Understanding Accounts Payable Internal Controls

As the hub for managing outgoing payments, the accounts payable (AP) department does more than process invoices — it keeps your business running efficiently. However, AP operations without effective controls can become a hotspot for fraud and inefficiencies.

Accounts payable internal controls help protect your business from costly errors. Whether it’s a duplicate payment or a missed invoice, these mistakes disrupt cash flow and strain business relationships.

To reduce risk, every business should assess its current accounts payable process and integrate controls throughout the workflow. 

What Are Accounts Payable Internal Controls?

Accounts payable internal controls are procedures that help prevent fraud, errors and inefficiencies in the accounts payable process. These controls dictate how a company manages its AP workflow, from verifying invoice accuracy to authorizing and reconciling payments. 

Key accounts payable controls include obligation to pay controls, data entry controls and payment controls. By implementing these safeguards, businesses can reduce the risk of human error and ensure payments are accurate and compliant. 

Why Are Internal Controls Important in Accounts Payable?

Accounts payable internal controls are critical for any finance department. By promoting consistency in the AP process, they support businesses’ ability to make secure, error-free payments. 

Mitigate Fraud and Errors

The accounts payable process is vulnerable to risks like invoice fraud and duplicate payments, particularly when relying on manual workflows. Internal controls that enforce segregation of duties and data entry procedures streamline operations and enhance oversight so businesses can resolve errors before they escalate. 

Ensure Regulatory Compliance

Non-compliance with financial regulations can lead to costly penalties and reputational damage. AP internal controls create audit trails so businesses can track the accuracy and approval of payments and provide the documentation required by relevant standards.

Enhance Financial Accuracy

Businesses across industries need reliable financial records to assess their financial health. Accounts payable controls support transparent recordkeeping and reconciliation so businesses can monitor payment workflows. Precise financial data also helps improve cash flow management and supports strategic decision-making to drive growth.

Common Risks in Accounts Payable Without Proper Controls

Most accounts payable teams operate under established procedures, but many still lack robust internal controls. The following issues can result if AP controls are insufficient or inconsistently enforced.

Fraud and Embezzlement Risks

An accounts payable process without checks and balances opens the door to fraud and embezzlement risks. For example, an employee with unchecked access to payment approvals could manipulate invoices to divert funds. Segregating duties like invoice approval and payment processing ensures no single staff member has complete control over any step of the payment process. 

Duplicate or Overpayments

Duplicate payments or overpayments can quickly add up to significant financial losses. With clear invoice approval and payment workflows, AP teams can confirm each invoice is verified before payment. For example, automated invoice processing manages invoices from receipt to final payment to minimize mistakes. 

Missing or Late Payments

Payment errors or delays threaten vendor relationships and your business’s reputation. Internal controls enabled by AP automation, like automated approval workflows, prevent human error and support accurate payments. A track record of on-time payments allows you to build stronger business relationships and potentially negotiate more favorable payment terms. 

Lack of Audit Trails

Without proper audit trails, it’s difficult to track and verify every payment action. This lack of transparency increases the risk of errors and fraudulent activity going unnoticed. By bolstering internal controls, businesses can swiftly identify discrepancies or suspicious activity and enhance accountability. 

3 Types of Accounts Payable Internal Controls 

There are three key types of accounts payable internal controls: 

1. Obligation to pay controls 
2. Data entry controls
3. Payment controls

Let’s explore how these controls work together to minimize risks and enhance AP operations. 

Obligation to Pay Controls 

Obligation to pay controls verify invoice accuracy so businesses only pay for goods and services they receive. This typically occurs through the following steps: 

1. Purchase order approval: 

The buyer’s procurement department generates a purchase order (PO) to outline the order details, including the items, prices and terms. Once the PO is reviewed and approved by authorized individuals, it is submitted to the vendor and becomes legally binding upon the vendor’s approval.

2. Invoice approval: 

The organization making the purchase receives an invoice from the supplier. Before executing payment, authorized approvers verify that the invoice matches the purchase order, contract terms and delivered goods or services. 

3. Two-way, three-way or four-way matching: 

Next, invoices are checked against corresponding documents. Two-way matching compares the invoice with the purchase order and three-way matching adds receiving information to verify the delivery of goods. Four-way matching includes inspection forms to confirm the quality of the products received.

4. Auditing for duplicates: 

Regular invoice auditing helps identify duplicate invoices by checking for multiple entries of the same payment request. While it’s possible to conduct manual audits, many AP teams use automated invoice processing to flag potential duplicates.  

Data Entry Controls

Data entry controls create a standard process for recording invoices. Businesses determine whether invoices will be entered into the system before or after internal approval.

1. Invoice entry before approval: 

Invoices are entered into the AP system as soon as they are received, before being approved internally. This approach prioritizes paying suppliers quickly, but works most effectively when verification steps like purchase order approval are completed beforehand. 

2. Invoice entry after approval: 

Invoices are entered into the system only after approval by an AP team member. Since invoices are verified first, this method helps prevent errors or duplicates from entering the workflow. However, it may extend the timeline for processing and finalizing payments.

With either approach, the use of technology simplifies data management and reduces the risk of errors. An AP automation solution that captures and matches invoice data to supporting documents can improve speed and accuracy in the AP process.

Payment Controls

After invoices are in the system, the next step is to pay your vendors. Payment controls ensure accuracy, security and accountability in the disbursement process, especially when managing paper check payments. 

