No one likes to be charged twice or overpay for a product or service, and the same is true for organizations. The sinking feeling a consumer might feel when they realize they’ve been charged twice is magnified exponentially for CFOs when they realize that because of an error somewhere in accounts payable, the organization now has less cash on hand and needs to come to terms with the shortfalls and gaps that exist in its financial record-keeping system.
To remain vigilant in this area, every organization should track, monitor, and benchmark data related to the number of duplicate or erroneous disbursements/payments in AP invoice processing. (A disbursement represents a single remittance to a supplier of goods or services to pay for the goods and services received.) This data, which encompasses duplicate payments, payments to the wrong vendor, or payments for the wrong amount, provides a good indicator of the maturity of an organization’s AP processes.
Data from APQC’s Open Standards Benchmarking® Accounts Payable survey shows that on average, even top performers report that nearly a full percentage point (0.8%) of their annual disbursements are duplicate or erroneous. Bottom performers report more than twice that amount at 2% of total annual disbursements.
These numbers might seem small, but keep in mind that they reflect the percentage of disbursements that are duplicate or erroneous, not the amounts of the disbursements themselves. Even one erroneous or duplicate disbursement could amount to tens of thousands of dollars and could put a serious dent in your cash reserves.
There is also a cost to getting that money back. Unless they are exceptionally ethical and attentive, vendors may not return these payments in a timely way without prompting, and not everyone is going to cooperate readily with your efforts to recover the money.
Eliminating Duplicates and Errors
If you find your organization coming up short in this area, the good news is that there are several straightforward interventions that can help you work to eliminate duplicate or erroneous payments by addressing their most likely causes.
Many of the most common causes of such payments, such as data-entry errors, poor-quality data in the master vendor file (MVF), and pricing errors, can all be greatly mitigated through automation. For example, in its accounts payable research, APQC found that 69% of respondents have either partially or fully implemented electronic invoice-matching systems for AP. Self-audit tools for AP now available in the marketplace can automatically find invoices with numbers that closely match, identify invoice and payment outliers, flag out-of-sequence invoice entries, and highlight vendor practices that create inefficiencies.
Smaller organizations may not be in a position to fully automate their AP processes, but there are still plenty of steps they can take to guard against duplicate or erroneous payments. If you’re a smaller business, use the technology that is available to you and work to ensure that your AP processes are airtight.
Ad hoc processes are a breeding ground for errors and fraud. For example, some of the biggest causes of duplicate or erroneous payments are errors, incomplete vendor information, or duplicate entries in the organization’s MVF. Every organization should do quarterly (or at the very least, annual) maintenance on the MVF to ensure records are complete, duplicate entries are removed, and inactive vendors are archived or deactivated. Rotate the responsibility of MVF maintenance between different employees to keep a fresh set of eyes on the MVF at all times.
Along with maintaining the MVF, work to establish detailed practices that each processor is expected to follow, including coding standards to be used when entering data. Even larger organizations with fully automated AP systems will be well-served by process standardization. While the technology behind many AP processes has grown more advanced, duplicate or erroneous payments can still slip through the cracks if AP processors are following ad hoc procedures or taking shortcuts that create erroneous or incomplete records.
Finally, work to ensure that AP controls and safeguards are in place, designed correctly, and operating effectively. To guard against fraud, for example, it is imperative to segregate AP duties and to rotate responsibility for them, even in small departments. One person should not have the power to approve a supplier, pay invoices, and sign the checks. When checks are approved, there should be a review process to ensure that the check hasn’t already been approved and paid in a prior period. Other common internal controls, from verifying invoice details to standards for data input to rigorous reconciliation processes, can help ensure duplicate or erroneous payments aren’t slipping through the cracks.
Regardless of the size of your organization and your performance on this metric, you should strive to eliminate duplicate or erroneous payments because even one can have a significant financial impact. Automation, standardized processes for AP, and effective financial controls can all help bring the number of duplicate and erroneous payments down as you work toward the goal of eliminating them.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.