How internal controls lead to a more secure accounts payable (AP) process
This article about the AP process was originally published in August 2021, and all statistics and relevant content has been updated as of August 2022.
It’s common knowledge that your organization needs a strategy and process to help mitigate risk and reduce the chance of error. One method of accomplishing this is by implementing internal controls to keep you from losing money through your accounts payable (AP) process.
Creating small measures to protect you from risk can go a long way in reducing stressors in the office and securing your transactions. But, the key lies in creating a process that doesn’t create unnecessary challenges or troubles for your employees. Below, we discuss the various controls you should consider implementing to create a smooth and secure AP process.
What are internal accounts payable controls?
Internal accounts payable controls are safety functions or safeguards you implement to help reduce the risk of errors or loss throughout your procure-to-pay cycle. With the right internal controls in place, you can build a resilient and efficient AP process. Your internal controls are set to mitigate risks you incur while doing business, such as duplicate payments, human error, fraud, and compliance troubles. To help explain the differences in your internal controls and display their importance, we’ll break them down into three categories:
- Obligation to pay
- Data entry
- Invoice payment
Bonus Material: How automation improves the AP process
1. Controls regarding the obligation to pay
The first thing you need to track and be aware of is who exactly you owe money. Your organization needs a process in place to verify these vendors. Is the vendor verified on your list? Is the debt that is owed genuine? Did you receive the goods or services as ordered? These questions need to be answered as you analyze your payment process. Here are four controls you should consider implementing to protect your company:
1. Approving the purchase order — The purchase order (PO) is a document used to track and control the purchase of services or goods from vendors. The PO is first sent to the vendor, detailing the order the buyer wishes to make. A typical PO lists the number of goods or services a company wishes to buy and at what price point. To be approved, the PO needs to be identified and verified. The first step involves ensuring the supplier is approved by their vendor lists. Then, you move on to obtain authorization and approval for purchase.
Tip: Use this as an opportunity to delegate more responsibility away from your upper-level managers. Your staff will feel more empowered in their roles, and you’ll help avoid bottlenecks for purchase approval.
2. Approving the invoice — The invoice is the purchase receipt used to track orders and outline payment terms. In terms of internal controls, the approver of the invoice needs to ensure that goods were received as they were ordered and that the price point matches the agreed-upon value.
1. Matching all three documents — The third control is crucial to the process. It involves matching the purchase order, the invoice, and the receiving report to ensure that all details are uniform. Part of this process also involves checking that the goods delivered were in the right amount and condition.
Tip: This process can be very time-consuming if it’s done for every invoice and payment. One way to avoid long delays is to set a threshold for which approvals can bypass this process. For example, if your payment is under a specific amount or is a recurring payment, it could skip this step in the process.
2. Look for duplicates — Sometimes, your organization may make duplicate payments for one single invoice. Taking the time to search for duplicates will help you protect yourself against fraud and give you a better overview of the current state of your AP process.
Tip: This step is highly time-consuming if done manually, and it still is prone to mistakes. Your best bet — investing in a solution that enables AP automation to delegate this task to your advanced software system.
2. Controls regarding data entry
You are prone to human error when you use a manual process for entering data into your accounts payable process. Manually entering data is time-consuming, even for your most senior employees. Slipping up on due dates, contact information, or invoice numbers can lead to exceptions that delay your entire process. For these reasons, it is important to implement controls to help screen for and flag errors before they become an issue. Data entry controls help you be more accurate in your efforts, enabling you to take advantage of more early payment programs.
There are two branches of controls for data entry:
- Record the invoice before getting approval: You enter the data in your payables system as soon as an invoice is received. This approach leads to a quicker payment cycle and works well when your AP controls are set in place for quicker approval processes.
- Record the invoice after you get approval: With this approach, you enter data after invoices are approved. This means it takes longer for the invoice to be recorded in your system but leads to greater control over the process.
3. Controls regarding invoice payment
The payment of invoices needs to be closely monitored by your company. It pays to be careful and have a second set of eyes on everything when it comes to money. Having a security process in place to check for fraud and errors can mean the difference between a smoothly flowing
payment accounts payable cycle and one bogged down by delays and errors. Below are two things you should consider when building out internal controls for invoice payments:
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- Separate the responsibilities — In retail, fraud is more likely to occur when someone has access to more than one aspect of the payment process. That’s why it is important to separate the duties and responsibilities associated with the procure-to-pay cycle. No single person should have complete control and authority over your transactions. Instead, it should be a process split across numerous individuals to help keep the process more secure. You need to have separate people keeping one another accountable through reviews and audits.
- Have processes in place to manage checks — As stated above, no single person should be in charge of the whole process for checks and payment approvals. The person signing the checks must be different from the one who prepares the check for approval. This extra step in your process helps you organize your data better and provides additional security to catch duplicate payments.
Accounts Payable automation software – your best friend when it comes to AP controls
When it boils down to it, your best bet for ensuring a secure, efficient, and insightful accounts payable (AP) process is with the support of automation software. The right AP software takes the stress and weight off your shoulders regarding time-consuming and monotonous tasks and offers greater control and transparency over your data and payment process. Products like Tradeshift Pay™ work to make your AP process more intelligent, more efficient, and more strategic at every step.
Are you looking to ditch the paper processes and instead embrace a digital-first approach to AP? We can help! Our team of experts can work with you to create a customized process to support your needs while displaying real value for both you and your suppliers.
To learn more about our AP automation software or see Tradeshift in action, reach out and schedule a demo today.