1. Segregation of duties: 

Segregation of duties divides responsibilities in the payment process. For instance, one team member prepares a check while another authorizes it. This separation improves oversight and protects against fraud by distributing accountability across the AP team. 

2. Manual check signing and double signing: 

Manual check signing offers better security compared to a stamp or signature stamp that unauthorized parties could access. For payments above a certain threshold, requiring two signatures adds greater fraud protection. 

3. Track check numbers: 

It’s essential to maintain a detailed log of all check numbers as they’re issued. If a check goes missing or is delayed in transit, the AP team can quickly identify the discrepancy and decide to stop payment or reissue the check.

3. Secure check storage: 

Physical checks, including unused check stock, should always be secured in a locked cabinet or safe. Only provide access to authorized personnel responsible for payment processing. Additionally, it’s best practice to secure any signature stamps to avoid misuse in transactions.

5. Confirm vendor payment updates: 

Changes to vendor payment details, such as bank accounts or addresses, may indicate fraudulent activity. Always verify updates directly with the vendor, and use a different mode of communication than the one they used to notify you. For example, if you received an update via email, call the vendor to confirm accuracy.

Best Practices for Accounts Payable Internal Controls

Accounts payable internal controls help address many challenges in B2B payments. Several best practices can help optimize your accounts payable operations: 

Centralize Document Management 

By housing payment records like invoices and purchase orders in a secure software, you can efficiently track payments, resolve discrepancies and maintain compliance with financial reporting standards.

Automate Approval Workflows

Manual approval processes can slow down the AP team and create bottlenecks in the payment workflow. Comparatively, an automated approval workflow routes invoices directly to the correct approver, minimizing human error and promoting on-time payments. 

Verify Vendor Information Regularly

Regularly verifying vendor details is critical to protect against fraud in B2B transactions. A process to vet new and recurring vendors will help you maintain reliable supplier data and mitigate illegitimate transactions.

Set Clear Transaction Limits

Require additional approval for payments above a certain amount to prevent unauthorized high-value payments. For example, a payment exceeding a specified limit could be routed to a supervisor for review as an additional layer of accountability.

How to Develop an Effective Internal Controls Framework

It can seem daunting to implement strong accounts payable internal controls. But with a methodical approach, you can establish practices that protect your business for the long term. 

Assess Current AP Process

Start by evaluating your existing accounts payable workflow to identify gaps and inefficiencies. For example, an inconsistent invoice approval process leaves room for errors, delays and fraud. A thorough assessment will enable you to determine high-priority optimization opportunities.

Define Roles and Responsibilities

Clearly defined roles and responsibilities simplify the accounts payable workflow while minimizing risk. Prioritize segregation of duties by designating different team members for each part of the payment process, like initiation and authorization. This delineation creates a system of checks to verify payment accuracy at every stage.

Implement a Supplier Onboarding Program

A structured supplier onboarding program establishes clear procedures for vetting and verifying vendors. By collecting and validating supplier information at the outset, such as tax IDs and banking details you can establish a reliable vendor database and foster healthy business relationships.

Leverage Technology for AP Management

AP automation strengthens internal controls by precisely executing routine tasks like invoice matching and payment approvals. For example, tools with duplicate payment detection prevent businesses from accidentally paying the same invoice twice. With new insight into payment workflows and vendor data, you can proactively detect and address errors and fraud risks. 

Common Challenges in Implementing AP Internal Controls

While accounts payable controls improve the AP process, implementing them can come with obstacles. Here are strategies to navigate and address potential challenges: 

Resistance to Change

The addition of new accounts payable controls can be daunting for employees. To help ease their concerns, proactively communicate the benefits of accounts payable controls — such as fraud reduction — and provide consistent support as employees navigate the transition. 

Integration With Existing Systems

Choose an AP automation solution that integrates seamlessly with existing platforms, like your ERP system, and consider piloting the software with a small group of employees prior to a wider rollout. 

Employee Training and Compliance

Accounts payable internal controls are most effective when employees understand their purpose. Conduct regular training sessions to familiarize staff with new AP workflows and tools, and also provide clear documentation and resources to help employees stay aligned with company policies. 

Strengthen Your AP Internal Controls with Priority

Effective accounts payable internal controls are essential to safeguard your business against risk. But to fully achieve the benefits — from error reduction to improved compliance — automation is key. 

Priority’s suite of payables solutions streamlines your AP process from start to finish. With an end-to-end AP automation solution, you gain the visibility and control needed to minimize errors, improve efficiency and boost cash flow.  

Get in touch to learn how Priority can help optimize your accounts payable operations. 

FAQs About Accounts Payable Internal Controls

For a quick overview of accounts payable internal controls, explore the answers to these frequently asked questions.

What are the key elements of AP internal controls?

Obligation to pay controls, data entry controls and payment controls are key types of accounts payable internal controls. Together, these components help businesses minimize fraud and errors in the AP process and maintain compliance with financial regulations.

How often should AP controls be reviewed?

AP controls should be reviewed at a regular cadence or during significant operational changes. Routine evaluations are essential to identify weaknesses and adapt processes to further reduce risk. 

What role does segregation of duties play in AP controls?

Segregation of duties divides responsibilities like invoice entry and payment approval between team members. This prevents any single person from having complete control over the AP process to protect against fraud and ensure greater accountability. 

How can automation enhance internal controls?

Automation cuts down on manual intervention and streamlines processes like invoice matching and approval workflows. Along with minimizing human error, automation provides real-time visibility into AP operations so teams can efficiently track payments and resolve discrepancies.