All businesses must expertly manage the payments they owe to other people or entities. This function, referred to as accounts payable, is critical to business operations, financial management, and long-term relationship building in every industry.
Accounts payable teams must find the balance between speed and accuracy to get the right payments to the right partners on time. The possibility of errors surrounding payments requires several accounts payable controls to be implemented throughout the accounts payable process.
Accounts payable internal controls have been carefully developed, widely implemented, and continuously refined to protect businesses from payment risks no matter where in the AP process they originate. We’ll examine the different types of AP controls, accounts payable internal controls best practices, and how to manage AP controls in today’s digital landscape.
Understanding Accounts Payable Internal Controls
When it comes to disbursing funds – whether it be to a customer who makes a return, a vendor who is sending raw materials, or a government entity that is collecting taxes or fees – it’s important that processing errors don’t get in the way. The business that is owed money will send an invoice, that invoice will be processed by the AP team, and then the AP team will send funds to the invoice owner. Once the funds clear, the process will be complete, and business can continue as usual.
Internal controls for accounts payable are a set of standards and requirements that make AP processes more efficient, reduce business risks associated with the function, and optimize long-term cash management. Put shortly, an efficient and effective AP team will positively impact every downstream business function.
Accounts Payable Risks
Accounts payable risks go far beyond late payments and damaged business relationships; if severe enough, business viability can be called into question because of accounts payable issues. Some of the biggest risks within this business function are:
- Fraud
- Late or Incomplete Payments
- Noncompliance with Audit Requirements
- Improper Invoice Management
- Overpayments
The Business Function of Accounts Payable Controls
When implemented correctly, accounts payable internal controls divide roles and responsibilities throughout the process, ensure invoice and payment accuracy, mitigate the risk of multiple payments, maintain a paper trail that can be audited, and reduce human error from start to finish.
With the right AP controls in place, business leaders, customers, and other vendors can sleep soundly knowing the risk of fraud is slim, the transfer of funds will be swift and accurate, and the financial stewardship of your organization is reliable. There are many accounts payable internal controls best practices that every business should prioritize; let’s get into them.
Types of Internal Controls for Accounts Payable
Accounts payable internal controls are split into three main subcategories: obligation to pay controls, data entry controls, and payment entry controls. Each category aligns with the major steps in the payment process: validating incoming invoices, ensuring data is recorded correctly internally, and disbursing the right amount of funds to the payment recipient.
Obligation to Pay Controls
The first type of internal controls for accounts payable centers around a business’s obligation to pay. When incoming invoices are sent to a business, the business must validate every invoice. They should align with the goods or services received and must not be duplicates of invoices that were already processed. At this part in the process, your AP team needs to do its due diligence using the following methods:
- Invoice Approval
Depending on the structure of your organization, the exact role in charge of invoice approvals could vary, but generally, there is one person or a small team of people who reviews incoming invoices, verifies that the amount owed is correct, and approves the payment for that invoice.
This can be harder to do than you’d think. The approver needs to know how much of a product is being purchased, what the agreed-upon sale price is, and if that product has been received. With the invoice, original purchase order, and shipping receipts, they can cross-check the information to ensure its accuracy.
When a business decides to make a purchase, the procurement team should issue and approve the purchase order. Once the purchase order is approved, it is given an order number and shared with the vendor. This gives the invoice approver a simple check prior to approving the payment of each invoice. This is a great way to mitigate overspending and manage expense forecasts.
- Three-Way Matching
The process of comparing invoices to purchase orders and receiving information is called three-way matching. This ensures that the items being paid for were received. Matching should be done before authorizing payment.
- Duplicate Invoice or Payment Audit
The final is to verify that the payment hasn’t already been sent to a vendor for the line items on the invoice. It used to be manual, but now, most businesses rely on a software tool like Nanonets to comb through their system, search for the associated invoice number and order number, and flag any duplicate payments.
