The typical internal audit department is charged with providing independent, objective assurance in the areas of control, governance, compliance and best practices. It accomplishes its objectives by bringing a systematic, disciplined approach to the evaluation process.

In terms of its focus on accounts payable, internal audit is interested in certifying that:

• Risks are being identified and managed
• Appropriate levels of internal control exist to mitigate risks
• Policies and procedures are adequately documented
• The AP staff is acting in compliance with policies and procedures
• Financial and operating information is accurate, reliable, and timely
• Continuous improvement is fostered within the AP organization’s control process
• Legislative or regulatory issues impacting the AP organization are recognized and appropriately addressed.

As a result of the evaluation process covering all these elements, internal audit will identify opportunities for improving management control, productivity, and cost efficiency. As such, internal audit can serve the AP function in a consultative capacity by not only identifying areas for improvement, but also providing justification for making significant process, system, and organizational changes. Unlike an individual audit by the IRS, which only conjures images of dread, an AP audit is the chance to really get under the hood and carefully analyze how the organization functions.

Related: Get up close and personal with real-world experts on Internal Audits and AP at INNOVATE 2015: The Purchase-to-Pay Innovate Summit in New Orleans, Sept 12-14.

AP managers should therefore approach a pending internal audit as an improvement opportunity. Whereas the rule of thumb with external auditors is to provide them with exactly what they request – no more, no less – AP managers are well-advised to discuss both the challenges the AP department is struggling with as well as the full range of improvement initiatives they believe will positively affect AP performance in terms of management control, productivity and cost effectiveness.

Getting Started

When first sitting down with your internal audit team, AP needs to work with the auditors to establish a time line for the audit, discuss the documentation the auditors will need to perform their work, and identify how communication between the two groups will be handled. This is the time to lay the groundwork for the process, so:

• Take the time to look back at previous internal audits, and see how they were conducted
• Make changes according to what worked and what didn’t
• Be clear and forthcoming about what is needed and expected and how the audit will be handled

An audit, by nature of its definition, requires the careful examination of documents for accuracy and verification. In AP, an audit also entails a comb-through of procedures to determine where any road blocks or loop holes exist in the AP system. As a result, auditors typically need to start with the following basics:

• An organizational chart of AP
• Copies of policies and procedures
• The supplier master file
• Workflow documentation with signature and authorization lists

Using this information, the auditor will begin compiling a detailed picture of the organization they are auditing.

It is essential to work with the audit team, through the documentation you provide, to help them understand how your AP group works. The better auditors can grasp the details of your AP processes such as invoice approval workflows, expense reimbursements, purchase card monitoring and so forth, the better suited they will be to offer suggestions that can make AP more effective and efficient. It is therefore extremely useful for AP managers to sit down in advance of the audit and create flow charts that represent every step of each process for which AP bears responsibility. The act of creating flowcharts will help you detail every step and level in your systems, ensuring that no part of the process is overlooked during the audit.

Outcomes & Reporting

One hopes that an audit will not reveal too much that requires attention in terms of the day-to day functioning of AP. The expectation is that routine matters should as a matter of course be handled efficiently and properly. The other side of an audit internal looks at the less-common items AP deals with, such as invoice exceptions, outstanding items pending approval, unclaimed invoices, and the like. Exceptions that are left unaddressed can over time clog up even the finest tuned AP system. Auditors should address not only how such items are dealt with, but the why’s behind how they came to be.

Once an audit is completed, the final phase is reporting the findings. A preliminary draft should be created for AP to review and discuss. Any action items stemming from the audit should be clearly identified. It is also important to validate the accuracy of all report content. From there, a final draft should be produced for reporting to management. This document should detail any implementation plans required to correct deficiencies, including who has been assigned responsibility for completion of the aforementioned action items.

Self-Audits

Audits are an excellent time to sit back and take a formal look at the AP functional areas. However, it is not necessary to wait for the audit team to come knocking. Following the process that an external audit would take, AP can perform its own internal audit in much the same manner. In this way you can identify improvement opportunities as well as enhance existing reporting structures.

