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An accounts payable risk assessment helps optimize your accounts payable (AP) processes by helping you better understand your business's threats and guiding you in improving your workflows. Here's what you need to know about these risk assessments, how they differ from an audit, and how to conduct your own.

Key takeaways

Accounts payable risk assessments help identify threats to your business.

A proactive approach to AP can improve efficiency and prevent fraud.

Risk assessments promote better vendor relationships and long-term cost savings.

What is an accounts payable risk assessment?

An accounts payable risk assessment systematically evaluates the potential threats associated with the AP process within your organization. You'll identify accounts payable risks like internal and external fraud, data entry errors, duplicate invoices, manual data entry, and any other mistakes that could lead to financial loss or inefficiencies.

Once you know what accounts payable risks you are facing, you can safeguard your business using a combination of internal controls, technology, and audits.

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Accounts payable audit vs. accounts payable risk assessment

	AP audit	AP risk assessment
Purpose	Reviewing AP processes and records for effectiveness	Identifying potential threats in AP processes
Process	Review transaction records, verify documents, and check compliance	Pinpoint areas prone to errors, fraud, or inefficiencies
Conducted by	Internal or external auditors	Internal management, risk teams, or consultants
Approach	Reactive – looks back at past performance	Proactive – aims to prevent future issues
Metrics reviewed	Transaction records, compliance documents, financial statements	Payment errors, slow approvals, check fraud, average days to pay, invoice exception rate, cost per invoice

Let’s unpack these differences further so you can better understand when to use a risk assessment vs. an accounts payable audit.

Purpose

You’ll typically perform an AP audit when you need to review your accounts payable process for efficiency and effectiveness. It’s at this point that you can pinpoint deficiencies and identify areas for improvement.

On the other hand, a risk assessment helps you identify specific threats that may disrupt your AP processes and lead to delayed payments, inefficiencies, or fraud.

Process

During an AP audit, the auditor will review all relevant documents and transaction records, comparing everything to relevant regulatory frameworks to ensure compliance with state and federal laws.

A risk assessment is more targeted and will focus on areas that are particularly susceptible to threats or errors. For example, if multiple people have the authority to approve AP invoices, your business may be at an increased risk of fraud due to a lack of centralized oversight.

Conducted by

Either an internal auditor or an objective third party may audit your accounts payable processes. The latter may provide unique insights into the efficacy of your AP processes and help you better understand ways to get better.

Internal management personnel or a dedicated risk mitigation team may be tasked with conducting your AP risk assessment. You can also partner with a third-party consulting firm to perform the assessment.

Approach

Accounts payable audits are reactive, looking at past transactions and records to determine what you’ve done well and what needs to get better. You are generally asking, “How have we been doing lately?”

Risk assessments are a bit more proactive, allowing you to use the resulting insights to safeguard your business from future issues.

Metrics involved

An accounts payable audit involves diving deep into critical AP metrics and records. It typically involves reviewing transaction records, verifying supporting documents, and sifting through financial statements.

A risk assessment focuses on metrics that could be risk precursors. A few examples include average days to pay, invoice exception rates, cost per invoice, check fraud, and payment errors. Each of these metrics provides a different piece of your risk profile puzzle. For example, a high average days to pay could lead to friction with your trade partners. Frequent errors could mean that you are more susceptible to overpayments.

How to conduct an accounts payable risk assessment

Here's how to conduct an accounts payable risk assessment:

1. Define your objectives and scope

Always start by defining the objectives and scope of your assessment. Determine what you want to achieve. Are you conducting the evaluation in response to a specific accounts payable incident, or do you want to establish a baseline to better understand common accounts payable risks? Some common objectives include:

Identifying external fraud risks
Ensuring you have the proper controls in place
Determining if manual processes are exposing you to threats
Identifying the source of payment delays

After you've outlined your objectives, define the scope of your assessment. List out the departments and transactions that will be included.

