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Internal Control for Accounts Payable

by Jason White

What does it take to maintain your car correctly? You need to get the oil changed every 3000 miles, rotate your tires every 5000 miles, and replace your windshield wipers every time you get your oil changed. These are basic things that we need to do in order to keep our cars running smoothly.

Every once in a while, your car needs more than maintenance. If you don’t take your vehicle in for regular check-ups, how would you know something is wrong? When it starts leaking fluids? Starts making strange noises? These are uncontrollable circumstances that apply to all car owners, whether we want it to or not. These sorts of mechanical mishaps happen regularly and aren’t usually that unexpected when you own the same car for long periods of time. 

What would happen if someone was intentionally causing damage to your car? If someone were to siphon a gallon of gas out of your car every day, would you notice? How could you? Unless you regularly monitor your car’s fuel efficiency, you would never know. It is crucial to monitor your conditions at all times because you may never know what is going on, but doesn’t it seem ridiculous to constantly measure your car’s fuel efficiency every time you go fill up? You won’t know if your car was underperforming until the damage to your wallet has already been done. 

Without a system of checks and balances in your internal control, this may be happening to you. Employees and outsiders may be taking advantage of your weak internal control system for your accounts payable to siphon extra money off the top. We will explain the downsides of a weak internal control, how to identify these problems, and how to make your internal control system even more effective.

Risks of Weak Internal Control

Sometimes the risks of an unsafe car could be fatal. There could be leaks within your engine that might lead to a fire and even an explosion! That is why most oil changing services offer a multiple point inspection to make sure your car is running safely and is fit for the open road. While the risks of a weak internal control do not mean life and death, they could lead to serious setbacks for your business. Be wary of the potential risks that your company could be taking on.

Weak internal control dramatically increases the risk of fraud within your company. In fact, nearly half of all frauds are because of internal control weaknesses. When most people think of fraud, they think of an outside source infiltrating their company because they take advantage of their weak internal checks and balances. While your company needs to be wary of external threats, no one knows the control system’s inner workings better than your own employees. It is not unreasonable to think that your own employees might be doing this to your company. Also, if you think you are safe because you are a small business, think again. Small companies lose an average of $200,000 per scheme, so all shapes and sizes of businesses are at risk. If your company is operating on a weak system of internal control, these are some of the risks you are taking on:

  • Duplicate Payments – While some duplicate payments are honest mistakes, some vendors may be taking advantage of your weak internal control and stealing thousands of dollars a year. Be sure to check the accuracy of your vendor’s number of invoices a year to ensure their validity.
  • SOX Certifications Are at Risk for Loss – Older automobiles get called in for emissions checks to make sure your car is producing safe enough air for the environment. If you do not pass the test, you are unable to renew your car’s registration. Similarly, if your internal control system is weak and non-compliant with the Sarbanes-Oxley Act, you could lose your certification along with current and future business. Be sure to continually check your internal control disclosure to ensure it has the rigor it needs.
  • Inaccurate Financial Reporting – Inaccurate financial reporting results from poor internal controls, therefore misinforming account executives who make important decisions based upon these financial statements. Be sure to set your company on the right path by double-checking your financial statements and keeping your company in line. Do not be afraid to send another employee to take an outside look at your reporting to get a second opinion. 
  • Tax Issues – If your company fails to follow the Generally Accepted Accounting Principles (GAAP), you could find yourself in hot water with the IRS. 

Ways to Check your Internal Control

If you do not have a reminder to get your oil changed, how would you ensure that your car has a safe level of oil to get from point A to point B? You get your hands dirty and check the dipstick. By doing some of the dirty work, you are able to ensure the validity of your car’s condition. The same applies for your internal control. Every once in a while, it couldn’t hurt to send a pair of fresh eyes to examine the safety of your internal control.

  • Random Sample Testing – This testing method randomly selects an invoice, and you must make sure there is a matching purchase order to go with it. This ensures the validity of the purchase orders and invoices if they are properly matched. Unless you have reason to believe a specific paper trail leads to fraudulent behavior, choose randomly. This ensures the integrity of your choices and could lead to unknown activity.
  • Run Vendor Maintenance Reports – An important aspect of your company’s structure is to make sure that none of the employees are playing duo roles as vendor maintenance and invoice processor. Also, check to make sure all invoices were run with a valid PO number and the appropriate approval before being processed. If one of these pieces of information is regularly missing from your procedure of processing payments, it should be raising red flags.
  • Wire Transfer Regulation – Be strict on your wire transfers. Only allow wire transfers if it has the supporting documentation. You would not want to buy a car from someone if they did not have the proper title, would you? Be sure to double check your documentation for the safety of your company and your vendor.

Internal Control Improvement

Changing the way you take care of your automobile can make its life last longer. You could switch from using standard oil to synthetic or you could fill up your tank with premium gas. In the long run, these sorts of adjustments can lower your cost for future mechanical issues. Just like your car, there are always different options for optimizing your accounts payable procedure.

  • Duty Segregation – You should be separating the data entry, vendor management, approvals and payment processing. While you separate these powers, continue to be wary. Just because an employee has tenure does not mean they cannot commit fraud. Thorough background checks are also an essential aspect of the hiring process. You need to ensure that none of the employees you are bringing along have a previous history of embezzlement or fraud. A sturdy foundation of loyal employees can lead to a better future.
  • Taking Advantage of Technology – A 20-year-old automobile could be in perfect shape, but is it worth it to keep driving that same car? A newer car that is just as reliable could get you plenty more miles per gallon. Your older style of processing accounts payable may work but holding back your business in terms of efficiency. An automated system that controls your accounts payable removes all human processing errors during the data entry procedure. This also saves time for the company.
  • Improving Payment Controls – By modernizing the way you handle accounts payable, like switching to electronic or ACH, you can eliminate some of the hassle you previously dealt with during payments. These processes can make tracking the payment, as well as processing, much easier. If a document is lost or stolen, the system will automatically know where to find the payment or how it was lost. Requiring additional signers also ensures the validity of each purchase order and invoice. The more people signing a check is an opportunity for your employees to hold each other accountable.

When it’s time to upgrade your current mode of transportation, you should always be doing your research. Cost of maintenance, reliability, and safety. If you don’t realize it is time to upgrade, you might find yourself stranded at the side of the road and left behind the rest of the traffic. Do not let yourself be the company that ends up in the fraud statistics. Be sure to check your company’s internal controls often and ensure the safety of your business. There should not be a reason to fall behind the competition by encountering a mistake that could have been avoided.