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Celebrating 40 Years of Excellent Client Service

Accounts Payable Best Practices

Presented by: Eddy Castaneda, CPA, MBA


Accounts Payable Best PracticesTop Practices


AP Top Practices

Document your current AP procedures• Can identify overlapping work• Can identify possible weaknesses in controls• Helps develop new staff• Helps your auditor


AP Top Practices (Cont)

Document your current AP procedures (Cont)

• Areas to identify:– Key personnel– Major classes of transactions– Risks inherent in the process– I.T. systems– Work flow– AP controls– Security




• Areas to identify:– Key personnel

– Controller/Finance Director– AP Supervisor– AP Clerk

– Major classes of transactions– Receiving invoice from vendor– Payment is properly authorized– Recording transaction in the AP system– Preparing JE to record transaction to GL




• Areas to identify:– Risks inherent in the process

– Cash disbursement transactions improperly reported– Purchase was not properly approved– Goods received do not match invoice but paid anyway

– I.T. systems– Accounting software– AP modules




• Areas to identify:– Work flow (example)

– Goods are received and counted– Goods are checked against packing slip– Information is transmitted to AP Department– AP clerk checks invoice against P.O.– AP Clerk checks for mathematical accuracy– Etc….




• Areas to identify:– AP controls

– Review and update signature authorizations periodically– Goods are received and checked against packing slip– Department supervisor approves payment of invoice prior to

submitting invoice for payment– AP Clerk checks invoice for mathematical accuracy– AP Supervisor reviews all invoices for payment




• Areas to identify:– Security

– Secure check stock in a restricted area– Restrict access to appropriate staff– Lock up stock and provide key or combination to as few people

as possible– Keep check stock log



Establish segregation of duties• Never have one person handling everything• Decreases fraud risk• Decreases operational risk



Establish segregation of duties (Cont)

• Best practice is to have different people:– Approve purchases– Receive ordered materials– Approve invoices for payment– Review and reconcile financial records

• Potential consequences if duties are not separated:– Erroneous or fraudulent invoices approved for payment– Unauthorized payments made to non-existent vendors



Review and reconcile• Best practices:

– Review vendor invoices for accuracy by comparing to purchase orders

– Verify goods and services purchased have been received– Perform monthly reconciliations of operating ledgers to assure

accuracy of expenditures

• Potential consequences:– Improper charges made to department– Improper budget restrictions to department– Payments made for items or services not provided



Train and cross-train AP staff• Relying on one person increases fraud and operational risk• Increases office functionality• Increases employee morale and productivity• Must have clear goal and plan• Serves as theft deterrent



Maintain the Master Vendor File• Prevents fraud• Reduces duplicate payments• Reduces missed payments• Establishes separation of duties• Enhances internal controls within AP process



Get a W-9 from every vendor• Documents vendor’s information• Creates a paper trail• Research the vendor• Allows IRS to go after vendors



Pay invoices as they are billed• Don’t operate under a “clean desk rule”• Prioritize invoices in order of due dates (unless vendor

offers a discount)• Can help relieve cash flow strain



Check for gaps and duplicate payments• Run gap detection reports on check registers• Keep inventory and log of check stock• May identify errors in AP process



Monitor the AP process• Monitoring helps identify ongoing effectiveness of AP

controls– Monitor departmental budget to actual expenditures– Monitor open purchase orders– Monitor payment activities


Accounts Payable Best PracticesPurchasing Cards and Travel Reimbursement



Purchasing Cards• Used as a tool to enhance the delivery of services and

goods to the entity

• Limits are usually set by the procurement department

• Department heads should be responsible for oversight in their respective departments


Accounts Payable Best Practices (Cont)

Purchasing Cards (Cont)

• Monitor purchasing cards on a periodic basis– Completeness of transactions is easy to achieve– Take a different approach to sampling– Review department head transactions– Check for authorization– Check for sales tax paid

• Compare purchasing card transactions to Purchasing Policy



Purchasing Cards – How bad it can get?• The Department of Defense uncovered its own purchasing

card scandal

• Over an 18-month period, Air Force and Navy personnel used government-funded credit cards for the following charges:

– $102,400 for admission to entertainment events– $48,250 for gambling– $69,300 for cruises– $73,950 for exotic dance clubs

• Compare purchasing card transactions to Purchasing Policy



Travel Reimbursement• Rates and guidelines are set by Florida Statutes

• Local governments may differ if approved by the governing body

• Authorization forms are very important– Provides attestation language that travel was for the benefit of

the entity– Provides justification for travel



Travel Reimbursement (Cont)

• Common errors– No receipt for transaction– Sales tax paid during trip– Mileage allowance not calculated correctly– Tipping exceeds authorized amount


Accounts Payable Best PracticesFraud Studies and Cases



Report to the Nations on Occupational Fraud and Abuse• Report conducted every other year by the Association of

