Sending out money is such a common action that sometimes we do it without thinking.
But when it comes to invoices, you could be losing precious dollars on unnecessary payments if you don’t do your due diligence.
Whether it’s from honest mistakes or invoice fraud, uncaught errors can result in duplicate payments that disrupt cash flow and can grind your operations to a halt.
But with accounts payable internal controls, you minimize the risk and keep your money safe.
What are accounts payable internal controls?
Accounts payable internal controls are the precautions taken throughout the accounts payable process to reduce the risk of fraud, human error, and other costly mistakes.
These controls should be part of your accounts payable policy, which outlines what controls are in place to maintain accuracy and security.
Accounts payable controls are separated into three types:
- Obligation to pay controls
- Data entry controls
- Payment entry controls
These controls are like checkpoints in the process.
As an invoice is received, entered, and eventually paid, it needs to pass each checkpoint before moving to the next step.
The challenge is finding the balance between the give and take of accounts payable internal controls.
Too many controls and your accounts payable process becomes slow and cumbersome. But not enough and you risk losing money and time due to errors.
Learn more: An accounts payable internal controls checklist for businesses
Why you need accounts payable internal controls
At first glance, accounts payable internal controls might feel like they’re extra steps that slow down the process.
However, the payoff is worth it and could make your teams work more efficiently.
Minimize the risk of mistakes or losses
At every step of the accounts payable process, there are chances to make mistakes that end up impacting the bottom line.
The purpose of checkpoints is to catch these mistakes before they snowball into something bigger. This reduces the likelihood of:
- Duplicate payments (that cost businesses millions collectively)
- Late payments
- Missed payments
More efficient processes
Accounts payable controls are great at setting an order of events that people need to follow.
As soon as one step is done, it’s clear what needs to be done next and who’s responsible.
By cutting out any ambiguity, the accounts payable process becomes a smoothly operating assembly line.
When set up properly, everybody knows what their responsibilities are and when to do them.
This means less time with an invoice sitting without being acted on.
Shared accountability
Each control used by an accounts payable team is typically assigned to an individual or team.
As a result, the burden of accuracy no longer falls on one or two people, but on everyone in the organization.
If something does go wrong, it’s easy to figure out what control was missed and who was accountable for that part of the process.
This kind of accountability isn’t about punishing the people who were responsible, but for diagnosing where the process is breaking and improving it.
For example, if a particular team is having errors due to the invoice approval process, you can work with them to make sure they know their responsibilities and how to execute them properly.
Examples of accounts payable internal controls
Accounts payable controls are divided into three categories: obligation to pay, data entry, and payment entry.
We’ve broken them out with examples of each below.
Obligation to pay controls
Obligation to pay controls are focused on the accuracy of the invoice and whether what was ordered is what was received.
Payments don’t go out until the invoice is verified.
Invoice approval
The invoice approval process grows in complexity as businesses and their finances grow.
Finance teams turn into valuable gatekeepers who protect assets, enforce budgets, and cut down on the chance of error or fraud.
The process should have internal teams collaborating and working in tandem.
The finance team and the team who’s overseeing the purchase being invoiced share the information they have to make sure it’s consistent and accurate.
Payments don’t get made unless both sides confirm the invoice is accurate and what’s on the order reflects the purchase order and what was received.
Two-way, three-way, or four-way match
The invoice matching process involves comparing documents across the accounts payable process for consistency.
Two-way matching is when you compare an invoice to a purchase order. If the information is the same and signed off on, it’s matched.
Three-way matching is the same with the addition of referring to a receiving information slip like a delivery receipt. (BILL Accounts Payable offers both automated 2- and 3-way matching.)
Then four-way matching adds in an inspection form.
If there’s any discrepancies, the invoice isn’t paid until they’re sorted.
Tip: Read this article to learn how to resolve seven of the most common invoice discrepancies)
This ensures that the invoice is accurate and represents what was received before the money is sent.
Reviewing for duplicates
Reviewing invoices for duplicates can be done on an ad hoc basis, but it’s most effective if done regularly.
If you use an accounts payable ledger, start by combing through invoice numbers, descriptions, amounts, and invoices entered on the same date.
A common cause of duplicates is inconsistent formatting.
For example, an invoice might be entered as “Invoice 001” or “Invoice 1.”
This might make it seem like two different invoices at first glance until you confirm with the other information available to you.
Data entry controls
Data entry controls refer to when an invoice is entered into your system.
There are two main options:
- Invoice entry before approval
- Invoice entry after approval
Invoice entry before approval
An invoice is entered into the system before it’s reviewed. It undergoes the review process after being entered into the system.
