The Accounts Payable Process

October 2017

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BDO PHA Finance has had the opportunity to provide consulting services for several Authorities. During our assessments of financial operations, we often find that the Accounts Payable (A/P) process is often overlooked for efficiencies and cost savings. Most Authorities feel as though if invoices are getting paid, the process is operating at a satisfactory level of effectiveness. This is typically not the case.

A couple of items that are initially evaluated during our assessments are internal controls, processes, and frequency of disbursements. When we begin our analysis we often ask, “How did the Agency develop the process for A/P?” The typical answer is, “This is the way we always did it!” That is not a bad answer because it provides a current position of the process and often indicates a tremendous opportunity for improvement.

Lack of internal controls is where the most risk resides for audit findings and fraud. The idea is to have internal controls at the most beneficial areas, but not too many internal controls.

“Internal control comprises the plan of organization and all of the coordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies.” [1}

With too many controls it is possible the cost of controls will outweigh the benefits they are providing. Redundant or unimportant controls intended to provide additional assurance may lead to confusion, frustration, and decreased effectiveness. Too many controls in an Agency can distract attention from where controls may be needed most. 

The implementation of internal controls should consider the following:

1. The ability to detect issues or problems
2. Achieving results at a minimum cost
3. Holding the staff accountable to carry out the policy and process
4. Placing controls where they would be most effective
5. Changing controls as the Authority changes
6. Implementing an appropriate corrective action when a control identifies an issue

Once the Agency can determine where and how to implement/modify their controls for the A/P process, the next task is to develop a policy and process. We have recommended, with much success, that payables be generated on the 1st and 15th of each month. Although many Agencies pay their vendors every week or every two weeks, this schedule leads to much more stress on the accounting department. Generating checks every week or every two weeks requires many staff hours to create checks or transfer requests, sign them, and distribute them to the vendor. Also, the cash flow has a tendency to be more erratic with this schedule. When checks are paid on the 1st and 15th of each month, there are several benefits. Cash flow is better controlled with two vendor disbursements each month. Outstanding checks that have not cleared the bank on the cash reconciliation are greatly reduced (the monthly bank reconciliations are the biggest culprit in preventing timely financial reports). This allows the accounting department to complete more analytical work, rather than taking the extra time to complete the bank reconciliations. It is expected that there may be a few intermittent check runs for emergency vendor payments.

The transition to this frequency will require some internal and external training. Vendors will have to be provided a calendar of due dates for invoice processing and internal invoice approvers must be trained to process invoices timely to meet the payment deadlines. This part of the process can get challenging, but once the vendor and staff training is completed, it is going to create an effective and efficient payables process. For other best business practice efficiencies, join us for the 2018: Everything You Need to Know seminar in Las Vegas. 

If you have questions regarding matters discussed above, please contact Brian Alten.

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[1] AICPA definition