By performing audits within your AP group with some regularity, when the official audit team shows up on your doorstep, it is more than likely they will serve to validate your own findings and the process will provide more of a positive experience across the board. The following checklist provides a run-down of the items that an auditor will examine.

• Is responsibility appropriately assigned?
• Are AP team members separate from other finance related functions (i.e. purchasing, receiving, cashier, etc.)?
• Have process rate goals been met?
• Are supplier invoices being checked for accuracy?
• Are supplier invoices being matched according to system requirements?
• When was the last time the vendor master files were cleaned out?
• How is the current exception rate compared to previous periods?
• Have discounts or savings been missed/un-used?
• Can anything be consolidated or expunged?
• Has there been a review of debit balances?
• Do any vendors owe you a refund?
• Are advanced payments being handled accurately?
• Are all SOX compliance benchmarks being met?
• Are there any conflicts of interest within the AP process?

The Case for High Value Audits

Audits need to be viewed as an opportunity for growth if they are to achieve their full potential value. In these current economic times where everyone is looking to pinch pennies, it is even more prudent than ever to take advantage of the full capabilities of an audit by creating a “high value audit” (HVA) situation. Instead of the audit’s scope centering upon the direct steps in the AP process, an HVA will branch out to include direct and indirect materials, utilities, outsourcing services, how technology is being used and more.

Where an HVA really shines is in its ability to transcend the traditional transactional audit in a number of areas. For starters, an HVA will go beyond looking at the fundamental procure-to-pay process and instead scrutinize it on many different planes to find errors or gaps that can result in significant financial leakage and to then create the necessary tools to recover and prevent future lost spend. This includes detecting suspicious and/or unethical activity that could be an indicator of fraud.

An HVA will also take a comprehensive look at suppliers. Too often, money is lost when there are multiple, conflicting payment terms on the books all for the same vendor. These discrepancies can then be repaired and options to realized further savings via consolidation or discounts considered. By taking each phase of the audit process a few steps further, the end results can be something that truly drives tangible benefits for your organization.

Part of that comes from differentiating between quantitative and qualitative results. Instead of simply looking at the controls and compliance issues surrounding the invoice process, an HVA will explore the larger context. The HVA seeks quantitative information and uses it to determine how to maximize processes in order to achieve the highest efficiency levels.

Quantitative Verses Qualitative Data

Benchmarks provide quantitative data that can be used to clarify the broader context. Instead of just marking your productivity rates and cycle times against yourself, an HVA will strive to compare your AP group against industry data to see how you measure up. By looking at what others are doing, an HVA will also allow you to discover ways technology can work to your advantage not just by performing process functions, but by also analyzing ways for increasing cost effectiveness. Technology facilitates constant monitoring and analysis, thereby developing future benchmarks aligned with specific goals that might otherwise not have been identified.

Qualitatively speaking, an HVA audit will provide gap analysis and impact reports, along with an assessment of processes and system capabilities. These reports create an excellent picture of the current state of any AP function by looking at the processes, procedures, personnel, and best practices and how they measure up across industry and beyond. When areas of improvement are found – e.g. key breakdown points or control risks – an HVA will help identify how to transition from the current status quo to a future.

Looking Ahead

Preparing for the future is one of the best benefits of going through an internal audit. Take advantage of the growth and improvement opportunities that result from a comprehensive analysis of your current operations. By going into an audit with a positive outlook, knowing that the in depth scrutiny will only serve to find areas for improvement (even if only in regard to future challenges), then you are going to come out the other side with a wealth of information and ideas for making your team more efficient and cost effective for your entire enterprise.

If you are interested in learning more about internal audits and their impact on Accounts Payable, register for INNOVATE 2015: The Purchase-to-Pay Summit in New Orleans. You’ll have the opportunity to learn from faculty members including Kim Rankel, Director, Purchase to Pay, Global Business Service Center, Eli Lilly and Company. She’ll be leading a session entitled, “Developing an Ironclad Foreign Supplier Payment Process in Compliance with US Withholding Tax Regulations.”