MAINTAINING CONTROL WITHIN ACCOUNTS PAYABLE

Last week we received the news that Britain is finally creeping out of recession but over the past few years we have seen the financial failure and collapse of thousands of businesses worldwide, some of them big household names. There is no doubt that when times are hard some businesses will fail and others will endure, perhaps even profit. There are many reasons for this of course, but one of the lessons we surely have to take from all of this is that good governance, risk management and internal controls are essential to corporate success and longevity. 

Internal control is designed to provide an acceptable level of control over the effectiveness and efficiency of operations, the reliability of reporting, and compliance with rules, laws and regulations. In other words, internal controls are those structures, activities, processes and systems which help management effectively mitigate the risks to an organisation’s achievement of its objectives. Accounts Payable is a key area of the business affected by the establishment and maintenance of good internal controls.

Establishing controls: Who is responsible?

The high level establishment of adequate accounting and internal control systems is the responsibility of an organisation’s management. They are charged with this responsibility on behalf of the organisation’s stakeholders and are held accountable by an oversight body (e.g. board of directors, audit committee, elected representatives). However, ensuring continued success demands proper attention on a continuous basis and often, internal audit is assigned specific responsibility for reviewing the design of the systems and processes, monitoring their operation and recommending improvements thereto.

Accounts Payable managers also need to proactively ensure that their controls are aligned with senior management and audit, otherwise other departments will start imposing their control on AP.

Good internal control begins with an ‘Accounts Payable audit’ which reviews the current AP way of working. An audit that engages the whole team, seeking their feedback and suggestions for improvement, will lead to a well-thought-out ‘AP Process’ plan which everyone is bought into. The best-in-class AP teams review this every six months to take account of any changes.

Reviewing and increasing AP control

When carrying out a review, it is important that AP look at ways of working across the organisation, examining, for instance, how information is exchanged between different departments such as audit, treasury, credit control, purchasing and IT. This may simply be a review of office layout or it may be a more in-depth look at the workflow, the type of work being carried out and how it is distributed. One suggestion could be to allocate a person within the AP team to each department to help ensure the lines of communication are maintained.

In turn, this may include evaluating the means used to identify, measure, classify and report on the information exchanged between departments and carrying out a specific enquiry into individual items, such as detailed testing of transactions, balances and procedures every three months. At this stage it is also really important to ensure that good metrics are maintained through the use of specialist AP audit software on a weekly and monthly basis. The key indicators for best-in-class AP teams include:

• Number of invoices processed per day per operator
• Average cost to process an invoice
• Exception invoices as a percentage
• Percentage of erroneous or duplicate payments
• Average time to approve an invoice R to P
• Percentage of discounts captured
• Percentage of electronic invoices
• Percentage of credit notes
• Worst performing suppliers
• Percentage of non- compliant invoices
  

Maintaining AP control

Once an AP team’s internal controls are in place it needs to look at how it maintains this level of control and adapt it as the organisation develops. One suggestion would be to task the person responsible for updating and maintaining the AP metrics with creating a monthly board report or dashboard for the AP team to chart the key areas of control, This person would need to be trained on the specialist software and supported to help adapt their role from being processing focused to becoming more of an analyst. This person may want to spend a week with audit as well in order to build bridges with this key function.

Summary

In summary then, there are three key elements to maintaining internal control within an AP team . In the very first instance, the managers and supervisors for AP who are responsible for ensuring good internal control should carry out an Accounts Payable audit of the organisation’s existing processes. They then need to put in place an AP process document that can be accessed on the intranet and will allow those responsible for ensuring control on a day-to-day basis to deliver against AP and senior finance management’s expectations. Once that is done, the whole process needs to be monitored and periodically reviewed by a trained AP team member who has the knowledge to carry out weekly AP audits. This will ensure continued best practice and optimum AP performance.