Accounts Payable Internal Controls: How to Detect Fraud

89% of accounts payable teams deal with fraudulent invoices. Is your AP department equipped to detect and prevent fraud?

How effective your accounts payable (AP) department is depends on the strength of its systems. Internal controls prevent fraud, minimize errors, and protect your company’s assets, financial accuracy, and compliance.

But what are AP controls — and how do you implement them?

We’ll cover everything from payment controls to data-entry controls, with best practices and a handy accounts payable internal controls checklist.

What are accounts payable internal controls?

Accounts payable manages obligations to company suppliers, vendors, and creditors.

AP teams:

• Process invoices.
• Match invoice data against purchase orders and receipts to verify accuracy.
• Authorize and ensure timely payments.
• Keep an eye out for fraudulent or duplicate payments and invoices.
• Record all payments and transactions in the company’s AP system.

There’s a lot going on behind the scenes. Without strong internal controls, errors and fraudulent or unauthorized payments slip through the cracks.

Accounts payable controls are a system of checks and balances that seal these cracks to protect cash flow and ensure regulatory compliance. Without them, you leave your organization vulnerable to fraud, over- and under-payments, inaccurate financial data, and unhappy suppliers.

Essential components of accounts payable internal controls.

Your company should have six main pay control categories. We’ll go over each one in detail and explain why it matters here.

Authorization controls.

These controls ensure that only permissioned and appropriate employees can approve transactions, which prevents unauthorized or fraudulent payments. This is where you establish approval hierarchies and workflows, and define which employees or departments can approve purchases from different categories.

Segregation of duties.

Segregation of duties divides responsibilities among AP team members to reduce the risk of errors and fraud. In other words, you don’t want to give one employee the power to take an invoice from approval to final payment.

We’d all like to explicitly trust our teams, but 75% of employees admit to having stolen from their employer at least once. Internal theft costs U.S. businesses $50 billion a year.

But it’s not just about fraud — the more eyes on the invoice approval and payment process, the less likely it is for mistakes and discrepancies to go unnoticed.

Accuracy and completeness controls.

Accuracy and completeness controls correct your financial data so decisions are made with confidence — and you know you’re compliant and audit-ready.

Implement key internal controls to verify invoices and record transactions:

• Specify exactly where and how employees should store financial documents.
• Set a process for verifying invoice accuracy.
• Dictate how employees should record transactions in your AP software.
• Set up a regular schedule to reconcile accounts.

Access controls.

Access controls restrict access to authorized employees only, keeping your AP information secure. Of course, you’ll need the right security measures and tools to enforce your access restrictions, such as strong passwords, encryption, and inherently secure platforms and software.

Education is key here, as it only takes one successful phishing attempt to compromise your whole network.

Make ongoing employee training mandatory to ensure everyone is aware of the latest fraud techniques and understands how to handle suspicious emails and requests.

Reconciliation procedures.

In addition to reconciling each individual invoice as it’s processed, you also need to conduct regular reconciliations to double-check every transaction over a set period and make sure it was processed and recorded correctly.

Strong reconciliation procedures ensure everyone uses the same methods and processes. For example, matching vendor invoices three ways against both purchase orders and receipts, rather than just the purchase order.

AP automation software provides automatic invoice processing and three-way matching to streamline workflows and minimize human error.

Auditors and internal controls.

You’ve done the work to create and implement your accounts payable internal controls — now it’s time to make sure they’re effective (and that your AP department is actually following them).

Regular audits by both internal and external auditors identify weaknesses and gaps in your AP controls and ensure organization-wide compliance.

Checklist: Accounts payable internal controls.

All that information is a lot to take in but, in practice, it’s straightforward.

Use this checklist for accurate, comprehensive, secure financial data.

1. Review the authorization process: All transactions should be approved by appropriate personnel.
2. Segregate duties: Different employees should own parts of the process to reduce the risk of errors and fraud.
3. Implement accuracy and completeness controls: Verify that all transactions are recorded correctly and completely.
4. Enforce access controls: Restrict access to financial systems and sensitive data.
5. Conduct regular reconciliations: Identify and resolve discrepancies.
6. Schedule periodic audits: Review the effectiveness of your internal controls.

Best practices for implementing accounts payable controls.

In addition to implementing accounts payable internal controls, you’ll need to ensure they’re achievable and, most importantly, followed.

Establish clear policies and procedures.

Your AP department can’t adhere to internal controls if they don’t know what they are.

Standard operating procedures (SOPs) win the day! Document, in detail, every policy and procedure, and make sure the documentation is easily accessible to every employee. Clear guidelines outline expectations.

Implement approval workflows.

Structured approval workflows give you more control over AP processes and ensure that every invoice and transaction gets the right authorization before payment processes. An AP automation tool is essential here, as it routes transactions through defined approval channels with minimal manual intervention.

This brings us to the next best practice…

Use technology for automation.

Beyond approval workflows, AP automation software significantly reduces human error and increases efficiency. An advanced accounts payable system:

• Streamlines invoice processing.
• Automatically conducts three-way matching.
• Highlights inaccuracies and discrepancies.
• Identifies and flags duplicate invoices and payments.
• Alerts you to potential fraud.
• Executes electronic payments.

AP automation platforms build these internal controls into your regular accounts payable workflow, making implementation and compliance simple.

Provide training and awareness programs.

Ongoing training is essential to manage what’s expected of your employees. Your training programs should cover:

• Specific internal controls and why they’re important.
• Relevant AP processes and procedures.
• Best practices to ensure accurate financial transactions.
• Fraud and inaccuracy reporting procedures.
• The latest fraud techniques and how to recognize them.

Onboard new employees and update current practices. Regular refreshers keep your AP policies top-of-mind and ensure ongoing compliance.

Automate your AP internal controls with Airbase.

Strong accounts payable internal controls:

• Prevent fraud.
• Minimize human error.
• Protect your financial standing.
• Create accurate financial data for better decision-making.

Follow these AP internal controls to safeguard your assets, cash flow, and your peace of mind.

If you’re ready to implement internal controls and secure your AP operations, Airbase is a comprehensive procure-to-pay platform that seamlessly applies and enforces internal controls organization-wide.

With automated invoice processing, three-way matching, approval workflows, and reconciliation, Airbase gives you full control over every AP process for unparalleled accuracy, security, and audit-readiness.

Schedule your free demo today and see how Airbase transforms your accounts payable.

FAQ.

Still have questions about accounts payable internal controls? Check out these commonly asked questions and answers:

What are internal controls in accounts payable?

Internal control mechanisms are designed to prevent fraud, minimize errors, and ensure financial accuracy by creating a system of checks and balances within the AP department. These controls help safeguard company assets and maintain the integrity of financial records.

What are the control measures for accounts payable?

Control measures for accounts payable include:

• Authorization controls: Ensuring all transactions are approved by appropriate stakeholders.
• Segregation of duties: Dividing responsibilities among different employees to prevent errors and fraud.
• Accuracy and completeness controls: Verifying the accuracy of recorded transactions and financial documents.
• Access controls: Restricting access to financial systems and sensitive data.
• Reconciliation procedures: Matching transactions against corresponding invoices and purchase orders.
• Regular audits: Conducting periodic reviews to ensure compliance and effectiveness of AP controls.

What is the internal audit of accounts payable?

An internal audit of accounts payable is a systematic review conducted by internal auditors to assess the effectiveness of internal controls within the AP process. This audit involves examining the procedures, verifying compliance with policies, and identifying any weaknesses or areas for improvement to ensure the accuracy and integrity of financial records.