Accounts payable refers to money that an organisation owes to its creditors (ie outside individuals and other businesses) for goods and services provided. They are generally short-term obligations to pay a debt and interest would not normally be charged if paid on time. Accounts payable should not include payments to staff which should be paid via the payroll or expenses system.
The systems for ordering, receipt and payment for goods and services may represent some of the most significant systems within an organisation. Regardless of expenditure type there is a need to ensure risks are fully identified, assessed and mitigated by applying robust controls to ensure operations run effectively.
Organisations should have systems and procedures which properly support expenditure in terms of committed expenditure, value for money, declarations of potential conflict of interest with controls in place to protect funds from fraud and corruption. These systems are often linked to procurement, which is outside the scope of this guidance.
Our guide considers the following questions:
How does an account payable work?
What does ‘payment terms’ mean?
How are payments made?
How are accounts payable accounted for?
Why do accounts payables matter?
What can be included in an audit of accounts payable?
What potential control weaknesses need to be considered?
What is the Public Sector Payment Policy (PSPP)?
What are the main categories of invoice fraud?
What are some of the most common types of invoice fraud?
What are the potential risks and likely management responses?
The most common form of an account payable is a purchase made on credit, via a purchase order (or equivalent), to a supplier. Not all invoices will have a purchase order such as utility bills. The supplier subsequently expects payment of the debt within the agreed credit terms. Some suppliers offer discounts to incentivise early payment.
The purchasing organisation usually receives an invoice from the supplier (creditor). Following a number of checks undertaken by the ordering department, such as, the goods ordered match the goods received, the agreed price/discounts have been applied, the invoice is arithmetically correct then it will be approved for payment by the budget holder. The supplier record will be updated by the finance department (purchase ledger) to show the amount owed as a creditor balance within the accounts payable ledger (until the debt is paid).
Payment terms, or credit terms, can be unique to the purchasing organisation. There may be a cash-discount incentive for early payment (within a defined number of days). As an example, 5% Net 30 means the debtor can deduct 5% from the invoice total if payment is made within 30 days. A payment after day 30 would have to be for the full amount, or possibly more if the invoicing organisation includes a penalty for not paying within 30 days.
Organisations use a variety of methods to pay a creditor. More recently, these include ePayables which automate the manual and paper elements of the process. Prior to paying an invoice, the organisation should have a verification process which includes the budget holder verifying the expenditure and confirming the goods/services were received. This may involve matching the invoice to the purchase order and delivery slip. This is known as three-way matching.
Ways an organisation can pay their debts include – cheques, electronic payments (such as Faster Payments, Bacs, CHAPS), cash, card payments (company or personal cards). Whilst it is possible to have to pay cash on delivery for goods or services, this is not explicitly covered within this guidance.
Organisations usually use accounting software to record and monitor cashflow, including accounts payable. Regardless of the system used, organisations will need to account for the debt.
When a purchase order is raised it is good practice to raise a commitment against a particular budget code enabling the budget holder to see the balance remaining. System controls should be in place to stop overspends taking place for that budget code. When the invoice is received/paid the committed expenditure will move to ‘actual’ expenditure enabling the budget holder to have a clear picture of spend.
In addition to receiving (either directly or via the budget holder) and processing invoices for payment this function will also be following up on unauthorised invoices, reviewing aged creditors reports (accounting software allows organisations to sort its accounts payable according to the dates when payments will be due), credit limits are not being exceeded to ensure that any increases do not go unnoticed or inaccurate balances are not going undetected and reconciliation of supplier statements to confirm receipt of invoices/credit notes and identify invoices they have paid that have not been processed by the supplier.
At the end of every accounting period the finance team usually prepare a set of accounts showing the financial position to that point in time. There will be some purchase invoices that have not yet been received, approved or fully matched. As a result these amounts will not have been entered into the accounts payable account (and the related expense/asset account).
