8 Accounts Payable Risks Businesses Must Guard Against

Accounts Payable Fraud is shown on a conceptual business photo

Common AP Threats and How to Reduce Them

Accounts payable (AP) is a vital function of any business. If vendors are not paid on time, supplies can be cut off, and the company could grind to a halt. But it’s not only the smooth running of an AP department that is critical. There is also the potential for error and fraud to be considered.

Most company payments originate from accounts payable. The sheer volume of individual vendor invoices makes it difficult to verify every single amount. Consequently, accounts payable are vulnerable. However, AP errors or fraud can be minimized with adequate control procedures. But first, you need to understand where the vulnerabilities might lie. Here are the most common AP risks that can affect any business.

1. Honest Mistakes

Accounts payable is a labor-intensive task. Wherever there is manual input, errors are possible. For example, the value of an invoice might be input incorrectly. Mistakes can be guarded against by implementing batch controls and reconciling accounts with vendor statements. It is also advisable to check invoice values when making payments. Hopefully, a vendor receiving an overpayment would inform the payor and refund the money. Still, an overpayment would impact the cash flow in the intervening time.

Related: 8 Significant Risks to Small Business Cash Flow

2. Duplicate Payments

There are several potential causes of duplicate payments. The accounts payable may not have been updated following an earlier settlement of an invoice. A vendor might invoice twice for a product or service. Sometimes, invoices get mislaid, and a copy is requested. But then the lost invoice resurfaces and is input into the accounting software. You can guard against duplicate invoices by implementing an accounting system with duplicate invoice number checking. Matching purchase orders to invoices before payment will also help avoid invoices being paid twice.

3. Late Payments

As mentioned in the introduction, the late payment of supplier invoices can disrupt the business. So, it’s best not to allow the AP team to become overwhelmed with work. Investing in technology and streamlining and automating AP processes will also help mitigate this AP risk.

Related: 10 Tips to Help Manage Your Accounts Payable

4. Fraudulent Invoices

External sources may send fraudulent invoices for non-existent services or products. A robust invoice approval system is the best way to prevent these invoices from being paid. For example, the appropriate departmental manager must approve every vendor invoice. You might also implement strict approval procedures for opening a new AP account. Insisting on a signed purchase order for all supplies will also help detect fraudulent invoices.

5. Unauthorized Purchasing

Unauthorized purchasing may not be fraudulent. Nevertheless, inadequate purchasing control can lead to unnecessary expenditure. For example, two employees may purchase the same item, leading to overstocking. And, of course, items may be bought that the business does not need or senior management has not approved. Using multiple vendors will also make it more difficult to control quality and gain the best prices. Therefore, it is advisable to restrict purchasing to authorized personnel and set purchase authorization limits.

6. Employee Fraud

There are several ways that employees can defraud their employer using the AP system. For example, an employee could set up a phony vendor, process invoices for that supplier, and make payments. Alternatively, an AP clerk could change the bank details on a vendor’s account. The segregation of duties can mitigate risks of this type. For example, having separate individuals set up new vendor accounts, process invoices, and make payments. Insisting on the authorization of new vendor accounts, invoices, and payments will also reduce the risk of employee fraud.

7. Collusion

Detecting and preventing employee AP fraud becomes more challenging when collusion occurs between multiple employees or people outside the business. An employee might agree with an outside source to process and pay phony invoices and share the proceeds. A manager might collude with an AP clerk to approve and pay fraudulent invoices. However, cooperation of this kind usually occurs between two people; consequently, the more individuals involved in the various stages of procurement, the more robust the protection.

8. Kickbacks

Kickbacks can pose two levels of risk. At the upper end of the scale, an employee could receive a significant monetary reward for selecting a high-priced supplier for a purchase or contract. At the lower end of the scale, the employee’s compensation may be no more than a gift of some kind. Of course, taking a buyer out to dinner is standard practice in some industries. Still, if dinner included a night’s stay in a five-star hotel, that might be considered bribery.

The best way to prevent kickbacks is to ensure that quotations from multiple suppliers are sought for every purchase. And the selection process should also not be the sole responsibility of a single employee. Vendors should also be periodically reviewed to ensure competitive pricing. It will also help to have written guidelines for employees with purchasing responsibilities regarding accepting gifts and incentives from vendors.

Related: How to Reduce Accounting Mistakes and Fraud in Your Business

The Bottom Line

Implementing purchase ordering procedures, the segregation of duties, and other AP controls can be challenging for small businesses. However, the lower volume of transactions will make it easier to spot fraud or mistakes. Ensuring that the person who manages the AP function is not a signatory on the bank account will usually provide sufficient oversight of payments for a small business.

However, it doesn’t take much of an increase in transaction volume for discrepancies in AP transactions to become less visible. Therefore, it’s advisable to be aware of the above AP risks, conduct regular AP risk audits, and implement further controls as a business grows.

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