Accounts payable internal control best practices that employees won't hate
Internal controls can save your business from losing money through the accounts payable process. Implementation of best practice controls around your obligation to pay, point of data entry, and payment of the invoice can go a long way in protecting the company and making life easier for your employees at the same time.
Implementing controls around spending can create challenging processes for employees. These are ways to implement these risk-mitigating controls in ways that are friendly to accounts payable staff and budget managers in the company.
What are accounts payable internal controls?
Accounts payable (AP) internal controls are safeguards to reduce the risk of loss through the procure-to-pay process. Adequate controls can mitigate against the risk of duplicate payments, minimize human error, prevent fraud, and ensure regulatory compliance for audit purposes. The three categories of controls are your obligation to pay, data entry, and invoice payment.
Obligation to pay controls
First things first—how do you verify your company indeed owes the debt? There are four controls in place to check the debt is genuinely owed, and goods or services were received, and it is the correct amount.
Approving the Purchase Order
A Purchase Order (PO) is a commercial document used to control the purchase of goods and services from external vendors. It is sent to the vendor, outlining what the company wishes to purchase, how much, and at what price.
The approver of the PO must first identify and check the supplier if there are pre-approved lists. The next step is purchase authorization or budget approval. Based on the amount, payments might require authorization from the relevant budget owner, senior management, or department head.
Tip: Set appropriate thresholds to specify what amount should be approved and by who, and distribute more responsibility away from upper management. This will empower your staff and avoid causing a bottleneck if too many purchases need to be referred to senior management.
Approving the invoice
The person authorized to sign off signifies their approval of the vendor invoice. However, this control only works if the approver can check whether the goods were received as ordered, and at the agreed pricing.
Tip: If the invoice approval process is manual, the best way is for AP staff to provide authorizers with a packet containing the invoice, purchase order, receiving report, and account number to be charged to provide a complete set of information on which to make their decision.
This is an important control to confirm the invoice is valid and the disbursement should be made. Accounts payable staff will match invoice data against the purchase order (which details what was ordered and under what terms) and receiving report (which checks the ordered goods have been received in the correct quantity and in good condition).
Tip: Three-way matching is very time-consuming, which can delay invoice payments and use up valuable staff time. Consider setting dollar thresholds under which invoices can circumvent the process and exclude recurring invoicing from approved payees. You can also set an approval buffer allowing AP staff to approve invoices if the prices and units listed in the supplier invoice are within a certain percentage of what was agreed in the PO.
Auditing for duplicates
A duplicate payment search helps to reduce double payment and protect against fraud. It involves checking the vendor file's paid invoices to determine if an invoice has already been paid. This can be labor-intensive if done manually, and duplicate invoices may fall through the cracks.
Tip: Invest in an AP automation solution that will automatically perform duplicate payment searches and prevent them from being processed.
Best practices for obligation to pay controls
- Accept invoices via email so you can keep them in one centralized place and reduce the risk of misplacing unpaid invoices.
- Utilize AP software to automatically complete the matching process.
- Segregate duties to reduce the risk of fraud and conduct audits on a regular basis.
Data entry controls
Manual data entry is time-consuming and prone to human error, even if completed by the most efficient employees. Inevitable data entry slip-ups of invoice numbers, amounts, and due dates, can lead to overpayment, duplicate payments, and missed payments, preventing you from taking advantage of early payment discounts or disrupting supply.
The AP controls for data entry are:
- Record invoice before approval: Data is recorded in the payables system as soon as the invoice is received, even before approval is verified. This speeds up the payment of suppliers and works best when you have a purchase order in place which establishes a prior approval.
- Record invoice after approval: Every invoice must go through an approval process before being recorded in the system. This provides greater control and separation of duties.
Best practice for data entry controls
- Develop strong coding standards for invoices and data entry in the master vendor file to minimize the risk of errors.
- Invest in an AP automation solution with OCR technology to automatically capture data with no human error risk.
- Digitize data within one centralized cloud or computer system network, so it is easily accessible by all team members.
Payment of the invoice controls
Segregation of duties
Fraud is made possible when one person has access to more than one function within the payment process. Segregation of duties within the procure-to-pay cycle means that no one staff member should have the authority to complete more than one piece of the transaction. For example, the staff member who creates the PO should not be the one who confirms the receipt of goods, or approves the invoice for payment. Ideally, a separate person should also conduct an internal audit review of bookkeeping transactions.
Manual check signing
Segregation of duties is also crucial with check signing. The person who prepares the check should be separate from the person who signs the check.
As you issue checks, make sure to track check numbers. Keeping a log of all outgoing check numbers will assist in identifying if checks are missing.
For larger checks, you might also implement a requirement for double signing. Adding a senior-level manager into the process adds another level of security against fraudulent or duplicate payments.
Best practices for invoice payment:
- Switch from hard copy checks to ACH. Electronic payments provide a digital audit trail, require less labor, and eliminate the requirement to file physical records.
- Utilize a Billpay system to schedule payment of invoices and avoid missed or late payments.
Accounts payable internal control procedures for budget managers
When a PO is raised, it should be marked against a particular budget code in the general ledger so the budget holder can see the balance remaining. Used in conjunction with real-time actual-to-budget analysis, budget owners can grasp exactly how much budget is remaining and make accurate forecasts for upcoming spending. A good AP software solution will enable controls to prevent overspending for that budget code.
Once the invoice is received or paid, the committed expenditure should be marked as actual expenditure, so the budget manager has a clear picture of spend.
Capture all payments
It is ideal to capture all outgoing payments within the same system, whether it be employee travel expenses, recurring subscriptions, or vendor invoice payments. This way, budget owners are able to view a full and accurate picture of actual or projected spend to budget and your CFO can effectively manage cash flow.
Accounts payable control checklist for maximum efficiency
- Create purchasing and accounts payable workflows
- Centralize accounts payable processing and reporting
- Digitize systems and move towards a paperless processing environment
- Set payment amount authorization permissions
- Separate the duties between two or more people
- Carry out random checks of the invoices
- Invest in an AP automation software
Weak controls within your AP process increase the risk of loss and cause frustration for your accounts payable department and budget owners. The right AP automation software will implement many of the best practices outlined above without you having to lift a finger.