Seven Questions to Ask before Approving Invoices

by John J. Hall, CPA
Pursuit, October 2007

Maintaining tight internal controls is critical. Therefore, a careful review of invoices, contractor statements, time sheets, expense reimbursement requests, purchasing card details, and other documents that result in cash disbursements is of paramount importance. Too often, these documents are rubber stamped. Signing off without careful analysis paves the way for errors or deceptive practices. At best, approval of incorrect or fraudulent transactions can be embarrassing; at worst, it can cause irreparable damage to the organization’s financial health.

Protect yourself and your organization. Answer these seven questions before approving invoices and other payment documents. All are derived from the general question, “How do I know?”

1. How well do I know this vendor or contractor?
Fake vendor schemes continue to be a major fraud risk. Ask yourself, “Do I have first-hand knowledge that this vendor exists?” Double-check to make sure. Choose to doubt when you are not certain.

2. Do I know that the vendor actually provided the goods or services identified in the invoice or other billing statement?
What evidence do you have that the work billed was done or that the goods purchased were received?

3. Do I know that the vendor is using the correct amounts for price, sales tax, freight, and other variables that comprise the amount invoiced?
Have you ever approved an invoice without seeing the supporting purchase order, contract, engagement letter, or other document that defines what you are getting and how much to pay? Don’t make it easy for others to deceive you. Become familiar with purchase order and contract terms before approving payment of invoices.

4. On what basis do I know that the prices charged are reasonable?
Before approving, determine whether the price charged is fair. If you are not certain, do a little research. For example, many goods and services are offered for sale through the Internet. Take a quick look at alternative sources and costs.

5. How do I know that the quantities make sense? On what basis have we agreed to purchase the stated amount?
One of my clients recently discovered that the company already owned a two-year supply of items invoiced. The client later found out that the vendor was having cash flow problems and had shipped out several hundred units to bolster sales in the month prior to year-end. Supplier “channel stuffing” often goes undetected unless inventory balances are closely analyzed.

6. How do I know that the invoice and other documents are mathematically correct?
Double-checking the math on invoices is a basic accounting control. However, it often fails and results in overpayment. Accounts payable employees are typically burdened with large numbers of invoices that must be verified, coded, batched, entered, and paid. This repetitive work may result in mistakes. Approvers should routinely spot-check quality.

7. Do I know that this invoice has not already been paid?
Duplicate payments happen for many reasons. Although disbursement mistakes can occur, most overpayments are due to intentional, duplicate billing by vendors.

Build these simple monitoring procedures into your accounts payable routine to help ensure that invoices are valid and only paid once.