What is an Accounts Payable (AP) Audit and How to Prevent Payment Errors
In any complex business, errors are bound to happen - people accidentally type “1000” instead of “100”, things get lost in translation with suppliers, or maybe their internal processes aren’t entirely up-to-date (or followed). Whatever it may be, it’s almost impossible to completely avoid any errors in your data.
But at the end of the day, your data is your most valuable asset -- making sure it’s accurate is crucial to your success and the sheer wellbeing of your entire organization.
That’s where an accounts payable (AP) audit, or accounts payable (AP) recovery, can help you.
What is an Accounts Payable (AP) Audit?
An accounts payable (AP) audit procedure is the process of reviewing and confirming all transactions and financial information in a company’s accounts payable records.
The purpose of an accounts payable audit is to evaluate internal controls and ensure compliance with vendor agreements, regulations, and procedures.
Auditors focus on several areas of your records, such as…
Examining procedures and processes that guide your accounts payable department and whether they are actually followed.
Analyzing paper trails such as purchase orders (POs), invoices, records, or journal entries to ensure transactions were completed and recorded correctly.
Verifying financial statements such as ensuring dates and amounts are correct and identifying potential duplicate payments or duplicate transactions.
Most importantly, accounts payable audits evaluate your transactions and financial information for accuracy and completeness. This process can involve a number of things, including matching transactions with invoices and authenticating accounts payable records with vendors.
Typical Errors that an Accounts Payable Audit Uncovers
Accounts payable audits offer great value in revealing harmful inaccuracies in your accounts payable records. Errors can come from a number of sources, such as theft, fraud, duplicate payments or duplicate transactions, and other sources of misinformation within your transactions.
Did you know, on average, .05% of a company's payments are erroneous? This might not sound like much, but if you have a billion in spend, that could be half a million in lost revenue.
Why?
Because even though your ERP system may catch some errors in your vendor payments, they are still limited by rigid processes of disconnected data streams. Meaning, not even the best ERP systems are designed to detect and flag all errors.
There are two categories of errors that are typically uncovered by an accounts payable audit: human errors and data errors.
Human Errors
The most common human mistakes are misinterpretations and typos. Whether people rush through reviewing invoices, miss the small details, pick the wrong vendor, or miskey the payment amount, systems do not think an error has occurred.
Example: Duplicate payment via invoice number
Invoice #12345/20029 for $5000, paid 07/01/2021
Duplicated against Invoice #12345, paid 05/18/2021
Data Errors
You have hundreds of vendors who all use their own systems and formats. And if you work with global vendors, that means different currencies, measurements, date formats, etc. Due to the infinite number of data variations from external sources, data is coming into your system incorrectly and undetected.
Example: Global vendor data entry error
Date in the US: 01/18/2022
Date in the UK: 18/01/2022
Those two errors lead to these errors…
System Errors
The problem is that these kinds of payment errors circumvent ERP system workflows because systems do not interpret these as errors. Since systems are not designed to detect human errors and data entry errors, they can’t handle the data correctly, causing issues like…
Payment to the wrong vendor
Duplicate payment to the same vendor
Incorrect amount paid to the correct vendor
Failure to record period-end payables, creating a false boosted net income
Unrecorded liabilities at period-end
How to Audit Accounts Payable
Today, businesses desire proactive solutions, but many of the processes in place are currently driven by stagnant, reactive solutions that disregard the actual root of the problem.
The Standard Approach:
01. Employ an approval system and ensure all transactions go through the approval process.
02. Organize your system to house all documents in one place, but segment the system to group things like departments, budgets, or workflow.
03. Implement three-way matching in your ERP system. Check that the purchase order, shipping order, and invoice all have the same information on them.
04. Carry out regular accounts payable audits to ensure things are being done correctly, identify potential duplicate payments or general payments errors, and correct those errors.
However, the slow pace and lack of accuracy and efficiency with this strategy have historically led to many errors going unnoticed and a great deal of funds unrecovered. While you receive some benefits from this type of standard review, businesses must incorporate a more efficient model to address modern problems.
The key lies with going beyond ERP systems and uncovering underlying issues with a more innovative approach -- monitoring accounts payable in real-time and ultimately implementing technology that eliminates and prevents errors in pre-payment.
The Modern Approach:
Manually recording your accounts payable transactions may feel like a safe, tried-and-true method for your organization - but human errors and data errors are nearly impossible to eliminate without real-time accounts payable monitoring.
Your ERP isn’t a catch-all system - Peoplesoft, SAP, Oracle, Workday - they’re not designed to be. Going beyond your ERP system and incorporating the right processes and technology is the only way to stay on top of human errors and data errors.
By using a preventative tool like FlexTrap, a payment error prevention tool that equips businesses with an unrivaled level of granularity and flexibility, you can identify and prevent all combinations of payment errors, making error prevention tangible and manageable.
Simple, easy-to-miss errors can feel like an unavoidable aspect of doing business – but they don’t have to be. Implementing thorough processes and taking those extra steps listed above can guide your organization toward financial harmony.
Discover how to get the most from your AP audits in our recent blog, “Accounts Payable Audits: 6 Benefits to AP Teams”
Equip your team with FlexTecs’ error prevention tool, FlexTrap, that shows you exactly where your errors are coming from and how to prevent them before payment is ever made.
Check the health of your AP process and see the steps you can take today to get proactive with our Ultimate AP Assurance Checklist