Certified Fraud Examiners• 51% of all fraud cases involved

– Billing schemes (such as shell companies and personal purchases)

– Expense reimbursement fraud– Check tampering

• Vendor fraud is more commonplace



Schemes, Risks and Perpetration• Shell company

– Employee creates a fake vendor and bills the entity– May include inflated, above-market prices on goods and

services

• Personal purchases– Employee orders personal items and submits invoice to

employer for payment– More commonplace among purchasing cards



Schemes, Risks and Perpetration (Cont)

• Fraudulent expense reimbursement– Employee files a false, inflated or fictitious expense report

claim– May also involve submissions of duplicate or inflated

expenses

• Check tampering– Employee steals blank checks from the entity, uses them for

personal use– Employee can also counterfeit bank account and routing

numbers from entity



Symptoms, Red Flags, and Detection• Be on the lookout for:

– Causes behind increased costs, coupled with lower-quality goods or services

– Incomplete vendor information– Address– Tax identification number

– Unusual, unauthorized vendor names or addresses added to the vendor master file



Symptoms, Red Flags, and Detection (Cont)

• Be on the lookout for:– Missing or altered copies of supporting documentation

– P.O.’s– Invoices– Receiving documents

– Changes in lifestyle– Lavish trips– Jewelry– Personal assets



Symptoms, Red Flags, and Detection (Cont)

• Be on the lookout for:– Increase in purchases from favored vendors or unusually

close relationships with suppliers

– Goods received but not ordered, or goods ordered but not received

– Links between employee information and vendor master file– Address– Bank account– Related parties



Controls, Countermeasures, and Prevention• Stay ahead of the curve by:

– Separating the vendor setup and approval process from the payment process

– Rigorously vet all new vendors when they are set up

– Frequently review the vendor master file– Payment volume activity– Reasonableness and consistency with known operational trends

and budgets



Controls, Countermeasures, and Prevention (Cont)

• Stay ahead of the curve by:– Maintaining and reviewing a log of sequentially numbered

checks and payables processing batches

– Setting up automated fraud detection tolls– Positive Pay

– Always require original receipts and invoices

– NEVER, EVER sign blank checks



Accounts Payable Case Studies• Case Study 1:

– A purchasing agent had a very good relationship with some of the company’s suppliers. On a surprise check on bids for a new project, it was discovered that the supplier chosen was charging a per unit price higher than other submitted bids. It turned out that this supplier was giving the purchasing agent a “commission” for each winning bid. Further investigation revealed that this supplier was chosen frequently in the past, despite bidding higher than other vendors.



Accounts Payable Case Studies (Cont)

• Case Study 2:– The bookkeeper typed out the checks to the suppliers, which

were then signed by the company owner. The bookkeeper used an erasing typewriter to remove the payee designation and amount from the check and replace them with her name and a significantly greater amount. These amounts were entered in the disbursements journal as payments for aggregate inventory to the company’s largest supplier, who received several large checks each month. More than $300,000 was stolen in this manner.




• Case Study 3:– A department head set up a dummy corporation and used his

home address as the mailing address. Over a two-year period, the department head submitted false invoices for more than $250,000. This scheme was eventually detected when a new employee noticed that the vendor’s address matched her boss’s address. If a P.O. box had been used, this scheme might have continued indefinitely.




• Case Study in Depth - ING:– A corporate mistake opened the door for Nathan J. Mueller’s

fraud. Two years after the error was made, he discovered he was authorized to request and approve checks of up to $250,000. A co-worker also was accidentally granted the same privileges, while a subordinate was authorized to request checks.

– Mueller, his subordinate, and the co-worker often logged on as one another to get work done. This allowed Mueller to request checks under one identity and then approve them under his own account.




• Case Study in Depth - ING:– Mueller and his subordinate were allowed to physically pick

up checks. This allowed Mueller to take physical checks to the bank to be deposited into the account of a fake vendor he set up.

– Mueller hid his debits in ledger accounts that he controlled. Better separation of duties could have helped to prevent the scheme.




• Case Study in Depth - ING:– The fraud netted nearly $8.5 million in four years. The money

was used to buy expensive cars, watches, and nighttime entertainment, as well as to pay for numerous trips from Minnesota to Las Vegas.

– Mueller told his wife his extra money was from gambling winnings. After a while, she began to doubt that explanation, and they divorced.




• Case Study in Depth - ING:– The fraud was uncovered when Mueller’s ex-wife expressed

her doubts about his income to his co-worker. The co-worker spotted questionable transactions in the company records and brought them to management’s attention. The scheme unraveled quickly after that.

– Mueller was sentenced to 97 months in federal prison after pleading guilty to fraud. He is due to be released in September after 5½ years in prison.


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