To take account of this an adjusting entry – ‘accrual’ will take place at the end of the accounting period. The balance in accrued liabilities will be reported in the current liability section of the balance sheet immediately after accounts payable.
|Current Assets:||Current Liabilities:|
|Short-term investments||Bank overdraft|
|Accounts receivable||Short term loans|
|Sub total||Sub total|
The payment of debts according to payment terms is vital to ensure the organisation maintains accurate cashflow and has visibility of their financial performance to operate effectively. An organisation that has persistent debt may also struggle to gain further credit elsewhere, or present themselves as a viable concern. Frequently delayed payments can lead to the supplier withholding goods or services, which can be risk for organisations that are overly-reliant on individual suppliers.
Many organisations have a dedicated accounts payable manager or team. Proactive management of accounts payable includes:
Organisations should ensure that they are operating within their contractual boundaries and within any requirements imposed by regulator (e.g. where paying on time is the norm and late payment is seen to be unacceptable across the business community resulting in late payment interest and debt recovery costs). This can be monitored using data available in the accounts payable function.
This can include obtaining credit ratings, or ensuring their sustainability and ethical processes are concurrent with your own. This may be a function carried out elsewhere in the organisation, rather than by accounts payable.
An organisation must be aware of any cash shortfalls or surpluses and be able to manage these. Accounts payable can provide regular reports enabling management to make cashflow decisions.
Organisations should ensure that they don’t impact their longer-term viability by taking on too much debt. Data available within the accounts payable function can assist management with monitoring financial performance.
Where an organisation has a surplus of funds, these should be managed appropriately and may be invested. Accounts payable, or the finance function, can assist with monitoring, or may have automatic ‘sweep’ accounts set-up to remove cash from a current account into a higher-interest account, and back again, based on previously agreed amounts. If the organisation has a treasury or investment function they may be involved with this, or carry out the role.
An accounts payable function has regular liaison with suppliers, and can build relationships, for example when discussing invoices, payment terms or timing of payments.
Controls to be considered for testing/review:
Potential control weaknesses include:
All central government departments and their agencies are required to:
Government Accounting regulations require that all bills are paid within contract terms. Where no contract exists bills should be paid within 30 days of the receipt of goods or a valid invoice, whichever is later.
There are four common kinds of invoice fraud:
This refers to cases of fraud in which an insider’s access to the organisation’s assets and payments, or their ability to influence the outcomes of organisational processes, would be essential for committing the fraud.
This includes any fraud for which it can be shown that steps were deliberately taken by the supplier to mislead the organisation with a view to obtaining payments that were not properly due.
This is also variously described as ‘change of bank account scams’, ‘payment diversion fraud’ or ‘supplier account takeover fraud’. This type of fraud occurs when someone gets an organisation to change a direct debit, standing order or bank transfer mandate, by purporting to be from a supplier they make regular payments to in order to benefit from unauthorised payments.
This involves organisations being misled into erroneously paying for services such as advertising space in publications, which are not required and may not be provided.
Some of the most common types of invoice fraud include:
Setting the right anti-fraud culture within the organisation is vital in preventing fraud and corruption. Ensure those involved in the process of payment of invoice comply with policies and procedures.
Staff at all levels should be aware of the existence of the anti-fraud policies in place and, where necessary, be familiar with their detailed provisions. Training should also be provided to relevant staff on anti-fraud issues to ensure that staff are aware of fraud indictors which will require further investigation.
Appropriate contact should be made with the (real) supplier using original contact details to confirm changes and then sent a bank account amendment form for their Finance Director or Company Secretary to sign, confirming the change of bank account details.
Suppliers should be asked to confirm information already held by the organisation, such as the previous bank account details, registered address, email address, company registration number, company VAT number or the name of the Company Secretary.
Continually monitor the internal control framework to ensure it remains effective. Undertake regular fraud risk assessments and systems audits to identify threats. Undertake accounts payable audits to identify duplicate payments, incorrect supplier payments, missed discounts and rebates and tax errors.
Suppliers should be made aware in writing of the organisation’s policy regarding changes to methods of payment bank account details.
Inefficient or ineffective procedures will hinder our ability to pay debts in a timely and correct fashion.
Inappropriate or invalid payments will impact our financial performance and ability to monitor budgets effectively.
Delays or payments that are untimely will damage our business reputation and may lead to misconceptions regarding financial performance