Avoidable Accounts Payable Errors: What to Watch Out for
When paying a bill for a business, we all try to be 100 percent comfortable that the bill payment is correct and justified. Is there ever a chance that that bill is fake or fraudulent? Could it be a duplicate? With so many fake bills being mailed to businesses these days, it makes sense to think about controls a company can put into place to reduce the risk that of writing a check out of hard-earned profits that should never be written.
Accounts Payable Controls
In the accounting profession, the term “internal controls” refers to processes, procedures, and automations put into place to reduce errors or fraud. In accounts payable, there is a specific subset of rules and controls put into place to reduce risk in this area. Here are just a few ideas.
This may sound obvious on the surface, but it is a surprisingly rarely adhered to rule. All bills should be approved by the appropriate level of staff in the business. Sometimes a bill gets approved that is fake or shouldn’t be approved, especially in areas where the approver doesn’t have technical knowledge of what they are buying. Be sure to read the fine print on the bill and make sure to know what is being paid for.
A common “scam” Lucrum sees is a “bill” for corporate registrations with the Secretary of State. A third-party company will send a very official looking notice stating something to the effect of “Fee Due” or other demanding language. However, upon reading the fine print one can see that it says, “This is not a bill” and states that the document is a solicitation or advertisement. We see similar scams with state-mandated payroll posters as well that most folks can get for free or low cost from their payroll provider.
2. Segregation of duties
The person who pays the bill should be different from the person who approved the bill. These people should be different from the one who signs the check. This reduces employee fraud. And sometimes more importantly, reduces the opportunity for the appearance of fraud. Employees should welcome this type of protection.
3. Receipt confirmation
A packing slip or other confirmation of receipt of the goods or services should be matched to the invoice, line item by line item. This also helps fulfill the segregation of duties requirement as we now have three people involved in the process: the one who received the goods or services, the one who approved the bill, and the one who will be paying the bill.
4. Math check
A prudent step is to check an invoice’s math, at least for reasonableness. We are amazed at how many simple math errors we see even in today’s age of computers.
5. Duplicate payments
If a vendor emails their bill as well as mails a hard copy, controls should be put in place (usually automated) to avoid duplicate payments on the same bill. Probably the best way is to require each bill has a unique identifier (invoice number). This may sound simple or standard but a lot of accounting departments cut corners. In cases where there isn’t an invoice number (utility bills), try using the date of the bill as the invoice number. For example, a water bill dated 2/15/2020 might be 02152020.
If there are a significant number of transactions between the company and a vendor, an accounts payable reconciliation should be performed each month via a statement. However, we do not recommend paying based on a statement. Typically the best practice is to simply use a statement to determine if there are missing bills and then request copies of those documents so they can follow the proper approval process.
7. Missing check numbers
Most systems provide a missing check numbers report to use to make sure all checks are accounted for. Any voided checks are typically retained and scanned/filed with the bank statement for the month in which they were skipped. This provides support to validate that a certain check number was in fact voided, and therefore shows up as skipped on the bank statement.
8. Bank reconciliation
A bank reconciliation is a sure way to see exactly what checks cleared the bank account. This also should be done by someone without other duties related to the check writing or deposit function as it provides an easy way to “cover your tracks” in the event of fraud. If properly set up, the bank reconciliation process can provide a wonderful window into any attempted fraud.
Coding each transaction to the correct expense account, inventory, asset, or cost of goods sold account is an essential part of the process. This is often part of the approval process since one would assume the reviewer has substantial knowledge of the transaction and therefore, is best to code the expenditure to the correct account.
10. Financial statement review
Each month, a review of the financial statements with special attention paid to the COGS, expenses and asset accounts as well as a disbursements ledger review for reasonableness can provide added peace of mind.
11. Purchase order
Requiring purchase orders is another control to add to the process. Purchase orders should be matched to packing slips and invoices before payment or approvals are made. To save paperwork, several Lucrum clients have implemented a process where if a bill matches or is within X% of a purchase order, it is automatically approved and does not need to go through the normal approval process.
12. In-depth knowledge of the business’s numbers
The more you get to know the numbers in your business, the greater chance you’ll have of accurate accounts payable handling.
If you’d like to have more confidence in the numbers, reach out to your Lucrum representative today. AP is just the beginning, with Lucrum in your corner, you will have the kinds of insights and understanding available to CEO’s with entire finance teams. Don’t keep making decisions on bad information.