Accounting teams depend on internal controls to mitigate the risk of AP fraud while ensuring efficiency and accuracy throughout their accounts payable (AP) processes.
With effective AP internal controls in place, your team can help your organization prevent fraud, reduce errors, and ensure regulatory compliance—all while helping you safely delegate financial responsibilities across your finance and accounting teams.
This post provides an accounts payable internal control checklist that can help strengthen your payment processes.
1. Obligation-to-pay controls
Obligation-to-pay controls help make sure your company is only paying amounts that it is, in fact, obligated to pay. They're designed to catch inaccuracies, duplications, and even outright fraud in your incoming invoices.
Purchase order approval
Establish a formal process for approving purchase orders to help you track upcoming spending and prevent excessive cash outflow. To request goods or services, individuals or departments can fill out purchase requisition forms, which are then reviewed and approved by the procurement department.
Pro tip: You can require purchase orders only above a certain amount to lower the number of hours this requires from your team, or simply use a spend automation tool like BILL Spend & Expense to set budgets ahead of time.
Invoice approval
Put a standard approval system in place to verify the validity and accuracy of supplier invoices before you process payments. Authorized approvers should review and approve invoices based on the goods and services actually received as well as agreed-upon pricing. Approvers do this by checking invoice items and amounts against purchase orders, packing lists, contracts, or other relevant documents.
Pro tip: In a strong approval system, approvers should be close to the goods and services received. Generally, they are not part of the accounting team but rather the department heads or managers who requested the goods or services that were delivered.
Invoice validation (3-way matching)
Use a 3-way matching process to ensure invoices match purchase orders, receiving information, and inspection records. This helps verify that the goods or services have been received as expected before authorizing payment.
Pro tip: Counting on busy approvers to apply perfect 3-way matching every time leaves something to be desired. Instead, standardize your 3-way matching with an automation platform that can streamline the process while ensuring that it's followed.
Duplicate search
Check each invoice as it comes in against your accounts payable and payment records to identify and prevent duplicate payments. This requires keeping your financial records up to date—in real time. Otherwise, your team could be checking its duplicate invoice or duplicate payment search against a list that doesn't yet include invoices you've received or payments you've already made.
Pro tip: Consider using an AP automation platform like BILL Accounts Payable that can automatically flag duplicate invoices, minimizing the risk of erroneous payments.
2. Data entry controls
As invoices are approved, they need to be entered into your AP system. Data entry controls help ensure that errors aren't introduced during this step.
Data entry standardization
First, establish clear, standardized processes for recording invoice data in the accounts payable system. This helps ensure consistency and accuracy in data entry, reducing the risk of errors.
Pro tip: Because invoices may arrive in different ways, such as by mail or via different email addresses, creating a standard process can be a challenge. If you're considering an automation platform, be sure it can read invoices and enter that data for you whether the bill arrives by email, by PDF scan, or even by photo snapped on a phone.
Double-check data entry
Create quality control guidelines for checking data entry after the fact, to help catch any errors that might have been introduced. A specific checklist can help drive attention toward key details, such as invoice number, amount, date, and terms.
Pro tip: If you're using an automation platform, make sure it includes OCR (optical character recognition) to read each invoice and enter it for you. Let automation take care of the first round of entry, and use human intelligence for quality control.
3. Payment controls
When it's time to pay each invoice, payment controls help increase the security of your payment process.
Secure check storage
Store physical checks in a secure and locked location to prevent unauthorized access and fraud. Additionally, keep signature plates and stamps in a secure place to minimize the risk of unauthorized usage.
Pro tip: Some payment services use clearing accounts to write physical checks for you, so there's no need to store physical check stock—or to expose your own banking information on your checks.
Separation of duties
Also known as segregation of duties, separation of duties in payments requires assigning various payment tasks to different staff members. For example, one person can prepare checks while another person signs them. This reduces the risk of fraud by ensuring that a single individual doesn't control the entire accounts payable process.
Pro tip: Consider using technology rather than a manual accounts payable process to ensure that payment controls such as separation of duties are followed in practice. Assigning roles and unique logins makes it far more difficult to cut corners when it comes to internal controls.
Check number sequence tracking
Keep a log of all check numbers and amounts issued to identify any missing checks, duplicate payments, or potential payment errors.
Pro tip: If you're using a payment platform to write physical checks, ask whether the platform uses Positive Pay as an added security measure.
Check signing procedures
Sign checks manually rather than relying on signature stamps. Also, consider implementing a double signing process for checks over a certain amount to enhance security and reduce the risk of fraudulent activity.
Pro tip: Be sure your payment automation platform supports custom approval rules so you can require dual approvals for higher-risk transactions—whether paying by ACH, check, credit card, or wire transfer.
Vendor payment information updates
When sensitive vendor information, such as account numbers or addresses, changes, take steps to verify and confirm the accuracy of the updated information. This helps prevent fraudulent activities and ensures secure payments.
Pro tip: Consider a payment platform with a network that lets vendors update and maintain their own information. This ensures accurate, up-to-date information while removing the time requirement from your team.
4. Fraud controls
Fraud controls are just what they sound like in your AP process—they help protect your company from fraud. While many of the controls above also help prevent fraud, there's at least one more to be aware of.
Record after approval
Record invoices in your AP system only after they've been approved by authorized personnel. This prevents errors and ensures that your invoice data is accurate and valid.
Pro tip: In a manual AP process, making sure that potentially fraudulent invoices haven't been entered into your system requires regular AP audits. By automating your approval, invoice entry, and payment processes—and limiting edit access to your accounting software—new invoices are forced to go through proper controls, reducing the chance of fraud and unauthorized payments.
Automate internal controls in your accounts payable process with BILL
“The controls that BILL has in place are the unsung heroes for our firm!” —Redmond Accounting, a Menlo Park–based firm and BILL customer since 2010.
Using BILL to automate your AP processes can help you make sure these AP internal controls are solidly in place—and that they're being used consistently.
BILL helps you enforce internal controls in your accounts payable processes with role-based user permissions, custom approval rules, an audit trail that logs every touchpoint, and more—making sure your internal control systems are applied automatically.
To learn more, visit our BILL page on accounts payable controls.
Internal controls in accounts payable FAQs
What are the types of accounts payable internal controls?
Accounts payable internal controls can be categorized into obligation-to-pay controls, data entry controls, payment controls, and fraud controls, as shown in the lists above. For more information, download "A complete guide to AP internal controls.”
Why are internal controls important for accounts payable optimization?
Internal controls are important for accounts payable optimization because they help ensure payment accuracy, prevent fraud, minimize errors, and ensure compliance with regulatory requirements.
Need to apply internal controls for a remote AP department? Learn how in our free on-demand webinar "Adapting Internal Controls for Distributed AP Teams."
How does automation enhance accounts payable controls?
Automation enhances accounts payable controls by streamlining processes, reducing manual data entry, improving accuracy, and providing better visibility into payment workflows. It also enables the use of system-based checks and balances, minimizing the risk of errors and fraud by ensuring that invoices and payments flow through the system of internal controls that have been incorporated into the platform.
Learn more in our free, on-demand webinar "9 Frequently-Overlooked AP Internal Control Issues: How to Prevent Them."