Good Internal Controls
Both in the Accounts Payable and Procurements departments will usually result from good controls throughout the organization.
The company’s management is responsible for establishing the Internal Controls and the environment in which the controls will operate correctly and efficiently. Balancing the need for good internal controls with the need for efficient operation is one of the most important tasks of senior management. How authority and responsibility are assigned and how the staff is trained will determine whether an internal control system is a dynamic part of total operations or just a philosophy or statement that is viewed from time to time.
In order to establish workable internal controls in an accounts payable system, management has to analyze the risks involved. Overmanaging or over controlling the process may be counterproductive if there are so many steps and barriers to the simplest task that work is completely bogged down. Management needs to establish and analyze the internal and external risks it faces to decide which controls are appropriate for those risks.
The policies and procedures that are ultimately established should have built-in controls to make sure they are followed. Throughout the system, the systems linked to accounts payable as well as account payable itself should have levels of approval, authorization, verification, reconciliation, and review to assure that controls are used. Establishing a policy, for example, that sets that only the CFO can approve expenditures more than $10,000 when no one is charged with filtering the disbursement process for anything over $10,000 is meaningless.
This concept leads to the importance of communicating the internal controls to those who need to know about them. As above, if the clerk entering an $11,000 invoice is not aware s/he should not be entering it without the CFO signature, the internal control policy has lost its value. Hopefully, someone in the chain of controls will be aware of the limitation if the company has installed various levels of approval and authorization. If such internal controls cannot be automated into the A/P system (e.g. the system will not accept an $11,000 invoice, unless other steps are taken, ) the relevant staff people need to be communicated with and trained for them to correctly follow these controls.
Once the checks are in place, and the accounts payable staff has been properly trained in them, how is management assured that sloppiness, laziness or time pressures do not result in circumvention of these controls? Monitoring. The company-wide financial audit does not occur on a frequent enough basis to be counted on as the only tool for monitoring compliance with financial controls. A system must be established whereby management, on a routine basis, is monitoring compliance with controls and any deficiencies in the control system are addressed, reported and corrected. This responsibility should be at the highest level in the financial area, such as the CFO, Controller, Director of Accounting or Director of Finance. Such a member of senior management should understand, support and communicate the internal control system throughout the accounting area, including the accounts payable section.