, it is normal for the shipper to apply to the physical distribution department of the carrier transporting the shipment for a shipping permit. That permit will be issued when evidence is submitted that arrangements for ocean space for transportation have been made. Shipments for ocean export may also move on domestic bills of lading if the shipper wishes to make arrangements for ocean transportation.
When carriers furnish bills of lading, they normally furnish the long form that provides the usual terms and conditions on the reverse. Shippers, in providing the bill-of-lading form, can also use a short form that has been used since 1949 for rail and motor carriers. The face of the short form bill includes a statement indicating that the terms and conditions of the uniform domestic straight bill of lading contained in the governing classifications or tariffs are applicable to the shipments made on the short form. This eliminates the necessity for carrying the terms and conditions on the reverse of the short form bill of lading, but they remain applicable. The ICC has held that a shipper is bound by the terms of a shipping receipt even though those terms may differ from oral arrangements made between shipper and carrier. Failure to examine the shipping receipt has been stated by the ICC to be the same as signing a contract without reading it.
The waybill is an historical record of the item being shipped. It is created by the originating agents and includes the origin station, destinations, routing, consignor and consignee, description of the shipment, weight, freight charges, and any other instructions needed. The form of the waybills vary based on type of shipment. Specifically, if the shipment is to be made on a single carrier's line, only one form of waybill is used while interline shipments demand a different type. A motor carrier may use waybills as a routing document.
Routing of Shipments
There are several technical points related to the routing of a shipment with which auditors should become familiar. For instance, Sec. 15(8) of the Interstate Commerce Act provides that ". . . the person, firm, or corporation making such shipment subject to such reasonable exceptions and regulations as the Interstate Commerce Commission shall . . . prescribe, shall have the right to designate in writing by which . . . through routes such property shall be transported to destination . . . ." This same section further provides that, in the case where there are competing lines that constitute a portion of the through route, the shipper shall, in all instances, have the right to determine over which line the freight shall be transported.
However, and foremost, the shipper's routing instructions must be obeyed. Second, if the shipper's routing instructions are complete and the shipments move in accordance with these instructions, there is no misrouting. Third, if a shipper tenders a shipment with a bill of lading on which the route is designated and no inconsistent rate is inserted or other error is evident, the shipper cannot claim misrouting if the carrier moves the shipment over the designated route even though a lower rate may be in effect over a different route. In short, if the shipper makes a mistake and chooses a more expensive route, this is the shipper's mistake and cannot be blamed on the carrier. On the other hand, if the shipper leaves the routing up to the carrier, the carrier has a statutory responsibility to transport the shipment over the least expensive route and can be held financially responsible for failure to do so.
In addition, according to Sec. 15(9) of the Act, if a shipment is diverted by one carrier to another carrier contrary to routing instructions in the bill of lading, the carrier that diverted the shipment will be jointly and severally liable to the carrier that has been deprived of its right to participate in the movement of the shipment. The liability of the diverting carrier will be for the total amount of the rate or charge it would have paid to the participating carrier had it not diverted the shipment.
However, there are two exceptions to this rule. The diverting carrier can avoid liability if it can show that the diversion is in compliance with a lawful order, rule, or regulation of the Commission. The carrier accepting the diverted shipment can avoid liability if it can show that it had no notice, by bill of lading, waybill or otherwise, of the routing instructions.
An arrival notice is sent to the consignee after the shipment arrives at the destination. The notice contains the same information as the waybill plus the location of the goods and the time when goods may be picked up. While the telephone is often used, an arrival notice is still sent to verify notification.
The freight bill is similar to the bill of lading and, in addition, includes the total freight charges to be collected. The freight bill is prepared by the agent at destination when charges are to be collected and by the originating carrier agent when charges are prepaid. If the freight charges are prepaid, the freight bill is given to the consignor. Conversely, the original freight bill is presented to the consignee for payment on a C.O.D. shipment.
Legally, shippers have 15 days to pay motor carriers freight bills but only 10 days to pay railroad and water carriers' freight bills. Individual carriers may establish their own payment periods when the consignee is properly notified, but such period cannot be shorter than seven days for motor carriers or five days for railroads and water carriers. The credit period begins with the first 12 o'clock midnight following the delivery of the freight if the freight bill is presented prior to or at the time of delivery of the freight. Howeverm if the freight bill is presented subsequent to the time freight is delivered, the credit period begins with the first 12 o'clock following the presentation or time of mailing of the bill.
Many Slips of Paper
The shipment of goods is still basically driven by slips of paper. Auditors and accountants involved with companies that ship and receiver or do the shipping should have a good understanding of what those slips of paper mean and the obligations and liability they may create.
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