Minimize Risk, Maximize Success: A Deep Dive into Accounts Payable Risk Assessment

In the prevailing business environment, assessing (and mitigating) risks is crucial for all business functions. And it’s even more crucial for a function like accounts payable, which is perhaps the most vulnerable. 

Accounts payable is expected to work closely with procurement to maintain healthy relationships with vendors and ensure that payments due are made in a timely fashion. The two functions should jointly demonstrate value and return on investment for every dollar spent. 

In many enterprises, however, the working of accounts payable needs a major overhaul, considering the several inefficiencies and risks the function is exposed to. 

Manual processes, duplicate invoices, payment errors and fraud – these are just some of the many issues that plague this function.

How can the accounts payable team eliminate these risks and work seamlessly with procurement?

What is Accounts Payable Risk Assessment? 

Often confused with accounts payable audit, accounts payable risk assessment aims to identify and evaluate various risks that can hamper the function’s operations. Risks can be related to vendor management, invoice processing, payment processing and other related areas.

While an audit is a reactive process to review a company’s financial records and check their accuracy, risk assessment is done proactively to identify potential risks before they can occur. The assessment also reviews the strength of internal checks and controls and the potential impact of these risks. Further, it suggests improvements to mitigate or eliminate these risks.

Also read: All That's Wrong With Accounts Payable Today (And How to Fix It)

Identifying Sources of Risk  

The first and foremost task in accounts payable risk assessment is to identify all sources of potential risk. The goal is to identify hidden risks in all such places where checks and internal controls may be lacking. Here are some of the most vulnerable places:

1. Maverick spend

Purchases that are made outside the accounts payable processes are the biggest source of risk. Many of these purchases are not related to a vendor contract and don’t have proof of payment. 

2. External fraud

According to the Association For Financial Professionals AFP Payments Fraud and Control Survey, 65% organizations were victims of payment fraud attacks/attempts in 2022. Interestingly, most cases of external fraud involve an insider who may collaborate with one or more vendors to share gains made from duplicate payments. At times, records may be falsified to overpay a vendor’s invoice and split the proceeds.

3. Internal fraud

Many a time, an internal employee is responsible for accounts payable fraud. The employee may falsify vendor files or even create fake vendors and send them payments. These payment deviations often go unchecked as they are below the “cut-off” amounts that are scrutinized with internal controls. Check fraud is another type of internal fraud where an employee redirects the company’s money to a dummy account.

4. Same staff, multiple responsibilities

Often, the same staff may be handling multiple job functions in a high-pressure work environment. When this happens, the chances of accounts payable fraud increase considerably. For example, the same staff that handles physical checks of inventory may also authorize payments made from the company account.    

Also read: How AI-Powered AP Automation Boosts Savings and Productivity

Documenting the Assessment and Implementing Improvements 

To complete the evaluation, document the findings of accounts payable risk assessment. Create a summary of each risk with a clear definition and recommended solution detailing specific policies, workflows and tools required to eliminate the risk.

Also remember to follow up and check on the improvement plan. If there is any deviation from the plan, take necessary corrective action. 

It is important to make accounts payable risk assessment a regular exercise. In fact, this should be an ongoing activity to safeguard the business against potential risks and protect the bottom line.

Finally, businesses must digitally transform accounts payable to make continuous improvement. Leverage an AI-powered accounts payable solution that can automate processes and bring together all relevant data in one place. 

AP automation can benefit the business in many ways. It can digitally scan invoices to process payments quickly and cut down invoice cycle time. It can also digitally route invoices for review and approval. And it can simplify accounts payable risk assessment by providing real-time visibility into AP processes. It can also detect and flag suspicious activity and provide audit trails to investigate fraudulent activity.

Learn more about how GEP can help transform your accounts payable process