Auditing Accounts Payable: The Ultimate Guide

Five percent. That’s how much revenue the average business loses to fraud each year, according to a 2020 study by the Association of Certified Fraud Examiners.

ACFE looked in the study at 2,504 cases of fraud in 125 countries finding that businesses suffered average losses of $1.509 million, with cumulative losses at over $3.6 billion. More than a third of the cases went unreported to law enforcement, with 54% of companies in the study not recovering any of what they lost.

With these sorts of risks in mind, it’s important that businesses do whatever they can to protect against fraud, particularly within their accounting departments, a popular area both for white collar misconduct and simple clerical errors. Today, we’ll look at how accounts payable audits can help protect companies and how AP automation software can lead to more fruitful audits.

The Basics of AP Auditing

Broadly speaking, in the American business world audits generally refer to either ones companies don’t plan for that are performed by the Internal Revenue Service or planned audits that can be carried out by internal or external auditors.

Let’s take a look at some of the basics when it comes to accounts payable audits.

How it Works

Audits can vary in scope, intensity, and duration, from a minor audit to determine if withholdings on employee checks are accurate to more serious investigations of if broadscale, long-term fraud is occurring within a company. Generally, though, internal and external auditors use General Accounting Principle and will typically follow a four-stage process that consists of:

1. Planning, where the auditing firm talks with the company it will be auditing ahead of time and the company gathers necessary documentation;

2. Internal controls, where the auditors get access to the records they will need and get a better idea of what inherent, detection, and control risks they might be facing, which will help lead to a more accurate audit;

3. Testing, where the auditors pore through the records and whatever else they need to conduct their investigation;

4. Reporting, where the auditors present their findings to the company.

Thereafter, another critical stage should occur, the sometimes unspoken follow-up stage, where auditors check in with the company at some point after the audit is concluded. As we’ll explore in a bit, this is a vital step and problems can compound if it isn’t followed.

What Gets Audited

Anything and everything financial is fair game in an accounts payable audit. Auditors might start with the general ledger which, as Small Business Chronicle notes, “holds all the financial information used to create the income statement and balance sheet reports, and serves several main purposes in the financial operation of the business.”

Auditors can review the ledger and see if anything appears out of place. The ledger can also be a gateway to deeper analysis, with auditors possibly asking to see corresponding purchase orders, invoices, and receipt reports to prove the validity of any transaction. Thus, it’s important to have all of this information quickly-available.

Not surprisingly, companies still primarily reliant on paper records might be in for longer and more expensive audits. And audits are already costly enough, with Strategic Finance reporting in late 2019 that 83 public companies had audit fees averaging $9.8 million and private companies averaging $139,000.

How Often AP Audits Happen

Audits can be fairly common, with ACFE finding 83% of companies in its study had their financial statements externally audited, while 74% had internal audit departments, and 62% had independent audit committees.

Public companies, which are subject to the Sarbanes-Oxley Act of 2002, must have annual compliance audits and internal controls reports to ensure the validity of their financial statements. The act passed after much-publicized financial scandals at Enron and WorldCom and nearly 20 years later, its stringent standards remain the norm for public firms.

For private companies, audits happen can much more sporadically. Some businesses do them on an annual, planned basis. Surprise audits seemingly aren’t as common, with ACFE finding that just 38% of companies in its study did them. But since internal fraudsters can cover their tracks if they know an audit is coming, it’s wise for companies to periodically launch surprise audits — and to be able to do them at a moment’s notice.

The Good and Bad of AP Auditing

It’s safe to say that audits can unearth a wealth of information and that they carry a number of benefits for companies willing to perform them. That said, audits also aren’t foolproof and companies undertaking them will want to be mindful of a few things before they get underway.

Here are some of the positives associated with audits and one cautionary tale to heed.

Protection Against Risk and Fraud

Businesses face all sorts of risks these days, with ACFE finding in its 2020 study that asset misappropriation, such as cash theft and billing schemes, occurred in 86% of cases it analyzed, with $100,000 median losses for firms. The COVID-19 pandemic has heightened risk, too, with 70% of respondents telling ACFE in another study that they’d seen increased fraud.

