After payroll, the largest disbursement of a company’s funds is usually related to Accounts Payable. Accounts payable is often the largest cost in the accounting function. However, it is often the least accurately tracked process due to the highly manual and transaction-intensive nature of the process. This study lists common problems and errors related to accounts payable processing found in most organizations.
Common issues/errors
data entry errors
Data entry errors can occur in any invoice field and account for the majority of errors in accounts payable processing. According to a research report, data entry errors average 1.6% of total AP transactions. While the ratio may seem small, the absolute number of errors increases in companies with hundreds of AP transactions. This also increases the likelihood that the mistake will cause a big dollar impact on finances and outlays! The other source of risk is that these errors are not easily measurable and/or visible in most accounting departments. This ‘hidden’ nature makes it difficult to develop rules or actions to reduce the impact of these errors.
mismatch errors
Reconciling invoices with purchase orders and packing slips/merchandising receipts is complex and error-prone, as AP staff often do not document and follow business rules for reconciliation. In most companies, the lack of sufficiently detailed documentation to match business rules makes it difficult to automate this process. This forces the accounts payable staff to manually apply the rules, increasing the possibility of errors.
Excessive use of purchase order-receipt-invoice matching tolerances
Many accounts payable departments use matching tolerances to reduce the effort of resolving mismatches, but these tolerances are often set too loosely (to reduce effort), allowing dollars to be lost.
Duplicate or incorrect invoices
Suppliers frequently generate duplicate invoices when an invoice has not been paid on time. Most companies can only track such invoices if invoices are properly matched to purchase orders.
Wrong account coding
Account coding is critical and the rules for coding are not well documented or established in most companies; this can lead to inconsistent coding between departments or manipulation for budgeting or other purposes. This lack of consistency in coding can also make comparison of trends for different expenses or income difficult or inaccurate.
Disappearing bills and unapproved bills
Invoices that come directly from the vendor to a business unit manager or non-accounting location tend to be delayed (sometimes on purpose) or lost due to disorganized paperwork or filing systems, decentralized operations, and multiple points Contact for invoices. As a result, the accounting may not know the exact amount of the invoices, and therefore the company’s liabilities may not actually be known or reflected on the balance sheet. This also leads to late fees and bad credit from vendors.
Approval of new suppliers or update of key supplier information
Careful controls must be put in place over who can approve the establishment or review of providers to prevent fraud.
Difficulty finding bills and checks after document processing and storage is expensive paper
Documents are difficult to locate after accounts payable processing due to filing errors and are costly to store and locate. Many companies store the invoice, a copy of the check, and the purchase order together for easy retrieval, but this is extremely expensive. The lack of a proper electronic document management system also exacerbates the problem.
Findings from a recent study highlight common mistakes and problems faced by the accounts payable department. They also emphasize the manual, inefficient, and error-prone nature of most accounts payable processes. The key findings of the study are:
• Errors – The average accounts payable department has an error rate of 1.6%.
• High Cost: The average cost to process an invoice is $16.54
• Lack of controls: Administrative staff have wide discretion on how to apply management rules around purchase order/receipt/invoice matching and payment and invoice authorization rules are not always followed.
• Poor Visibility: Finance Managers Increased Outstanding Monthly Accounts Payable; many of the individual transactions are paper invoices sitting in managers’ inboxes waiting for approval that financial managers have not seen
• Poor Documentation – The large amount of paper in the process makes it difficult to locate manually filed invoices and check documents.
• Management time – All of the above contribute to an inordinate amount of management time, attention and resources being spent on a non-value added function.
