Guarding Against Fraud: Internal Controls in Accounts Payable

Recently updated on December 4th, 2024 at 11:14 am

I recently sat down with a group of business owners to delve into a pressing concern that permeates the world of accounts payable (AP) automation: Fraudulent Payments. In our open discussion, a common refrain echoed through the room – the urgency of establishing a robust safeguard against an array of challenges that beset the landscape of accounts payable operations.

Julie, owner of a retail outlet, stated “Internal fraud is the most common issue we face. Without comprehensive internal controls, our systems are vulnerable to unauthorized payments that eventually compromises operational integrity.” While Billie, owner of an auto care shop, stressed the impact of “Duplicate and late payments on cash flow, motivating us to implement vigilant internal controls for scrutinizing each payment.”

During the discussion, a few other SMB owners believed that 70% of the fraudsters committing business payment fraud are ahead of the game.

This candid exchange illuminated the vital role of internal controls within the accounts payable process. If you are looking to improve security and control, AP automation solutions can help pave the way to a more efficient and secure way to process invoices and payment.

From here, our journey delves into the core of accounts payable internal controls, exploring their significance in fortifying your AP process against fraudulent payments. We will unveil actionable strategies empowering you to establish secure transactions effectively.

Exploring the Core of Accounts Payable Internal Controls

AP internal controls stand as sentinels guarding your invoice processing ecosystem. When integrated with AP automation solutions, they reinforce secure transactions by streamlining workflow, enabling two-factor authorization, real-time monitoring, and error reduction. This harmonious collaboration empowers your accounts payable process with efficiency and resilience, safeguarding against threats and advancing operational excellence. These controls encompass three pivotal stages, each a vital link in the chain of payable precision:

Your Obligation to Pay: This foundational stage involves a meticulous assessment of payables’ authenticity and accurate assessment of corresponding dues. By aligning invoices with established contracts and purchase orders you create a barrier against unauthorized payments and potential theft.

Data Entry into the System: The bedrock of error-free AP automation, this stage demands careful input of various transactions, vendor details, and payment terms. This control layer is pivotal in curbing discrepancies that could lead to overpayments or underpayments.

Payment of the Debt: The final step culminates in accurate and timely payments. Setting up controls here encompass dual authorizations, multiple level of approval, and rigorous reconciliation. These stringent measures mitigate the risk of misdirected and unauthorized transactions.

Unlocking AP Excellence: Why Internal Controls Matter

As I mentioned above, Julie and Billie raised concerns regarding the fraudulent transactions they encounter in their accounts payable operations. However, they are not alone in facing these challenges; their experiences resonate with enterprises spanning the spectrum. This is precisely where the role of internal controls becomes evident. Internal controls are far from being a mere luxury; instead, they are an absolute necessity. These controls function as vigilant watchdogs, effectively safeguarding your business from an array of threats while simultaneously enhancing efficiency and accuracy.

So, let’s delve into the core reasons why you need to establish internal controls:

Minimize Fraud: Internal controls ensure the integrity of each transaction. They serve as a barrier against deceitful activities, maintaining a trustworthy environment.

Mitigate Risk: In the world of business, risks are ever-present. Operational controls function as a strategic defense, identifying potential challenges ahead of time and providing a safe route forward.

Increased Accuracy: Internal controls are akin to precision architects, orchestrating each interaction within your AP team as invoices and payments are redirected for necessary approvals. Their precision ensures accuracy down to the minutest detail, meticulously constructing a dependable foundation of data.

Shared Accountability to Foster Unity: Envision your team as a united force, driven by shared responsibility. Internal controls foster this unity, aligning everyone’s actions with collective goals and nurturing a culture of accountability.

Supplier Relationships: Trust is the bedrock of business partnerships. Operational controls within your accounts payable process establish and uphold this trust, overseeing transactions to ensure timely and accurate payments that strengthen relationships with your vendors.

Auditing: Internal controls find a strong ally in auditing, lighting the path to transparency. They leave behind a trail of clarity, streamlining audit processes and enhancing your reputation for sound accounts payable practices.

Cost Saving: Implementing internal controls can reduce the cost of fraud by up to 50%. Setting up internal controls can reduce errors, leading to significant cost savings in operational and auditing expenses.

In essence, internal controls provide the structure, reliability, and security needed to navigate the complex landscape of AP. They empower you to address challenges proactively.

Strategic Tips for Implementing Internal Controls for AP

Implementing internal controls into your AP process need not strain your resources; instead, it requires a prudent allocation of time and effort. Consider these strategies as your compass to navigate this implementation journey:

1. High Level Approvals:
For significant amounts, set up higher level approval done by AP Manager or Chief Financial Officer (CFO). This ensures that larger transactions undergo an additional layer of scrutiny, minimizing the risk of unauthorized or error-prone activities.

2. Annual AP Process Review and Re-evaluation:
Treat your AP process as dynamic entities that evolve over time. Perform an annual review to reassess their efficiency, relevance, and alignment with your business goals. This practice ensures that your internal controls remain agile and effective.

3. Safeguarding Access to General Ledger:
Restrict access to the general ledger, allowing only authorized personnel to modify or access it. This measure enhances control over sensitive data and reduces the risk of unauthorized payment tampering.

4. Vendor List Vigilance:
Regularly update and refine your vendor list. Ensure that it remains current and accurate, reducing the likelihood of erroneous transactions to enhance overall process accuracy.

5. Crafting Customer Credit Policies:
Formulate comprehensive customer credit policies that include predefined limits. These policies should be regularly reviewed to ensure they reflect the latest industry trends, striking a balance between facilitating payments and mitigating risks.

In closing, the significance of internal controls in accounts payable cannot be overstated, particularly in the context of guarding against fraudulent transactions. The synergy between internal controls and AP automation presents a powerful solution to fortify your AP process against financial risks. By meticulously overseeing each step of the payment journey, from obligation to payment, organizations can ensure precision, prevent fraud, and establish a reliable AP framework. As you implement strategic internal controls, you’re not just optimizing your operations; you’re securing the long-term integrity of your business.

Experience the transformative impact firsthand – unlock your business’s full potential with the unison of internal controls and AP automation.

Published on: 4 September 2023

Author

John Bugh

John Bugh is Chief Revenue Officer for PathQuest, responsible for the strategic direction, planning, vision, growth, and performance of the company’s marketing, branding, and revenue streams.

As a seasoned professional with over 35 years of experience in executive sales, marketing, and operational leadership, John has worked to build high-performing leadership-teams that have a demonstrated track record of accelerating growth, increasing revenue, establishing sustainability, and improving profitability.