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Home » Blog » Accounts Payable » Setting Up Internal Controls in Accounts Payable Processes

Setting Up Internal Controls in Accounts Payable Processes

Setting Up Internal Controls in Accounts Payable Processes
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In today’s technologically evolved and digitally connected world geographical borders seem to be irrelevant when scaling a business. However, more business volume means more financial transactions, higher the risks and this is where a strategy and process to mitigate risks takes center stage.

One way of achieving this is to establish internal control in Accounts Payable (AP) function so that the business does not lose money.

Most accounts payable teams have controls in place however there is a scope of making AP processes more efficient and robust.

With advancements in technology and availability of cutting-edge AI-enabled accounts payable automation software many critical and repetitive tasks of accounts payable can be automated and human errors eliminated.

In this blog we deep-dive into the three primary internal controls that are a must have in any AP function and also touch upon the why and how of it. Let’s get rolling!

What are Internal Controls in Accounts Payable?

Internal controls in accounts payable may be understood as standard operating processes which businesses use in their accounts payable workflow with an objective to minimize human error, wrong payments, fraud prevention, and meeting regulatory compliances. You may wonder why accounts payable in particular.

A study conducted by ACFE (Association of Certified Fraud Examiners’) in 2020 suggests that accounts department is responsible for 14% of corporate frauds committed with accounts payable reporting a 47% rise in frauds . The typical risks associated with accounts payable function are:

  1. Duplicate payments
  2. Missed or late payments resulting in additional fines
  3. Internal frauds
  4. Lack of proper visibility into invoices
  5. Missing audit trail
  6. Conflict of interest

However internal controls in accounts payable need to be implemented across the accounting function and not just accounts payable to safeguard businesses interests and fall in the below three broad categories:

1. Detective Internal Controls in Accounts Payable

The intent of these controls is to spot issues at an early stage before they become a full-blown problem. This involves investigating an issue after it has already occurred. Reconciling ledger statements and bank statements on a regular basis, stock taking, and performing regular internal audits are all detective internal controls.

2. Preventive Internal Controls in Accounts Payable

Perhaps one of the most important controls in AP these are controls put in place with an objective to prevent any event of fraud. These typically include giving access to employees to only that part of the system which they are responsible for, and dividing tasks like entering the invoice in a system, reconciliation, and payment approvals among multiple employees etc.

3. Corrective Internal Controls in Accounts Payable

These are controls put in place to plug discrepancies discovered during an internal audit or accounts reconciliation. Disciplinary action, updating policies, and putting a system in place to ensure suggested corrective measures are followed fall under the purview of corrective internal controls.

One must understand that the accounts payable function in particular requires special internal controls in accounts payable. Let’s delve into the internal controls that should be implemented in the accounts payable function.

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What are the Types of Internal Controls in Accounts Payable to Implement?

Internal controls in Accounts payable fall mainly under preventive and corrective internal controls. Let’s look at them one by one.

1. Obligation to Pay

Obligation to pay control involves assessing how much and to whom do you as a business owe money.

However, since this involves outflow of money there should be internal controls in accounts payable in place to check that one truly owes money by verifying if the goods/services were actually received, is the invoice value correct etc.

There are four primary controls that fall under the purview of obligation to pay controls:

    1. Approving the purchase order
    2. Approving the invoice
    3. Three-way/four-way matching
    4. Auditing for duplicity

Before making any purchase the concerned department needs to raise a purchase request with the details like number of units, price per unit, vendor from whom to procure and submit the same to the procurement team which then raises a purchase order after doing all the required legal, compliance, and budgetary checks. This is then submitted to the vendor.

Next the vendor sends an invoice after delivering the goods/services which is then checked by the concerned authority for correctness and validity and approved.

The three or four way matching involves matching the invoice received with the purchase order and the verifying whether actual delivery of goods and services happened or not.

Lastly, all previous trails are checked to ensure that the payment has not been already released.

This entire process can be automated using Zycus E-invoicing that harnesses the capabilities of Merlin AI which uses AI & ML to match invoices received, and check for fulfilment of all internal policies and compliances and then sending out the same for payment.

Zycus Tips for Obligation to Pay Controls

    1. Communicate and receive and share invoices via email
    2. Leverage AP automation software to reduce manual, time-consuming tasks
    3. Delegate and divide responsibilities, one man show is a perfect recipe for frauds

2. Data Entry Controls

Manual data entry is both time consuming and prone to errors. The most common errors being missing the date to enter invoice, entering incomplete contract details, incorrect invoice numbers leading to delays in the payment cycle and incorrect accounting.

To avoid payment delays and incorrect accounting data entry controls are important and fall under two categories.

