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Mary Schaeffer
Mary Schaeffer

A Control Disaster Waiting to Happen

Do you know what happens when payments are made outside of your accounts payable department?

January 6, 2011
by Mary Schaeffer

When multiple parties perform the same task under the direction of different managers the potential for problems skyrocket. And that is exactly what's going on today in the payment world. When payments are primarily made by paper check, the process was handled almost entirely in accounts payable. While there were problems then as well, they were more manageable as they were under the direction of one professional.

The Problem

Most organizations have a pretty good handle on the internal controls surrounding the processing of invoices and the issuance of paper checks. They also have decent controls on the three-way match, extinguishing purchase orders (POs) and receiving documents. These tasks are typically handled in accounts payable (AP).

As we move forward into the electronic payment arena, it appears that automated clearinghouse (ACH) payments are more often than not being initiated outside accounts payable. And of course, payments made using purchasing cards (p-cards) are almost always made outside AP. And of course, wire transfers are also often made outside of accounts payable. Since these tend to be large dollar payments, and are frequently for items in which an invoice is not prepared, there have been fewer problems.

When payments are made outside AP, the associated tasks, such as performing the three-way match, are frequently not handled with the same rigor as they are when payments are made in accounts payable. There are two solutions to this control issue:

  1. Move the responsibility for all payments to accounts payable or
  2. Insist everyone else making payments adhere to the same rigid controls employed in the accounts payable department.

If this is not done, the potential for duplicate payments and fraud will skyrocket.

Additional Controls If Multiple Parties Make Payments

Those organizations that opt to have payments made outside their AP departments need to employ some additional reviews:

  1. Review all wire transfer and journal entry activity monthly to ensure no duplicate payment was made. These transactions should be compared with check runs and ACH payments. This review should be done for 60 days to 90 days after the wire transfer is conducted. If a duplicate entry is found, identify the internal control weakness and fix it.
  2. Eliminate associated PO and receiving documents when the review is being made, should they exist, if they are not when the payment was made.
  3. Work with your auditors to convince management that normal payment processes should be followed when any payment is made, regardless of who makes it. If other areas making payments are not following best practices including strong internal controls, a case should be made for moving that activity to accounts payable.
  4. Propose that wire transfers be replaced with ACH transactions, especially if it is handled in accounts payable.
  5. Have a duplicate payment audit performed by a third-party contingency firm. If no duplicates or other erroneous payments were made, you are in good shape. However, if there were a large number of duplicates, start an investigation immediately into why they  occurred.

Conclusion

As we move into the electronic payment arena in greater numbers, the challenges facing accounts payable are likely to grow. By recognizing where the problems might occur, you will be well positioned to deal with them effectively for your organization.

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Mary S. Schaeffer is the author of over a dozen business books including Controller & CFO's Guide to Accounts Payable (John Wiley & Sons) and Fraud in Accounts Payable: How to Prevent It (John Wiley & Sons). She is the publisher of the CFO & Controllers Accounts Payable Management Journal, a quarterly electronic journal for senior executives concerned about internal controls and cost control in their payment function, writes a monthly newsletter, a free weekly ezine e-AP News, speaks at accounts payable webinars, seminars and conferences and directs the organization's consulting practice.