LUTZ BUSINESS INSIGHTS
How to Use Accounts Payable and Disbursements Controls to Prevent Fraud at a Small Business
SAM ADDY, AUDIT PARTNER
Having and strictly implementing accounts payable and disbursements controls is essential for companies, especially small businesses. With strong internal controls, small businesses ensure that they’re only paying for necessary and received services. They also lower the risk of accounting fraud. Below are examples of how small businesses can properly implement accounts payable and disbursements controls to protect themselves.
Internal Controls Do Nothing Without Monitoring
Before discussing anything else, it’s important to mention that having controls is worthless if they aren’t followed. Controls only establish the process to follow to protect small businesses. The people within the company responsible for following that process must do so, and everyone has to hold each other accountable for their roles in that process.
What Will Internal Controls Prevent from Happening?
Having a strong control process in place can prevent a small business from losing money in multiple ways. Some of the most common things proper controls will prevent from happening include:
- Paying vendors for unnecessary or wasteful products/services
- Paying vendors for products/services that aren’t being delivered
- Fraudulent purchases
Implementing Accounts Payable and Disbursements Controls
There are multiple steps that small businesses should take to ensure that goods and services are received, that payments are properly processed, and that your business isn’t vulnerable to accounting fraud.
Separation of Duties is Essential
This is a necessary component for establishing an effective internal control process. By having multiple employees responsible for different parts of the payment process, small businesses have the checks and balances in place to make sure everyone responsible for the payment process is held accountable.
In an ideal scenario, different people would be responsible for:
- Approving purchases
- Receiving purchased goods or services
- Approving invoices
- Preparing bank reconciliations
Separation of duties is something that small businesses struggle with, especially those with small accounting departments. Larger businesses have the resources necessary to effectively separate duties, but many small businesses only have the budget and need for a one person accounting team.
This is where small businesses run into trouble and become vulnerable. When one person is trusted to handle the entire accounts payable and disbursement (or all the accounting as a whole) process, small businesses are susceptible to fraudulent invoices being paid or making payments for goods and services that aren’t needed or aren’t being received. In the vast majority of fraud cases, there has been blind trust put in a single employee.
Though it’s a challenge for small businesses from a resource standpoint, separation of duties is still something that small businesses need to implement. Even with only one accountant, responsibilities should be divided among the accountant, the owner, and possibly another high-level employee who has a strong grasp of the company’s activity.
Key Accounts Payable and Disbursement Controls in Small Accounting Environments
There are a couple critical controls that businesses should implement and monitor in smaller accounting environments.
Regular Monitoring of Vendor Master File
In order to ensure that all checks and disbursements are paid to an approved vendor, there should be a vendor master file that is strictly monitored by someone not responsible for making purchases and or processing disbursements. Any new vendor and changes made to existing vendors should be reviewed so all vendors in the master file are legitimate and information is correct. It’s recommended that the master file is reviewed on a monthly or quarterly basis. There should be system limitations whereby processing of payments can only be to vendors in the system (i.e. no manual checks).
Check Signing and Accounts Payable Duties Should be Separate
In order to prevent fraudulent purchases, the person responsible for the accounts payable and disbursements function shouldn’t have the ability to sign the checks or execute wires. By allowing one person to handle the entire process, you put yourself at great risk for fraud. Dual signatures should be required for checks over certain dollar limits.
Monitoring by a Person with Adequate Knowledge
Among small businesses, the owner or a key employee is often responsible for the check signing. This works well when the owner or a key employee is in tune with the day-to-day activities of the company and would be able to identify anything that might be fraudulent or not in the company’s best interest. Often the case in small businesses, the owner isn’t always able to be that ingrained in the details. The owner or key employee should also be looking at bank statements (including cancelled checks), bank reconciliations and financial statements on a regular basis.
Though separation of duties isn’t easy for small businesses, it’s something that can’t be ignored. Putting too much trust in one or a few people makes a small business very vulnerable to fraud. Not all fraud can be stopped with internal controls, but adequate monitoring and separation of duties can reduce the company’s risk before it is too late.
ABOUT THE AUTHOR
SAM ADDY + AUDIT SHAREHOLDER
Sam Addy is an Audit Shareholder at Lutz with over 17 years of experience. He has significant experience in providing accounting, auditing and consulting services to privately-held companies in various industries including agriculture, manufacturing, and wholesale.
AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- BSBA, Colorado State University, Fort Collins, CO
- Memorial Little League, Treasurer
- First Tee of Omaha, Treasurer
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