After payroll, the largest outlay of a company’s funds is often 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 issues and errors related to accounts payable processing found in most organizations.

Common problems/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 all AP transactions. While the proportion may seem small, the absolute number of errors increases in companies with hundreds of AP transactions. This also increases the likelihood that the error will cause a large dollar impact on finances and disbursements! 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
Reconciling invoices with purchase orders and merchandise receipts/packing slips is complex and error-prone, as AP staff often do not document or 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 accounts payable staff to manually apply the rules, increasing the potential for errors.

Excessive use of purchase order-receipt-invoice matching tolerances
Many accounts payable departments use matching tolerances to reduce the effort to resolve mismatched items, 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.

Incorrect account encoding
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 comparing trends for different expenses or income difficult or imprecise.

Disappearing invoices and unapproved invoices
Invoices that arrive directly from the vendor to a business unit manager or a location other than accounting 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, 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 providers.

Approval of new suppliers or update of key supplier information

Careful controls must be put in place over who can approve the establishment or supplier review to prevent fraud.

Difficulty finding invoices 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 expensive 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 facing 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 reconciling purchase orders/receipts/invoices 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 awaiting approval that finance managers haven’t 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 contributes to an excessive amount of management time, attention and resources being spent on a non-value added function.