Scrubbing Accounts Payable
“Scrubbing” in a financial context refers to the act of thoroughly reviewing and cleaning up data to ensure its accuracy and consistency. Thus, “scrubbing accounts payable” involves a detailed review and validation of accounts payable (AP) records to ensure that they are accurate, valid, and complete.
The primary purpose of scrubbing accounts payable is to prevent errors and fraud, optimize cash management, and ensure that the company’s financial statements are accurate. Here are some of the specific tasks and considerations involved:
- Duplicate Payments: Ensure there are no duplicate entries for the same invoice or payment. Duplicate payments can arise from data entry errors, multiple receipt of the same invoice, or system issues.
- Mismatched Invoices: Compare invoice amounts to purchase orders and delivery receipts to ensure they match. Any discrepancies need to be identified and resolved.
- Pending Invoices: Identify any invoices that haven’t been entered into the system or that are still pending approval.
- Unauthorized Transactions : Ensure that all AP transactions are authorized and have the necessary documentation.
- Timing and Terms: Review payment terms and ensure that payments are being made optimally, taking advantage of any early payment discounts and avoiding any late fees.
- Vendor Details: Confirm the accuracy of vendor details, such as bank information, address, and contact details. Regularly update the vendor master file to remove outdated or duplicate vendors.
- Reconciliation: Regularly reconcile the accounts payable ledger with vendor statements and with the general ledger.
- Fraud Detection : Implement controls and regularly review AP transactions to detect and prevent fraudulent activities, such as fake vendors or inflated invoices.
- Documentation : Ensure that there’s appropriate documentation (like invoices, purchase orders, and approval forms) for every transaction in the AP ledger.
- Obsolete Items: Identify and write off any old items that are no longer valid or collectible.
- System and Process Review: If scrubbing frequently identifies errors, it might be beneficial to review and improve the accounts payable process or consider system enhancements.
Scrubbing accounts payable, especially for larger businesses, can be a comprehensive task. Some companies use specialized software tools or services to assist in this process to ensure accuracy and efficiency. Regularly scrubbing and maintaining the AP can help a company improve its cash flow management, maintain good vendor relationships, and ensure accurate financial reporting.
Example of Scrubbing Accounts Payable
SunTech Corporation, a medium-sized tech company, has noticed some discrepancies in its monthly financial statements. The CFO suspects that there might be errors in the accounts payable ledger. To rectify the situation, she instructs the finance team to perform a comprehensive scrubbing of accounts payable.
Tasks Undertaken:
- Duplicate Payments:
- The team identifies two payments made for the same invoice to a vendor named ElectroParts. This was a result of the invoice being entered twice in the system.
- Mismatched Invoices:
- An invoice from WebServices Inc. for web hosting was $5,000, but the purchase order was for $4,500. Upon investigation, the team realized that there was an extra charge due to some additional services availed last month. After confirming with the IT department, they updated the records.
- Pending Invoices:
- The team discovered three invoices from various vendors that hadn’t been entered into the system. They promptly processed these invoices for payment.
- Unauthorized Transactions:
- There was an invoice from an unfamiliar vendor, QuickRepairs, which lacked proper documentation. After some probing, it was revealed that an employee had authorized repair work without proper approvals. The management decided to review and reinforce the company’s procurement policies.
- Timing and Terms:
- By analyzing payment terms, the team realized they missed out on early payment discounts from two vendors in the past month. The CFO emphasized the importance of timely payments to avail discounts in the future.
- Vendor Details:
- The vendor list was updated, and several old, inactive vendors were removed. Additionally, contact details for some vendors were updated.
- Reconciliation:
- The accounts payable ledger was reconciled with vendor statements. A few minor discrepancies were found and corrected.
- Obsolete Items:
- The team identified a two-year-old payable amount related to a vendor who had gone out of business. After confirming that this amount was no longer payable, it was written off.
Outcome:
After the scrubbing process, SunTech Corporation’s accounts payable ledger was much cleaner and more accurate. The process highlighted areas where the company needed to improve its procedures and controls. The CFO decided to make scrubbing a bi-annual activity and also initiated training for the procurement and finance teams to avoid future discrepancies.
This example demonstrates how scrubbing accounts payable can identify errors, inconsistencies, and areas of improvement in a company’s financial processes.