2. Identify potential risks

Next, you can identify risks that could threaten your company's money or negatively impact vendor relationships.

Here are a few of the risks you need to be cognizant of:

External and internal fraud

Internal fraud may look like an employee overcharging on invoices and pocketing the difference. External fraud may take the form of fake invoices or intentional overcharges.

Maverick spending

Maverick spending occurs when department heads, managers, or other members of your organization make large purchases without securing approval through the proper channels. All it takes is a few major purchases to quickly crater your budget.

Conflicts of interest

You want to avoid any risk of conflict of interest in your AP processes. For example, an employee could agree to purchase goods from one supplier at a premium price in exchange for kickbacks.

Payment errors and delays

Overpayments, underpayments, and delays in AP processing can create friction between your business and its trade partners. Frequent payment errors can compromise cash flow and lead to long-term supply challenges.

3. Develop mitigation strategies

After you've assessed your risks, develop strategies to mitigate them. Here’s a step-by-step strategy for mitigating risks:

Review invoice arrival

When receiving invoices, your team should be checking them for accuracy and completeness. They should also compare the invoice to the original purchase order and the goods received to ensure you are paying the correct amount. This initial review process is your first line of defense against fraud and other errors.

Review invoice data capture

Then, consider how you are capturing data. Make sure that the information from the invoice is accurately transferred to your accounting solution. If you are relying on manual invoice capture processes, explore ways to automate the process to save time and reduce the likelihood of errors.

Define AP approval controls

Create a clear and transparent process for approving invoices, setting firm limits regarding purchase limits for managers and department heads. Make sure your AP team is aware of these limits so they can route large purchase requests to you for approval. Most importantly, segregate AP approval duties so that you aren’t reliant on a single person for accounts payable approval. Implementing this segregation of duties can prevent fraud.

Enhance AP visibility

You should maintain a real-time view of your accounts payable processes. Better visibility will help you track performance, identify and prevent delays, and continually work to forge better relationships with your trade partners. Automation tools are invaluable for improving visibility, as they can accelerate data capture and prevent errors, ensuring you have an accurate view of AP workflows.

4. Monitor and review

Risk assessment is not a one-time activity. You must periodically assess the threats facing your business and conduct secondary assessments. Determine whether the improvements you made effectively mitigated the threats or if you need to implement further changes.

Continuous monitoring helps ensure your AP processes are resilient and adaptive to changing circumstances.

Questions to ask in your accounts payable risk assessment

During your accounts payable risk assessment, you and your team need to ask these key questions:

Is there adequate segregation of duties in the AP process?

Segregation of duties helps prevent fraud and errors. Ensure that different individuals are responsible for invoice approval, payment processing, and record-keeping.

If a single person has unilateral control over AP approval, they could defraud the business of money and hide their illicit activities. Honest employees could make mistakes if their work is never checked by at least one other party. Either way, you could have a big problem if you don't segregate duties.

How are invoices verified for accuracy and legitimacy?

Evaluate how you verify invoices before remitting. For example, you should match invoices with purchase orders and receive reports. This process safeguards your business against fake invoices while ensuring that it received the products and quantities it's being billed for.

Are there controls in place to prevent duplicate payments?

Duplicate payments can lead to substantial financial losses. Assess the controls in place to detect and prevent double payments. Segregation of duties can help protect your business against duplicate payments. Assign one person to issue payments and another to review/approve said payments.

How are we managing and updating vendor information?

You must keep vendor information up to date. Points of contact and payment details change over time. Make sure that your AP department is aware of any vendor information updates so it can remit payment to the right entity and account.

What measures are in place to ensure compliance with regulatory requirements?

Do you have robust controls to ensure your AP and AR processes comply with industry-specific regulations? Assess the strength of your compliance posture through regular audits and policy reviews. Thorough employee training also plays a critical role in promoting compliance and avoiding violations.

How is invoice approval documented and tracked?

