Accounts payable (AP) risks are an unfortunate but common pain point for businesses. External and internal fraud, conflicts of interest and errant payments are some of the most common practices that can lead to a business losing money. To prevent you from being duped by fraudulent practices, here’s an overview of the top five AP risks you should be aware of this coming year:
Risk 1: Conflicts of Interest
Accountability is key when it comes to preventing conflicts of interest, according to an article on AP practices by UC San Diego, such as paying an internal employee for unauthorized outside work. If you lack the proper channels for the authorization, review of, and approval for payment processes, another potential consequence is favoritism for a particular supplier. Gifts can go unchecked and prevent more competitive suppliers from getting certain discounts. That’s why you should practice due diligence across all areas of your business, to prevent conflicts of interest.
Risk 2: External/Internal Fraud
With the complexities that come with technology nowadays, bogus vendors can easily send themselves the payment through a third party address or a PO box — in more ways than one, internal fraud also falls under cybersecurity, as typically AP departments should also work hand in hand with their corporate security team. It’s important to pay attention, both in a micro or a macro setting. Creating and having this sort of visibility around payment issuers is one of the most effective ways to mitigate these AP risks.
Risk 3: Errant Payments
Due to human error, there’s always the risk of errant payments. This can include overpayment for invoices, duplicate payments, or extraneous payments. For instance, when things get busy a department can approve the payment for an invoice as soon as it has been received, without actually confirming that the product or service has been delivered. Similarly, invoices may be lost in the hustle and bustle of day-to-day operations, leaving you with unpaid debts. In a discussion on the pros and cons of debt settlement, Marcus reiterates that failing to pay your bills may affect your credit score and even end with your debt being sold to a collection agency, leaving you with late fees, interest, and other penalties. In order to prevent errant payments from happening, it’s always a good idea to ensure that all payment systems are cross-integrated and that paperwork, which can easily go missing, is eliminated.
Risk 4: Errant Forecasting
If there’s a lack of clarity concerning the financial forecast of your business, it’s a sign that your AP process isn’t set up so that you have the visibility you need. At the end of the month, having to add up the pending spend by department or various criteria can be a challenge. If your paperwork is disorganized, you might have to estimate your total accruals, which is even more difficult if you have late or missing payments. AccountancyAge also emphasizes the importance of accurate forecasting for SMEs, especially when it comes to securing funding from lenders.
Risk 5: Lack of Audit Trail
If invoices are processed manually and done offline, it may be difficult to pinpoint when exactly a decision was made and why a payment ended up being approved and paid. This opens the door to individuals who are looking to take advantage of gaps in the system. However, by having an online system that accurately tracks each step of the AP process and provides clear visibility and accountability for individuals, you’ll probably discourage fraudulent attempts from occurring.
From this list, it’s clear that there is a myriad of aspects to consider when it comes to identifying and mitigating accounts payable risks within your company. For more in-depth information on fraud risks, here’s a previous article by Leonard Vona on ‘Common Payment Fraud Schemes Every AP Team Should Know About’.