Data Entry Controls
Data entry controls -- especially with the digital solutions utilized in most accounting and FP&A functions – are key internal controls for accounts payable teams today. After determining your obligation to pay, data entry controls are in place to get the correct data into your accounts payable software. Whether you use an ERP, an automation platform, or a combination of tools, accurate data entry must be prioritized. There are two ways to navigate these internal controls for accounts payable:
Record Invoice Before Approval
With this approach, an invoice and its respective debit are recorded as soon as the AP team receives it from the sender. It is then sent through the approval process, often resulting in faster processing and fund disbursement.
Record Invoice After Approval
If you’re worried about duplicate payments, opt to record the invoice in your system after it has been approved by the proper authority internally. If you’re erring on the side of caution, this is the recommended approach.
Payment Entry Controls
The last major type of internal controls for accounts payable processes is all of the payment entry controls. These focus on sending the payments associated with invoices that have been approved and uploaded into your system. The accounts payable controls in this category are:
Segregation of Duties
Segregation of duties, an integral part of accounts payable internal controls, involves dividing responsibilities among different individuals to enhance security and accuracy in financial transactions. Do not assign the same person to prepare and sign checks; keep them separate to create an added layer of security. This also makes sure that a second person is double-checking everything before a payment is made. This may seem simple, but Segregation of duties plays a major role in overall accounts payable internal controls. In essence, segregation of duties is a fundamental principle of internal control, ensuring that no single individual has the power to initiate, approve, and execute a financial transaction independently.
Manual Check Signing
Stay away from signature stamps and mandate old-fashioned manual check signing for all vendor payments. Stamps could be used by unauthorized individuals, increase the risk of fraud, and cause accidental duplicate payments.
Safe Check Storage
Store checks in a locked storage area that is separate from any signature stamps your organization uses.
Tracking Check Numbers
By keeping a close eye on all the checks that have been sent out using a check run, AP teams can identify if any checks go missing and flag the issue through the proper channels.
Double Signing
Accounts payable controls wouldn’t be complete without a double signing policy for any payments over a certain amount. A manager or a higher-level executive can serve as effective safeguards when a lot of money is on the line.
Accounts Payable Internal Controls Best Practices
All categories of AP controls come with best practice recommendations. It’s important to stay updated on what the current accounts payable internal controls best practices are, especially as new technologies change the AP process internally and externally. Also read accounts payable best practices.
Best Practices: Obligation to Pay Controls
To get the most protection from the obligation to pay controls, be sure to utilize a cohesive document storage solution. If your business accepts paper invoices, keeps them all in different places, and doesn’t have a standard process in place for where they go, things will get lost.
Instead, invest in AP software such as Nanonets, that can keep a digital copy of each invoice, track the approval flow, and match invoice data to other systems within your organization. Software solutions can also flag duplicates or notify individuals when a payment has already been sent. Even with a digital tool, be sure to avoid conflicts of interest and keep multiple people involved in the approval and payment processes to help segregate roles and responsibilities.
Best Practices: Data Entry Controls
Data entry is a massive candidate for human error. Instead of relying on one of your AP staff members to input the information from each invoice or purchase order by hand, scan the documents into a document reading tool that can automatically extract the information and distribute it through the business systems you employ. Flow by Nanonets is customized to eliminate manual data entry and seamlessly communicates with all top ERPs, CRMs, and other business tools.
Best Practices: Payment Entry Controls
In alignment with the payment entry controls themselves, be sure to keep some segregation of duties in the process. You don’t want the same person who approved the invoice to be the person who writes and signs the check; another set of eyes should be looking everything over before a payment is made. Even better, consider switching to ACH payments or wire transfers instead of printed checks. Things can’t get lost, the paper trail is indestructible, and payments are received almost immediately.
Internal Controls for Accounts Payable Protects Your Business, Vendors, and Customers
If you’re eager to implement new AP controls but you aren’t sure where to start. Sit down and audit the process from start to finish. Who is involved? What are the exact steps that take place from once an invoice is received until it is paid? What are the pain points with the current process? How does technology factor in
Once you have the answer to these questions as a baseline, you can start to identify the low-hanging fruit and more complex changes before jumping in. You’ll need people who understand the function very well to help implement new controls or updated processes, but once complete, these controls will protect your business and every person or organization that is involved with it.
