Accounts payable for internal controls: Full guide

Accounts payable can be daunting, especially for small business owners. However, without the right internal controls for accounts payable, it could also doom your business. 

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We’ll use real-world examples, actionable tips, and a cost-benefit focus to show you how to build effective internal controls for accounts payable and keep your financial operations on track.

What are internal controls for accounts payable?

Internal controls for accounts payable are a set of processes designed to ensure the accuracy and security of a company’s financial transactions, particularly in preventing and detecting fraud in their AP workflow. 

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These controls are essential for maintaining the integrity of financial information and safeguarding against fraudulent activities. While the cost of implementing these controls may be difficult to measure, they are crucial for protecting a company’s assets, as failing to do so can lead to significant financial losses, such as a depleted bank account due to undetected fraud.

Why you need internal controls for your AP process 

Fraud and errors can cost your business big, but accounts payable internal controls give you the upper hand. With 80% of companies targeted by payment fraud in 2023, a system of checks and balances is critical. 

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Internal controls for your AP process aren’t just safeguards—they’re your secret weapon. They help prevent fraud, reduce costly errors, and ensure every dollar is accounted for. Beyond protecting your business, they streamline workflows and build a smarter, more efficient AP process.

What causes risks in accounts payable?

Risks in accounts payable often stem from weak processes and lack of oversight. Fraud, human error, and inconsistent workflows can lead to costly mistakes or strained vendor relationships. Without proper segregation of duties, a single person handling payments increases exposure to fraud.

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Here’s a quick look at the biggest AP risks:

• Fraud: Duplicate or fake invoices slipping through weak controls.
• Human error: Mistakes in data entry or missed payment deadlines.
• Lack of accountability: Inadequate segregation of duties increases exposure to fraud.
• Inefficient workflows: Inconsistent approvals create gaps for costly mistakes.

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Good internal controls could prevent these risks. Let’s break down the different types.

Types of internal controls for accounts payable

A well-structured accounts payable process requires multiple layers of internal controls to safeguard against fraud and unauthorized payments. Below, we break down the key types of AP controls into three main categories: your obligation to pay, data entry into the system, and payment of the debt.

Your obligation to pay

Controls in this category ensure that payments are legitimate and authorized before processing. These controls help verify that the obligation to pay is real, matches the company’s records, and is properly approved.

• 3-way match: After the AP clerk completes the 3-way match (matching the purchase order, receiving report, and invoice), a seasoned controller should review it to ensure accuracy.‍
• Vendor approval: Implement a preparer and reviewer process for each new vendor. This ensures no conflicts of interest, such as vendor addresses matching an employee’s address, preventing fraud.‍
• Authorization limits: Set transaction limits so payments above a certain threshold require additional approval. This control helps avoid manual errors and unauthorized high-value payments.‍
• AP aging report: Review the AP aging report monthly to monitor outstanding obligations and ensure alignment with the company’s cash flow needs.‍
• Budget-to-actual comparison: Regularly compare expenses to the budget to identify errors or overspending and correct them on time.‍
• Invoice approval process: Ensure that invoices go through a formal approval process, verifying that goods or services were received and invoiced correctly.

Data entry into the system

This category of controls ensures that information entered into the AP system is accurate, reliable, and secure. Effective data entry controls prevent mistakes and reduce the risk of fraudulent or unauthorized entries.

• Vendor approval: Implement a dual review for new vendor entries to ensure data integrity and avoid fraudulent entries.
• Authorization limits: Apply system-based thresholds to prevent unauthorized large transactions from being processed without additional approval.
• Access controls: Restrict system access based on user roles. Only authorized personnel should be able to enter vendor information, approve payments, or modify data.

Payment of the debt

Once an obligation has been verified and the data is entered correctly, the final step is ensuring that payments are made accurately and only by authorized personnel. Controls in this category help prevent unauthorized or incorrect vendor payments from being processed.

• Wire/check approval: Ensure that one person prepares the payments, while check signing and final approval are handled by an authorized individual after a thorough review.
• Bank reconciliations: Perform monthly reconciliations to confirm that all payments match outgoing funds. To ensure accuracy, each reconciliation should have a preparer and a separate reviewer.
• Duplicate payment detection: Implement controls that flag potential duplicate invoices or payments to avoid paying the same bill twice.

