Accounts Payable Audits to Detect Overpayments Before Month-End

It is the end-of-month close that places pressure on every finance department. The accounts payable department must ensure reconciliations are performed, exceptions handled, balances validated, and books closed by the deadline. However, in this process, there is one thing that often goes unnoticed: How many overpayments have already passed through the accounts payable department?

Organizations do have processes such as three-way matching, duplicate payment checking, approval processes, and even ERP validation rules in place. But these are not meant to catch all types of overpayments.

Invoices that reconcile with purchase orders and receipts may still include wrong prices. The duplicate payments do not need to be duplicates at all. Vendor credits may never get applied. The terms in the contract may have been modified without changing the system rule.

Why Do Accounts Payable Overpayments Remain Disclosed Until Month Closing?

Lack of controls is not the only root cause for accounts payable overpayments. Sometimes it is the gap between what those controls are created to identify and things that occur across a complex organization.

Bigger organizations process an ample number of invoices across vendors, ERPs, and various business units. Operations handle the receiving data, and AP can take charge of handling invoice and payment records. Sometimes these datasets are not analyzed together, so the major discrepancies remain undiscovered.

Pricing changes and contracts create gaps

Contractual agreements, discounts, and rebates can change after a certain period of time. If the invoice highlights an expired cost or a negotiated agreement is not included in the relevant system, a transaction can bypass standard overflow. The best thing is that, after bypassing the standard overflow, the transaction would never raise an exception.

Duplicate payments cannot become identical

Duplicate transaction detection usually involves looking for identical invoices by number, amount, vendor, or date. Real life duplicate invoices, however, may have slight variations.

Thus, for instance, an invoice may have been duplicated but with formatting changes, with a new invoice number, or with some slight difference in the amount. The exact match approach will register it as another invoice.

Adjustments can slip through

Not all overpayment cases are caused by incorrect invoices. There are many situations when the company can suffer due to credit memos, rebates, returns, and other adjustments.

By the time these problems become visible in the month-end review, the payments might have already been made.

Balance Between Audit Coverage and Early Identification

It is appropriate to find overpayments early, but speed cannot come at the cost of coverage.

Whereas a financial department that audits a small number of transactions will catch some errors, many transactions are unlikely to be audited. In addition, a process where each transaction has to be manually audited will hardly be effective at the enterprise level.

The ideal strategy is a combination of full coverage and selective audit.

As an illustration, for a business that deals with $1 billion worth of transactions annually, a relatively small proportion of the transactions needs to have an error for the impact to be meaningful. With an overpayment rate of 0.1%, there will be $1 million worth of financial leakage.

How Can The Financial Department Reveal AP Overpayments Before Month Close?

1. Enhance Data Readiness Before Audit

The AP audit is only as good as the data it evaluates.

To evaluate any transactions, financial teams need to gather all the information necessary to get a full picture of the transaction process. It can involve documents such as invoices, purchase orders, payment transactions, vendor master file, contracts, credits, and adjustments.

In addition, data needs to be standardized to ensure that it will be possible to compare vendors, invoice numbers, dates, and amounts.

This will make it simpler to find connections that would remain hidden if every dataset were reviewed individually.

It will also save time for the auditor in cleaning and reconciling data.

2. Check beyond perfect match duplicates

Duplicate identification needs to go further beyond inquiring whether both invoices have the same amount.

The financial department also needs to identify for near duplicate transaction.

Take, for example, two invoices from one vendor that have similar amounts, similar periods of service, and similar descriptions. Since the invoices will have different numbers, a basic duplicate criteria might not recognize the connection. A more comprehensive analysis, however, could be used to determine whether the connection is an exception that needs further investigation.

Some other signals of possible duplicates could be:

• Similar invoice amounts
• Repetitive descriptions
• Overlapping service periods
• Similar purchase orders
• Repetitive payments to the same vendor
• Minor differences in invoice numbering and format

3. Differentiate invoices against the latest pricing agreements and contracts

The reason is that the invoice can be consistent with the purchase order but not in compliance with the agreement.

That is why AP matches cannot be restricted to the level of invoices only.

Finance professionals can perform checks using transaction information compared to pricing terms, rates, discounts, rebates, service agreements, and other contract elements.

For instance, the supplier can agree to give a discount equal to 5% for transactions which will be more than some threshold value. The transaction can be in compliance with a three-way match even if the supplier does not give any discount on the invoice.

Contract to invoice analysis can help to find such issues.

4. Incorporate technology to prioritize better expectations

It is not possible for the enterprise AP team to conduct an in-depth investigation of each exception in the manual approach.

Technology can be used to prioritize transactions according to criteria such as monetary amount, frequency of transaction, history of vendor, type of transactions, probability of exceptions, among others.

Analytics and AI technology can be used to analyze large transaction populations and understand relationships that are difficult to detect with manual investigation and simple logic.

Build a proactive AP auditing strategy

Besides identifying the overpayments made, successful AP auditing is also about understanding why they happened and how similar mistakes can be avoided.

It is not just about analyzing transactions.

The finance departments require access to invoices, payments, contracts, suppliers, and financial data. Also, they should have processes to verify the claims, recover overpayments, and discover control gaps.

This is particularly important for large enterprises that have high transactional volumes, as even minor percentages of leakage mean financial consequences.

Begin With A More Proactive Step

Waiting for an audit at the end of the month or periodically to discover overpayments in AP could lead to making it even harder to recover. Moreover, it can allow the same problems to persist in further transactions. Adopting a proactive strategy enables the financial team to be better aware of the possible leakage and find a solution to it.

Discover Dollar allows corporations to detect any overpayments in AP through analytics and auditing experience. The accounts payable recovery audit is performed. It helps in discovering any possible recovery, verifying the claims, performing vendor recovery, and learning from any errors made in the process to avoid them.

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