The good news, though, is that companies can gain valuable protection against both risk and fraud by periodically conducting audits. Whether done by internal departments or external specialists, audits can get results, with internal audits detecting fraud 15% of the time and external audits detecting it 4% in ACFE’s study.

Companies tended to benefit from being proactive in their auditing, with ACFE finding for firms using their own internal auditors, the median duration of fraud was half as long as if they’d used external auditors – 12 months instead of 24 months – with their median losses $100,000 instead of $150,000.

Verification of What’s Going Wrong – and Right

In a story we’ll explore in a second about the New Jersey Transit Corporation, a state senator there who was looking to strengthen audit power for the public told USA Today Network in December 2020, “Sunshine makes everything in government better. The only people it makes unhappy are usually the elected officials or the bureaucrats that are involved.”

So it is with accounts payable audits. Sunshine in the form of an honest, rigorous audit can flush out problems within a business or outright fraud that might have gone unchecked for decades. It’s a great opportunity for a company to excise bad actors and correct faulty practices. As one CFO website notes, “Undergoing a business audit is a lot like visiting the dentist. It might be unpleasant—painful, even—but it’s necessary for maintaining good (organizational) health.”

Audits are also a good opportunity for businesses to see what they’re doing right and to give confidence to their employees, customers, and investors or shareholders that records are valid and things are as they should be.

Where Audits Can Fall Short

The problems allegedly began as early as 2006 for the New Jersey Transit Corporation and a private contractor it had hired to run some of its routes.

Internal audits by NJ Transit discovered missed routes, a lack of accountability in invoice keeping, and shoddy record keeping. But NJ Transit didn’t make these results public and problems went on for years, eventually costing the agency $15 million in missed routes and leading the New Jersey Attorney General to launch a criminal investigation, according to USA Today Network.

While it’s not incumbent on a business to self-report its audit findings to the general public, it’s important that it take the findings seriously and act promptly upon whatever is found. Otherwise, it’s essentially wasted money and unchecked liabilities.

Preparing for AP Audits with Automation Software

Getting ready for AP audits can be stressful for companies, sometimes requiring them to hunt down invoices, receipts, and other records that may or may not exist if they’ve been stored simply in paper form. Audits don’t come cheaply and inadequate preparation, whether intentional or the result of bad records, is like burning money.

The audit preparation process gets easier, though, if a company is using accounts payable automation software, which not only can help businesses pay their bills faster, but can have them well-positioned for even the most surprising of audits.

Easily-Stored Bills and Clean History

With Stampli’s all-in-one AP automation platform, companies don’t have to just hope that they’re able to find all the documentation they need before the day an audit commences. The system stores purchase orders, invoices, and receipts which get matched together during the bill payment process and are downloadable at any time.

Companies also don’t have to fear not being able to answer an auditor’s question about a particular transaction. Stampli’s software prioritizes communication, placing windows for it at the top of invoices within the system for any authorized user to review.

Cheaper Audits

Auditors don’t come cheaply, from the moment they arrive at a company, with Strategic Finance estimating their hourly fee for work for private companies at $191. And the costs can start well before auditors show up, with the magazine noting, “Some financial executives reported large increases in documentation requests as reasons for the increased time and expense to complete the audit.”

But with AP automation software which, as we mentioned, stores a lot of this documentation, costs should fall. This can be expressed both in staff time that will be saved that they would be spending looking for documentation and in the fact that companies are audit-ready at any time with AP automation software. They won’t have to keep an auditor waiting for documents.

Good Legwork

One differentiator with Stampli is its artificial intelligence assistant, Billy the Bot. Not only does Billy the Bot help company controllers and CFOs by going through countless transactions and flagging possible signs of fraud, it can have this information at the ready for auditors.

Just as an auditor will more than likely want to look through a general ledger when they kick off their work and use it as a prompt for deeper analysis, it’s as if Billy the Bot can do this virtually ahead of time, providing invaluable legwork.

Overall: A Better Audit with AP Automation

At the end of the day, AP automation software can help make for better audits, from providing richer and fuller information for auditors to AI-driven legwork.

Five percent of annual revenue is a lot for any company to lose to fraud. Still, with the help of a good audit bolstered by AP automation software, that number can start to come down.

Prepare for your next accounts payable audit in weeks, not months.Try Stampli today.