Entering an invoice before it’s approved puts the focus on getting vendors paid as soon as possible.
But if you haven’t completed checks beforehand (like receiving a purchase order), this is more likely to lead to mistakes.
Invoice entry after approval
An invoice is only entered into the system after it’s been reviewed. It assumes that any invoice could be a mistake until it’s been verified.
Entering an invoice after it’s been approved prioritizes accuracy over speed.
It may take longer for an invoice to enter the system and start moving through the pipeline, but it’s less likely to be fraudulent or have mistakes.
Payment entry controls
Payment entry controls ensure that the payment needs to be made, has been authorized, and is getting to the recipients.
These protections help avoid double payments and the chances of fraud.
Track check numbers
It’s best practice to log the check number associated with an invoice. This way, it’s easy to tell if a payment has gone missing or is still in transit.
For example, if a vendor reaches out saying they haven’t been paid yet, you could find the check associated with the invoice and either cancel the check to write a new one or see if it’s been deposited meaning it could be a clerical mistake on their end.
Sending and tracking paper checks is made easier with BILL.
It’s all done in-platform so there’s no chance of forgetting to log a payment.
Manual check signing
If you’re using physical checks, having someone responsible for signing the checks has two major benefits.
The check signer carries the responsibility of one last verification that everything is correct before signing off on the payment.
This extra verification cuts down the chance of mistakes.
Manual check signing also reduces the chance of fraud. A signature is harder to replicate which makes forgeries or illegitimate checks less likely to happen.
Confirming vendor payment information updates
If a vendor reaches out to update their payment information, it could potentially be someone looking to reroute payments to their personal bank account.
To avoid this, always confirm vendor payment information updates.
A solid rule of thumb is to use a different method of contact than they used to reach out.
As an example, if they notify you by email, give them a phone call to confirm the details.
Remember, don’t give them the information to confirm, but rather get them to repeat the information back to you.
Accounts payable internal controls best practices
Involve multiple stakeholders
The purpose of accounts payable controls is to increase the likelihood of catching mistakes or fraud.
If all of these controls are one person’s responsibility, they aren’t going to be as effective.
Sometimes what’s needed most is a second set of eyes. And generally speaking, the more eyes reviewing the better.
Whether it’s approvals, auditing, data entry, or making payments, having different people involved in the process will give you the highest likelihood of catching something before it impacts your business.
Standardize processes and formatting
When setting accounts payable controls, define what they look like.
While not every control needs a process, standardizing is about creating consistency in how something is done and what the output is.
A good example of this is how you format data entries like invoices and check numbers.
If there isn’t a set format, someone is more likely to miss something when reviewing the work.
As an added benefit, people will be more likely to find what they’re looking for when they need it.
If someone is looking for “check 024” but it’s been entered as “check 24,” it’ll take more time to find, if they can find it at all.
Embrace automation
Automation saves you time and creates more consistent results.
The level of automation available to you depends on the tools you use in the accounts payable process.
The more you depend on paper, the less automation you have available to you.
When choosing what to prioritize, look first at the steps that are most prone to error.
This is most likely data entry where a misread or mistype can cause a headache down the line.
Automation also creates consistency. You set the rules once and whatever is being automated will be done in the exact same way every single time.
An easier way to implement AP internal controls
Accounts payable controls give you peace of mind that everything is correct before sending out a payment. But that peace of mind comes with extra effort and steps.
Enter BILL, an accounts payable platform with built-in controls and automation that keeps the process streamlined and efficient. These tools give you more control, visibility, and certainty in your accounts payable process without slowing you down.
Try BILL for yourself to see how you can make your process faster and more secure.
AP internal controls FAQ
How does BILL ensure there is a clear separation of duties?
It is important to implement different levels of permissions and clearly separate duties. By default, BILL allows 5 user roles, each of whom will have the proper permissions to perform tasks in the BILL platform that is critical to their function.
- Administrators
- Accountants
- Clerks
- Approvers
- Payers
Using these roles, you can customize BILL so that your external accountant can have access to view your finances but cannot make payments, and different managers only have view bills that their department is responsible for and not able to have access to any other parts of the business.
You can view more information about exact permission levels of each of the default user roles.
What do custom roles in BILL look like?
If your business has specific needs that require more granularity in the permission settings, BILL also offers custom user roles that allow you to change specific permissions for various tasks. This will allow you maximum flexibility in designing role that will best fit your organization.
You can view the list of permissions you have at your fingertips in our Custom User Roles section of our support page.
