Segregation of Duties for Effective Accounts Payable Management

Invoice fraud costs mid-market businesses an estimated $280,000 a year — protect your cash flow with AP internal controls.

Businesses prioritize security and efficiency across departments and workflows, but those controls are critical in accounts payable:

• AP security measures prevent fraudulent payments.
• AP efficiency keeps vendors paid and happy, improves cash flow, and minimizes labor costs.

A fundamental way to increase both security and efficiency in your accounts payable department is with segregation of duties (SoD). Let’s look at:

• What SoD is.
• How SoD works.
• Best SoD implementation practices.

What is the segregation of duties in accounts payable?

AP segregation of duties (SoD) involves dividing tasks and responsibilities among different accounts payable professionals so that no one person has too much control over the entire financial process.

In other words, a single employee shouldn’t be able to take an invoice all or most of the way from receipt to final payment without any input or oversight from others in the AP department. The goal is to limit the risk of errors and fraud through increased visibility, accountability, and division of responsibilities.

Segregation of duties is part of a larger set of accounts payable internal controls designed to increase financial accuracy and transparency.

Accounts payable is responsible for paying a business’s creditors and suppliers on time and accurately. AP professionals:

• Process invoices and verify their accuracy and legitimacy.
• Authorize payments.
• Record transactions.
• Regularly reconcile transactions to double-check accuracy.

Giving one person control over this whole process opens your business up to payment fraud risks, security concerns, and costly errors.

The goal is to limit the risk of errors and fraud through increased visibility, accountability, and division of responsibilities.

How to segregate duties in accounts payable.

Now that you have a clear picture of what SoD is and why it’s important, let’s look at the different AP responsibilities and how to divide them the best way.

Invoice receipt and processing.

The accounts payable process starts with invoice receipt and processing. Here, AP professionals:

• Verify that the invoice is legitimate.
• Compare the invoice to the purchase order and receipt to check for accuracy.
• Enter the invoice into the business’s accounting system.

Strong internal controls are essential at this stage, as this is the most likely place for fraud to occur.

With segregation of duties accounts payable controls, a different employee takes care of each step. This minimizes opportunities for fraud and errors, such as duplicate payments or over/underpayments.

If one employee is responsible for verifying invoice legitimacy and accuracy, it’s easy to push fraudulent or incorrect invoices through or let a human error slip through the cracks.

Invoice approval and payment authorization.

Next, the invoice moves into approval and payment authorization. Invoice approval is unique in that it’s not necessarily an AP department’s responsibility at all. Typically, invoices go to the head of the department that made the purchase or another assigned person within that department.

Most companies have a built-in internal control here, but it can be a challenge for smaller organizations with limited personnel. If this is the case for your company, at minimum, you should have at least two separate people responsible for approving invoices and authorizing payments.

The payment authorization role is the person responsible for actually making the financial transactions. It’s up to them to issue manual or electronic payments to vendors and creditors — on time and accurately.

Transaction recording and reconciliation.

The last step in the accounts payable process is recording transactions and reconciling accounts. If the duties in the previous steps were properly segregated, the biggest concerns here are data entry mistakes and other human errors.

No one’s perfect, and mistakes will inevitably occur. This is the last opportunity to catch those errors before they make it into the books. The more eyes on a transaction, the less likely it is for mistakes to go unnoticed. So you should have more than one person in charge of recording transactions and reconciling accounts.

Transaction recording is a pretty simple, straightforward process, as it’s just entering manual and electronic payments into the accounting system. The bank reconciliation process is much more complex. Here, an accounting professional (or several) goes through bank and credit card statements to match the transactions with those recorded in the accounting software.

Manual bank reconciliations are especially labor intensive, tedious, and error-prone. Fortunately, there are AP automation tools like Airbase that automate much of the process, making it simpler, faster, and more accurate.

Best practices for segregation of duties.

Ready to secure your AP process and increase efficiency by segregating duties? Use these best practices to design and enforce your internal controls.

Establish clear policies and procedures.

Before you implement and enforce segregation of duties (or any other internal controls), create clear, documented policies and procedures that detail the what, why, and how. These guidelines should:

• Outline the specific responsibilities of each role (and what they are NOT authorized to do).
• Explain why SoD is important and the goal of the new policies.
• Cover instructions for handling any exceptions.
• Regularly review and update these policies as needed to improve their effectiveness and keep everyone on the same page.

Implement role-based access controls.

Of course, your internal controls will only be effective if your accounts payable team follows them.

Enforce accounts payable controls with strong role-based access controls (RBACs). To do this, you’ll need a modern AP software solution, like Airbase, with built-in internal control mechanisms.

With an advanced AP automation solution, you assign duties and permissions by role, so that only those with authorization can access specific systems or data. For example, the person responsible for invoice processing can access the tools they need to upload or manually enter invoices, but the system will not let them into the financial reporting and payment processing tools.

Conduct regular audits and reviews.

Regular audits and reviews ensure compliance with segregation of duties and other internal controls. This is another area where an AP automation tool is incredibly helpful. It keeps you audit-ready and makes it simple to generate and view reports.

With Airbase, you get powerful, customizable dashboards for a bird’s-eye or granular view of the full accounts payable process.

AP automation is especially useful for organizations with smaller accounts payable departments. You get strong internal controls to mitigate fraud and reduce errors — without hiring multiple employees you don’t actually need.

Use technology to enforce internal controls

In addition to enforcing RBACs, an accounts payable automation platform also tracks and monitors financial transactions and flags suspicious activities or deviations from your established procedures. This adds another layer of security and oversight to the accounts payable process to prevent fraud and human error.

For example, Airbase provides automated:

• Invoice capture.
• Transaction recording.
• Expense categorization.
• Custom approval workflows.
• Three-way invoice matching against purchase orders and receipts.

The platform also alerts you to duplicate payments, unauthorized transactions, and other anomalies. AP automation is especially useful for organizations with smaller accounts payable departments that might struggle to fully segregate duties. 

Simplify your AP internal controls with Airbase.

Segregation of duties and other internal controls are essential for accounts payable efficiency and security. Dividing duties prevents payment fraud, minimizes human error, and improves the accuracy of financial reports.

But actually implementing and enforcing these internal controls can be a challenge — and that’s where Airbase comes in.

Airbase is comprehensive procure-to-pay software with built-in accounts payable internal controls for maximum accuracy, visibility, and security. The platform’s automation tools make it simple to segregate duties, implement RBACs, conduct audits, and get deep insights into your payment processes.

Ready for a more secure, efficient AP process? Schedule a demo today and see how Airbase delivers unparalleled internal control.

FAQ.

Still have questions about accounts payable segregation of duties? Check out these common questions and answers for more insight.

What duties should be segregated in accounts payable?

Ideally, you should segregate each step of the accounts payable process, including:

• Invoice receipt.
• Invoice processing.
• Invoice approval.
• Invoice payment authorization.
• Transaction recording.
• Account reconciliation.

The more you divide responsibilities and access, the more secure and efficient your AP department and financial operations will be.

What is separating duties in the accounts payable department?

Separating duties in accounts payable means dividing the responsibilities among different individuals. For instance, one person approves invoices, another records transactions, and a third issues payments. This division ensures that no single person has control over the entire payment process, reducing the risk of errors and fraud.

How do you segregate accounting duties?

Segregating accounting duties, whether in accounts receivable or payable, involves dividing up financial tasks and responsibilities among different individuals. This creates a system of checks and balances to minimize the risk of errors, such as data entry mistakes and duplicate payments, and prevent fraud.