Auditing your Accounts Payable is a routine necessity to ensure you’re not losing money to errors or fraud. An accounts payable audit doesn’t just reveal overpayments that you can pursue to recover money; it can also be used to identify common errors so you can take proactive measures to prevent them from continuing to happen.
Here are five steps to run an accounts payable audit:
Step 1: Establish the Scope of the Audit
The first thing you need to do is refine the scope of the data you’ll be collecting and analyzing.
- Determine your timeline. How far back do you want to go? Two to three years is good, but anything farther back than three years will probably be harder to recover.
- Identify which regions you’ll be looking at and in what order. Are you only auditing your spend in Latin America, or do you want to look at Asia and North America too? Do you want to audit multiple regions simultaneously or split them up over time?
- Choose which business areas and spend types you’ll be looking at. For example, it’s not worth going after taxes or fees paid to government agencies. Or depending on your company, there might already be a dedicated team to certain expense types, so looking into those would be a waste of resources. If you’re an airline company and there’s a whole team responsible for monitoring fuel costs, you can leave that out of the scope of your audit.
Step 2: Acquire Relevant Data And Eliminate Non-Viable Vendors
Once you pull all the data that falls into the scope of your audit, correct any initial errors and remove any vendors that you won’t go after.
Combine any duplicate vendor listings to aggregate spend so you have an accurate understanding of each account. For example, if you only spent $10,000 at CVS that might not be worth the cost of auditing and recovering, but if CVS has 20 vendor master records of $10,000, that’s $200,000 and you might want to look into it.
Based on your company size and the resources you have available, set a minimum spend amount for the companies you’re going to look into. If the cost of recovery efforts would outweigh the results of the audit, it’s not worth going after that account.
Once you have that minimum in mind, remove any vendors that fall below that threshold. Additionally, remove any other vendors that shouldn’t be on your list like refunds, government taxing agencies and charities.
Step 3: Plan Outreach
Determine how you will reach out to vendors to verify overpayments. How frequently will those outreach efforts be made? Who will be conducting the outreach? What communication channels will be used?
Then create a template for the outreach, informing the vendors that you’re doing an accounts payable audit and asking for any information you need.
While planning the outreach, inform any relevant parties that the audit will be happening. Get approval from relevant parties on who should and shouldn’t be reached out to. For example, if your legal department has a pending lawsuit with a vendor, they might not want you reaching out to that vendor.
Additionally, make sure employees within your company know who to contact if they receive questions regarding the audit.
Step 4: Prepare for Statement Audits
While planning your outreach to inform vendors of the audit, also plan any statement audit requests you need to make so you can minimize touchpoints with vendors.
Statement audits go hand-in-hand with duplicate payment audits. A duplicate payment audit looks out internal records and then reaches out to a supplier saying, “Our records indicate you owe us money.” A statement audit reaches out to the company and asks “Can you tell me if you owe us money?”
Conducting outreach for both audits at the same time will save you time so you don’t reach out to a company telling them you have records of duplicate payments and then call them again two weeks later asking if they have open credits for you.
Step 5: Start the Audit
Finally, conduct the accounts payable audit. Comb through the data collected for irregularities and make sure you document the root cause of any overpayments so you know what needs to be fixed at the end of the audit.
If you find 1,000 errors, and 600 are due to duplicate vendors, then you know you need to fix your master vendor files. Don’t just write off those errors as an overpayment, because then you won’t know how to prevent errors from occurring in the future.
The goal of your audit shouldn’t just be to recover overpayments. You should also be identifying trends and repeated errors so you can implement a solution to fix them.