What is the importance of accounts payable risk and control matrix?
All business processes entail some degree of risk, including the accounts payable system. Indeed, unfamiliar financial territory, faulty records, or other such discrepancies can lead to fraudulent or unnecessary business-to-business (B2B) payments.
As fraudulent or unnecessary B2B payments are infamous for hurting a company’s finances, often severely.
Now, while we must accept that regardless of what measures we put in place there will always be a certain degree of risk involved in business there are metrics you can use to keep this risk at a minimum.
The accounts payable risk and control matrix is one such metric that you can use to keep your business safe and secure.
What is accounts payable risk and control matrix?
Accounts payable risk and control matrix is used to minimize the risk that a company has to undertake as a consequence of accounts payables.
While businesses are encouraged to be agile and adaptive to situations, having a risk control matrix is a wise thing to do. An AP risk and control matrix provides different objectives for control that companies must take into consideration.
The controls corresponding to the risk-protection of the company may arise if these controls are not checked regularly.
Why is it important to have accounts payable risk and control matrix?
Protect from Inherent risk in accounts payable
Businesses have to process a large number of invoices on a regular basis. Every day, accounts payable teams receive piles of invoices that they have to match with purchase orders and make payments.
A lot can go wrong in this process, especially when your accounting is done manually. This is the kind of work that comes with inherent risk.
Inherent risk is defined by Investopedia “as the possibility of incorrect or misleading information in accounting statements resulting from something other than the failure of controls.”
Inherent risk essentially is caused by ignorance or errors due to unusual or complex calculations.
Control prevalence of residual risk
There will be times when risk will remain in your business practice no matter the degree of careful accounting and caution you exercise.
This risk is what is called residual risk. Residual risk is defined by Compliance Week as “the exposure that remains after you’ve assessed the existing controls.”
Residual risk is observed to be present in cases where steps have been taken by a company to address a probable issue yet, due to some reason or other, the problem was not fully resolved.
For instance, if your company undergoes server upgradation for its network of internal accounting but misses out on investing in data backups that are off-site or cloud-based to account for natural disasters.
How to develop an accounts payable risk and control matrix?
For a complete accounts payable risk and control matrix you need to create its two parts and combine them to formulate a broader risk assessment strategy:
Developing an inherent risk matrix
Given that residual and inherent risk matrices work in tune with each other (residual risk being determined by the tabulated level of inherent risk), it makes sense to compute inherent risk before trying to understand residual risk.
The inherent risk matrix is essentially a chart. For the X-axis, use a scale that rates the impact that risks would have, with the least risky at the beginning of the axis and higher risks further on the axis.
For the Y-axis, the scale has to depict the frequency of risk occurring, with “Rare” at the start and increasing frequency as the chart continues.
Developing residual risk matrix
After you have created the inherent risk matrix you can use it to formulate your residual risk matrix. On X-axis, place a scale, from minimal to high, of the inherent risk calculated.
For the Y-axis, the scale must represent the approximate impact of your teams’ devised control mechanisms, starting strong and going progressively weaker as the Y-axis goes higher.
Computing both matrices
Finally, you must combine or integrate the two matrices to form a risk assessment strategy that is broader and all-encompassing.
How to run a comprehensive risk assessment strategy?
Given below are four tools or strategies you can use for error-free invoice management and accounts payable processing:
1. Running accounting audits regularly
Regular accounting audits, both unplanned and planned, should form an important part of your risk assessment strategy.
Accounts payable audits can help you gauge risk in accounts payable and assess the accuracy and transparency of your organization’s financial records. Regular audits are especially important when you approach tax time.
2. Spending policies
Keeping comprehensive, all-encompassing spending policies in place can go a long way in helping you mitigate risk in accounts payable.
They can keep rogue, unauthorized spending in check and prevent fraudulent transactions from harming your company before they can be carried out.
3. Batch payments
Using the batch payments approach to invoice processing can help you mitigate the risks of processing piles of invoices and bills manually.
The risks associated with data-entry errors, duplicate payments, or erroneous transactions can all be eradicated if you use standardized batch payments.
4. Accounts payable automation software
Accounts payable automation software can help you create a comprehensive risk control matrix for accounts payable.
With an accounting automation system in place, you can radically reduce the risks associated with the manual processing of invoices and payments.
Additionally, accounts payable automation software is AI-powered to be able to sift through hundreds of invoices and identify discrepancies or cases of fraud within minutes.
How can Volopay help mitigate your accounts payable risks?
Using automated accounts payable software is a foolproof way to address all company risks in accounts payable. Volopay is one such platform that can do this and more.
Volopay is a comprehensive accounts automation platform that is capable of managing and streamlining end-to-end accounts payable processes.
With Volopay you can eradicate both the inherent and residual risk that is often associated with manual accounting & accounts payable.
Use Volopay's automated accounts payable software to no longer worry about risks associated with data-entry errors, duplicate payments, and fraudulent transactions.
This is because Volopay can automatically process invoices with zero errors, flag unauthorized transactions before they go through, and keep your data as secure as it is with a bank.
Additionally, Volopay also comes with a highly customizable automated invoice approval workflows, which you can tailor it according to your needs, set it up once, and let the system take care of the rest.
FAQ's
Accounts payable metrics are used as key performance indicators (KPIs) that can help highlight AP process inefficiencies. These metrics can be anything from the number of electronic paper invoices captured to tracking the average cost per invoice.
Accounts payable for business can be audited using four procedures: analyzing source documents (such as invoices, purchase orders, and bank records), reviewing standard operating procedures (SOPs), comparing the Accounts Payable ledger to the financial statements, and confirming balances with vendors.
The controls commonly used in accounts payable include i) Obligation to pay controls, ii) Data Entry Controls, and iii) Payment entry controls.
The biggest challenges in accounts payable are matching errors, slow processing, manual follow-ups, exception invoices, sending payment before delivery, unauthorized purchases, disappearing invoices, going paperless, and double payment.