Accounts Payable Risk Assessment: How to Identify and Mitigate Risks

Accounts Payable risk assessment identifies potential risks in your accounts payable process. Accounts Payable is the amount owed for purchases made on credit. These debts are paid off later based on pre-discussed terms with the vendors. 

Like all financial processes, accounts payable are also subject to risks and frauds, making you lose money. An accounts payable risk assessment ensures your company doesn’t become a victim of fraud or payables errors. 

What Is Accounts Payable Risk Assessment?

Accounts payable risk assessment analyzes the AP process to determine potential risks or leakages. It is often mistaken for an accounts payable audit. An accounts payable audit is used to verify all accounts payable records within the company and to detect potential frauds or mistakes, whereas an accounts payable audit risk assessment is performed to ensure all AP processes are secure and fraud prevention measures are in place. 

Risk assessment is also an essential part of an accounts payable audit, making it absolutely necessary to perform in case of an external audit. It acts as a preventative rather than a corrective action, like an accounts payable audit. 

Common Risks Associated With Accounts Payable Risk Assessment

Some common risks are considered when performing an accounts payable risk assessment. 

Internal Frauds

Internal fraud occurs when someone within the organization with access enters their personal bank details instead of the vendor’s to launder money or partner with a vendor to bill an extra amount. This can also occur if checks aren’t stored securely, and someone with access issues a check to debit money into their account. Without proper checks within the company, employees can misuse company cards for personal use, causing them to lose money. 

Maverick Spend

Maverick spend is unaccounted or unapproved spending within the company, done without following the proper procedures. This purchase is usually made from outside vendors, leading to a loss in negotiations and payment discounts, which the company’s usual vendors could have provided.

This goes unnoticed, as it generally constitutes small sums of money but can aggregate to a significant loss for the company. 

External Frauds

External frauds are generally invoice frauds, which occur when someone outside the company gains access to the company’s sensitive information, allowing them to transact money. This can happen in the form of fake invoices, sending duplicate invoices, or a fraudster intercepting an invoice mail thread to replace an actual vendor’s payment details with their own. Having proper risk assessments in place can reduce the likelihood of external fraud. 

Conflict of Interest

A conflict of interest occurs when an overworked AP department handles more than one operation in the AP process. This poses an issue if the person responsible for making payments is also the approver. This gives the employee too much power, or mistakes might get overlooked without a set of second eyes. 

Manual Errors and Late Payments

Without a proper AP process and a lack of human resources or automation, manual errors and late payments might become a rampant problem in your company. If you end up paying late payment fees or missing invoices or payments, it is time to rethink your AP process. 

Conducting An Accounts Payable Risk Assessment

Accounts payable risk assessment can be performed in many ways. Some checkpoints or questions are core for a successful risk assessment. Here’s what you need to take care of:

Mode of receiving invoices

Does your AP team receive vendor invoices via mail, email, or directly from the vendor? The mode of invoice submission is an important point when performing an accounts payable risk assessment. Receiving invoices on paper can pose many problems for your AP team. They are tough to store and track and might lose information depending on how they’re handled. Maintaining your invoices digitally on a single platform is essential to reduce risks. 

Invoice data entry technique

Do your accountants manually enter data into your accounting systems and assign GL codes based on their understanding? Companies end up losing millions of dollars to manual invoices and late payments. Performing accounts payable processes manually increases the volume of errors in your invoices and leads to longer processing times and missed discounts or late payment fees. 

Gated logins and approvals

Does everyone in your company have access to sensitive information like credit card details and check storage? If there is a possibility that sensitive information might be getting leaked within or outside of your company, you might end up losing a significant amount of money to fraud. Ensuring only authorized personnel gain access to sensitive information and having multiple payment approvals ensures you don’t become susceptible to these fraudulent practices. 

Visibility into the AP process

Do you have enough visibility into where your money is going, whether vendor spend has increased, or which departments are responsible for the increase in cash outflow? Having visibility into your funds is paramount for better financial planning and budgeting. Failure to do so might lead to surprise expenses for your company, which might end up causing losses. 

How Automation Can Help With Accounts Payable Risk Assessment

Accounts payable risks are challenging to avoid without the use of automation. Most AP automation vendors store invoices on a single platform, making keeping track of your costs a breeze. ClearTech AP automation software also digitizes your invoices with 100% accuracy, avoiding manual errors and payment delays. With gated logins and smart approvals, you can completely prevent internal and external fraud and gain complete control over your funds with interactive dashboards to answer your questions. ClearTech also gives insights into spikes in line items or invoice values, making catching fraud easy. 

In Conclusion

Accounts payable risk assessment ensures your accounts payable processes are not susceptible to fraud or leakages. It is an essential part of conducting an AP audit. Internal and external frauds, maverick spending. Conflicts of interest in employees and manual errors or delayed payments can jeopardize your accounts payable processes. Effectively storing and managing invoices, implementing automation to remove manual tasks, having visibility into your AP processes, and implementing gated access within your company can help address these risks for your financial well-being.

FAQs

• What is the risk assessment for accounts payable?

Risk management in accounts payable ensures that your accounts payable processes are not prone to any leakages and that all preventative measures are being implemented. 

• What is the SOX in accounts payable?

SOX, or the Sarbanes-Oxley Act, requires companies to maintain accurate financial records. This law is implemented for the safety of investors against fraud.