Step by step guide for accounts payable internal control
The importance of a company’s account payable department cannot be overstated. This department determines the ultimate profitability of a company since it pays all the bills and other outstanding liabilities. It is also the department where fraud can occur.
Here are some things about accounts payable to consider and a step by step guide for setting up accounts payable internal controls.
What is Accounts Payable?
A company has two regular, major payments. One is payroll. The other is its unpaid bills. These unpaid bills include invoices due to suppliers as well as any debt that has been requested and granted by financial institutions. The size of your company will determine how many people are responsible for paying the bills. The more hands involved in accounts payable, the more internal controls are necessary.
Why is Accounts Payable Susceptible to Fraud?
The accounts payable department is the most susceptible to fraud because this is where the checks are written and signed. There is no shortage of fraud instances in large corporations. It simply occurs due to the size of the company. All it takes is one unethical person to set things into motion. Government agencies are another example of an organization that is susceptible to fraud because they are so bureaucratic.
It is Not Just Fraud, Though
Assembling the best team to manage your company’s accounts payable tasks is of the utmost importance. It is not just fraud that has to be prevented. Hiring professionals who will ensure the company receives what they are paying for, not being billed twice and that the books are balanced is important, too. While it may seem time consuming, it is this department’s job to ensure an invoice correctly states the number of units actually received, the cost per unit and terms are accurate not because a supplier is trying to cheat but because innocent mistakes do happen.
How to Prevent Accounts Payable Fraud?
The good news is that fraud is preventable. The smaller the company, the easier it is to control and prevent unethical behavior. Not every corporation is going to experience a racket scheme. Thorough background checks and assembling the best team is one step that can be taken. Checks and balances is another. Setting up and following through on an accounts payable internal control checklist helps, too.
Why Are Internal Controls Necessary?
By setting up internal controls for the accounts payable department, several goals are going to be accomplished. The possibility of paying a fraudulent invoice, inaccurate invoice or paying an invoice that has already been paid gets eliminated.
Internal Checklist for Accounts Payable
1. Obligation to Pay
When this department gathers all invoices, they have to ensure that each invoice is approved for payment. One suggestion is to have staff gather the invoice, the authorized purchase order and any other supporting documentation into a packet. The purchase order must be authorized, too. There should be a search for duplicate invoices before a new packet is assembled. Another method that is often utilized is the Three-Way Match Approach. Here, the supplier invoice simply has to be matched to the purchase order. This approach is best facilitated by adopting accounting software because it eliminates the need to track down physical paperwork.
2. Data Entry
Before an invoice is entered into the accounting system, it must be approved. If it is entered before approval, it could signal to the accounts payable staff that it was already approved, which could cause issues in cases where it was not. Placing an emphasis on immaculate data entry, especially when it comes to invoice numbers, prevents accidentally duplicating them and causing problems when it is time to reconcile accounts. Data entry errors can be caught by using the information in the financial statements against every department’s budget. If a department is incorrectly billed, it can be brought to the attention of the accounting team.
All accounts payable controls are important, but the ones in the payment phase are probably the most. If something is going sideways, as long as the check does not get signed, it can stop the train. One suggestion is to split the check printing and signing duties because it increases the set of eyes. Checks should always be kept in a safe and locked location when not being used. Checks should be kept in number sequence and used in that sequence, too. They should always be signed manually. In some cases, like when a check amount is high, a requirement of more than one signor can be implemented.
At the end of the day, there is an interesting balance happening in the accounts payable department. Timing becomes essential because no company wants to run out of cash by paying bills too soon. There also have to be safeguards to protect the assets.