1. Recording Invoice Before Approval

Invoice is entered into the AP system as soon as it is received leading to a faster payment cycle, but may lead to duplicate and excess payments in the absence of adequate controls built into the system.

2. Recording Invoice After Approval

In this method the invoice enters the AP system after all due approvals are in place, the payment cycle is longer but the control over the process is better more so in case of manual processes.

Zycus Tips for Data Entry Controls

    1. Devise a standardized process for invoice recording and data entry.
    2. Invest in an AP automation software where all systems and information are at a central location to avoid any errors
    3. The Zycus AP solution uses the capabilities of Merlin AI to extract invoices in different formats and also identifies duplicate or fake invoices saving precious dollars.

3. Payment Entry Controls

Invoices are verified and approved, all due diligence is done, invoices have been entered into the AP system and now is the time to release payments. Whenever money outflow is involved it is a good practice to double check everything.

Hence putting proper controls when releasing payments is crucial. Put the following controls in place when it comes to payment entry controls.

4. Segregate Responsibilities

Segregating responsibilities of the entire procure-to-pay cycle is a good way to make sure that a single person does not have the complete control and authority on payment transactions. Failure to do so means no accountability and hence higher chances of fraud.

Merits of Internal Controls in Accounts Payable (AP)

Internal controls in accounts payable bring the much required balance and consistency throughout the accounting function and the business as a whole.

It gives employees a clear idea on what’s expected of them, enables businesses to remain compliant of the legal regulations and requirements, and mitigates any potential frauds or risks.

Not to forget, it significantly impacts the cash flow and bottom-line. A few other merits comprise:

  1. Enhanced efficiency by eliminating of any repetitive tasks
  2. Improvement in overall business performance by flagging areas that need extra attention
  3. Makes a clear audit trail easily available
  4. Establishes a sense of accountability by clearly defining roles and responsibilities
  5. Ensures all legal and regulatory compliances are adhered too

Internal Controls in Accounts Payable – Best Practices

1. One Place for All Documentation

Scattered documents, invoices stored in separate files and folders can lead to high processing times, missed entries, late payments, and a plethora of such mismanaged processes.

A digital system where all documents can be stored at a single place makes the entire process smooth and minimizes any misses and errors.

The AI-powered e-invoicing by Zycus for example enables invoice generation within the system. It enables both the internal team and suppliers to convert existing POs to invoices, ensuring all documentation happens at a single location.

2. Well-defined Processes

Having robust policies defined and processes for vendor evaluation, verification, enrolment, well defined criteria for invoice approval and exceptions, and thorough checks at every point is the key to ensure that all controls are in place and adhered to.

This also helps to detect and manage any potential frauds well in time.

Advanced AP Automation Software like Zycus come with Anomaly and Fraud Detection module which helps stops payments to vendors not authorized by the system, flag duplicate invoices eliminating instances of over payments, and also prevents any phishing and other digital fraudulent attempts.

3. Inbuilt Authority Matrix

As iterated earlier it’s important to segregate and define duties and authority. A personnel entering an invoice in the system must be different from the one approving it.

Investing in an AP Automation software helps implement this by pre-feeding a delegation matrix and giving access to different users access to modules only which they are responsible for.

4. Switch to Paperless Processes

Maintaining bulky account ledgers, registers, and heaps of paper invoices is a thing of the past and for a good reason. Manual paper-based accounting poses several bottlenecks which slows down the payable function making it highly-inefficient.

By switching to a touchless invoice processing system like Zycus businesses can leverage AI for faster invoice processing, 3-way matching, dynamic discounting, global compliance, and more.

5. AP Automation is the Future

Given the current dynamic business landscape and the scale of business it makes sense to automate your entire Accounts Payable function. It not only helps eliminate human intervention but makes the overall process more streamlined, efficient, and agile.

It facilitates better communication between the business and suppliers, establishes a fair and transparent system, boosts profitability, and helps enhance your reputation.

Zycus Accounts Payable Automation Software: A full-proof way to Implement Internal AP Controls

The Zycus AP Automation Software with its Merlin AI suite automates tactical tasks and provides data driven insights.

The E-invoicing, Supplier Communication module, Global Tax Compliance, and Anomaly and Fraud Detection ensure that all required accounting internal controls in accounts payable are built in making the AP function secure, efficient, and agile.

To know more about Zycus AP Automation Software, sign up for a demo today.

Related Read:

  1. Top 5 Proven Accounts Payable Best Practices in 2023
  2. The APIA Secret Sauce: Ingredients for a successful AP Transformation
  3. Accounts Payable – A Strategic Business Value Driver
  4. How to get started with Accounts Payable Automation
  5. eBook – Revolutionizing Accounts Payable for Shared Services
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