The approval process must be both nimble and thorough. To achieve both goals, you must use digital tracking strategies that ensure accountability and transparency. Paper-based reporting is inefficient and clunky, often leading to delays and reporting errors.

Are there any recurring issues or trends in the AP process?

Identify persistent challenges in your accounts payable workflows. This represents one of the key use cases for an accounts payable risk assessment. Analyze historical data to pinpoint patterns or trends that may cause friction with your vendors.

Accounts payable risk and control matrix

A risk and control matrix (RCM) is a table that helps you spot and understand potential problems by organizing risks and showing their potential impacts. It helps you focus on what you can mitigate while increasing awareness of residual threats. Businesses of all sizes can benefit from a risk and control matrix.

In an RCM, you list risks in the left-most column and then provide details about that threat in the cells to the right, like so:

Risk	Potential impact	Likelihood	Existing controls	Control effectiveness	Additional controls needed	Owner	Review frequency
Duplicate payments	Overpayment, financial loss, cash flow issues	Medium	AP software flags duplicate invoices, manual review before payment	High	Conduct periodic audits to verify effectiveness	AP Department Manager	Quarterly
Fraudulent invoices	Financial loss, reputational damage	Low	Vendor verification process, two-person approval for all payments	Medium	Implement additional training on fraud	Chief Financial Officer or Controller	Monthly
Missed payments	Late fees, damaged vendor relationships	Low	Automated payment reminders in AP	High	Review and adjust payment schedule as needed	AP Clerk	Monthly

You should review this matrix about once a month, updating it anytime you conduct a risk assessment or make changes to your preventative measures. If you notice that some risks aren’t well-controlled, you may need to add extra safeguards.

For example, suppose that you’re worried about duplicate payments of invoices. You may already have software in place that automatically checks for duplicate invoices, but the risk is still marked as Medium because of the volume of payments you process each month. To be safe, you might implement a manual review for all payments over a certain dollar amount.

Mitigate risks in your accounts payable with automation

Artificial intelligence-powered automation solutions set the stage for hands-free AP. You can enhance the speed and accuracy of your AP process, helping to mitigate risks effectively. Here are a few things you can achieve with automation:

Streamlined processing

You'll be able to process AP invoices faster by reducing your reliance on manual processes. Team members can focus on more dynamic tasks while your automation solution handles redundant work. AI-powered platforms like BILL are particularly effective at saving you time and alleviating the burden on your team.

Enhanced fraud detection

Automation tools can help detect fraudulent activities by analyzing patterns and flagging suspicious transactions.

For example, suppose that you typically conduct one monthly transaction with one of your key suppliers. The average AP invoice size is approximately $10,000. However, you suddenly receive another invoice one week after paying the usual bill. Not only is this invoice unusual in terms of the time it was issued, but the amount is roughly double what you expected.

An inattentive team member might automatically approve the invoice since it came from a trusted vendor you've done business with for a long time. Conversely, automation tools will flag the invoice and notify you so you can investigate further.

Increased control

Automation provides real-time visibility into your AP process. You can monitor key performance indicators and track invoice status. This increased visibility helps you identify and address issues promptly, improving overall process control.

Explore the power of automation with BILL

BILL provides accounts payable automation solutions designed to mitigate the threats facing your business and provide unmatched visibility into your AP workflows.

With BILL, you can set custom roles and permissions for each user. For example, you can set purchase authorization limits for department heads or prohibit access to certain workflow processes.

BILL also includes a two-layer approval framework. That is, you can require a second admin approval via our dual control feature to decrease the risk of error or fraud. By ensuring that two sets of eyes review every large AP transaction, you significantly reduce the likelihood of a major mishap.

Perhaps most importantly, BILL provides a holistic view of payments in and payments out. You can identify risks, speed up inefficiencies in your day-to-day workflows, and maintain better relationships with vendors by ensuring they get paid on time.

Explore our suite of tools today and take the hassle out of AP risk mitigation.