When and how to build a framework for AP internal controls

Building an AP controls framework starts with understanding your current process. Here are a few steps on how to start building your framework, from procurement to payment:

1. Map your current workflow: Start by documenting every step of your AP process, regardless of your team size. Clearly outline where errors or fraud could occur to identify key risk areas.
2. Implement segregation of duties: Ensure no single person controls the entire AP process. For instance, one employee should enter invoices, another should approve them, and a third should handle payments to reduce fraud and undetected errors.
3. Introduce key controls: Incorporate tools like Ramp to automate three-way matching, set approval thresholds, and manage vendor approvals. These controls simplify workflows and provide transparent audit trails.
4. Review and reconcile regularly: Regularly review AP aging reports to catch issues early and perform monthly bank reconciliations to ensure payment records align with outgoing funds.
5. Train and audit your team: Educate your team on the importance of following internal controls and conducting regular audits to maintain compliance and address any gaps.‍
6. Adapt and improve: Continuously evaluate and update your AP internal controls framework as your business evolves, ensuring it scales with your growth and mitigates emerging risks.

Best practices for internal controls in AP

Strong AP internal controls are built on three core practices: conducting regular audits to catch issues early, adapting controls to grow with your business, and leveraging automation tools like Ramp to streamline your payment process and minimize errors.

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Together, these practices create a foundation for security in your AP workflow. Now, let’s break down each type of internal control and explore their specific best practices.

Best practices for obligation to pay controls

Ensuring payments are legitimate and authorized is the foundation of a secure and efficient AP process. This includes:

• Performing a 3-way match: Match the purchase order, receiving report, and invoice before issuing payment. Have a controller or manager review it to ensure accuracy.
• Vetting vendors thoroughly: To prevent fraud, approve new vendors using a preparer-and-reviewer process. Look for red flags like matching employee and vendor addresses.‍
• Setting authorization limits: To avoid high-value errors and unauthorized transactions, require senior approval for payments exceeding a set threshold.

Best practices for data entry controls

Accurate data entry is critical to avoiding costly errors and maintaining the integrity of your AP system. Make sure to:

• Add a dual review for vendor entries: Require a second person to review new vendor data for accuracy and legitimacy.
• Restrict access to your accounting system: Use role-based access controls to ensure that only authorized personnel can enter vendor information, approve payments, or make changes.‍
• Enforce authorization limits: Set system thresholds to flag large or unusual transactions requiring additional approval before processing.

Best practices for payment entry controls

Secure payment processing starts with strong controls. To further prevent fraud and ensure every payment is accurate:

• Segregate payment duties: One person prepares payments, while another authorized individual reviews and approves them for release.
• Reconcile bank statements monthly: Assign one team member to prepare and another to review reconciliations, ensuring payments align with outgoing funds.‍
• Detect duplicate payments: Use automated controls to flag duplicate invoices or payments, preventing overpayments and preserving cash flow.

Where does automation fit in?

Accounts payable automation is a powerful tool for strengthening internal controls. By enforcing strict, built-in controls, AP automation reduces manual intervention, minimizing human error and the risk of fraud.

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For example, automated 3-way matching ensures that invoices and payments are properly matched with purchase orders and receipts, eliminating errors like incorrect payments to vendors.

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With Ramp, companies can implement custom approval workflows, ensuring that transactions surpassing certain thresholds receive appropriate review before processing. Additionally, AP automation provides real-time visibility into outstanding payments and vendor data, making it easier to catch discrepancies and detect potential fraud.

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With AP automation software, businesses can maintain strong financial oversight without relying solely on manual processes.

Example of a lack of accounts payable controls 

Consider this real-life example of a lack of internal controls in the accounts payable process:

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Tom, a senior accountant, discovered by chance that six months ago, a $2,000 payment meant for a vendor, Alberti Inc., was mistakenly sent to a former employee, Albert. Without proper internal controls in place, this manual error slipped through unnoticed.

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The CFO was too busy to review payments, and an executive assistant with no accounting background acted as a second set of eyes. By the time the mistake was caught, it was too late to reverse the transaction, leaving the company unable to recover the funds.

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Mistakes like these aren’t about bad accountants—they’re about gaps in the system. The key to preventing errors and safeguarding your business? Proper internal controls.

Accounts payable internal controls checklist

To help sum up our complete guide on AP internal controls, here’s a checklist of best practices to review:

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Take full control of your accounts payable with Ramp

Ramp Bill Pay provides a range of user roles and permissions, allowing businesses to manage finances efficiently while ensuring robust control and security. This includes:

• Customizable approvals: Streamline workflows and ensure only authorized individuals approve payments.
• Set role-based permissions: Assign precise roles to control who can manage, approve, and pay bills.
• Multi-layered security: Add extra safeguards with multi-approval requirements to reduce fraud and errors.
• Detailed tracking: Monitor every step with audit trails for full transparency and compliance.

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Take control of your AP with Ramp.