After payroll, the largest disbursement of a firm’s funds is typically related to Accounts Payable. Accounts Payable is often the single largest cost in the accounting function. Yet its’ often the least accurately tracked process due to the highly manual and transaction intensive nature of the process. This study lists the common issues and errors related to accounts payable processing that are found in most organizations.
Data Entry Errors
Data entry errors can occur on any invoice field and account for most of the errors in accounts payable processing. According to a research report, data entry errors average 1.6% of the total AP transactions. While the proportion may seem small, the absolute number of errors increases in companies with hundreds of AP transactions. This also increases the probability of the error causing a large dollar amount impact on financials and disbursements! The other source of risk is that these errors are not readily measurable and/or visible in most accounting departments. This ‘hidden’ nature makes it difficult to develop rules or actions to reduce the impact of these errors.
Matching of invoices to purchase orders and goods receipts/packing slips is complex and prone to errors as business rules for matching are frequently not documented or followed by AP staff. In most companies, the lack of sufficiently detailed documentation for matching business rules makes automation of this process difficult. This forces accounts payable staff to apply rules manually thereby increasing the possibility of errors.
Excessive Use of PO-Receipt-Invoice Matching Tolerances
Many accounts payable departments use matching tolerances to reduce the effort to resolve unmatched items, but these tolerances are often set too loosely (to reduce effort), allowing dollars to be lost.
Duplicate or Incorrect Invoices
Vendors frequently generate duplicate invoices when an invoice has not been paid in a timely manner. Most companies can only track such invoices if a proper matching of invoices with POs is done.
Improper Account Coding
Account coding is judgmental and rules for coding are not well documented or otherwise established in most companies; this may lead to inconsistent coding across departments or manipulation for budgetary or for other purposes. This lack of consistency in coding can also make trend comparison for different expenses or revenues difficult or inaccurate.
Disappearing Invoices and Unapproved Invoices
Invoices that come directly from the vendor to a business unit manager or location other than accounting tend to get delayed (sometimes on purpose) or lost due to the unorganized paper work or filing systems, decentralized operations and multiple touch points for invoices. As a result, the exact quantum of invoices may not be known to accounting and therefore company liabilities may not be truly known or reflected on the balance sheet. This also leads to late charges and poor credit from vendors.
Approval of New Vendors or Update of Key Vendor Information
Careful controls should be placed on who can approve the establishment or revision of vendors to prevent fraud.
Difficult to Find Invoices and Checks after Processing and Document Storage is Expensive Paper
Documents are difficult to locate after accounts payable processing due to filling errors and are expensive to store and locate. Many companies store the invoice, a copy of the check and purchase order together for ease of retrieval, but this is extremely expensive. The lack of a proper electronic document management system also exacerbates the problem.
The findings of a recent study highlight the common errors and issues faced by the accounts payable department. They also stress on the manual, inefficient and error-prone nature of most accounts payable processes. The key findings of the study are:
• Errors: The average accounts payables department has a 1.6% error rate
• High Cost: The average cost to process an invoice is $16.54
• Lack of Controls: Clerical staff has broad discretion on how to apply management rules around PO/receipt/invoice matching and payment and invoice authorization rules are not always followed
• Poor Visibility: Financial managers accrue outstanding payables monthly; many of the individual transactions are paper invoices sitting in manager inboxes waiting for approval that financial managers have not seen
• Poor Documentation: The paper-intensity of the process leads to difficulty in locating manually-filed invoice and check documents
• Management Time: All of the above contribute to an excessive amount of management time, attention and resources being spent on a non value-added function
Priyankar Baid is an experienced accountant who has consulted small businesses in US, Canada and UK over the last few years. He also runs a firm http://www.outsourcinghubindia.com specializing in online accounting. He helps businesses set-up accounting systems, clean-up existing books and implement outsourcing agreements. His firm specializes in providing accounting and reporting services to small medium businesses in North America.