How to Assesss Internal Controls for Procurement

Among the most critical controls a business must set internally are internal controls for procurement and purchasing processes. With functioning rules, companies will be able to meet their goals while creating more efficient operations. Have you invested time in implementing internal controls, appointing someone to take charge of purchasing, and are still facing challenges with compliance or enforcement? Don't give up. This doesn't mean your time and resource investments have gone to waste. In fact, in most cases, e-procurement solutions can be integrated with Accounts Payable, allowing your business to continue adjusting your obligation to pay controls in alignment with other purchasing policies.     

To reinforce the value of these investments and help you make further improvements, a few areas must be considered:

1. The importance of having procurement controls
2. A foundation to assess the effectiveness of existing controls
3. Identification of some of the available procurement solutions in SAP to help your business enforce purchasing controls 

Why Procurement Controls are Important  

Internal controls for procurement systems are essential for a few reasons. First, with adequate management, your business will be able to determine how well the suppliers and vendors you work with can meet the terms and conditions established when you started working together. The better external parties can meet your needs, the more valuable the relationship is, and the more you will fight to continue working with them in the future. Alternatively, many contracts may be passing unfulfilled or with errors. Businesses often use this as an indicator that it is time to consider other vendors or to renegotiate policies to work with the same vendor in the future.  

A secondary benefit of having proper internal controls is that it ensures your business minimizes the risk of wasted resources and inefficient processes. Controls can be set up to improve visibility across the organization and identify threats as they happen. Tight controls ensure your business does not experience financial losses and spend leakage as a result of departments failing to abide by purchasing guidelines or not tracking budgets closely. While spend leakage may never be eliminated, duplicate payments, unaccounted for orders, fraudulent expenses, and data entry mistakes can be greatly reduced with proper controls.  

Finally, controls create a data trail that can be followed by an auditor. This means no last-minute scrambling for documents that may or may not be found.  

Internal Controls for Procurement Best Practices 

Within the purchasing function, one area at high risk of loss is Accounts Payable, responsible for obligation to pay processes, entering payables data into an online database (such as SAP) and ensuring suppliers receive payment. You probably already have many of these widely used controls integrated into your business process, but is that all you can be doing? 

• 3-way matching: Ensures that supplier invoices are matched to the purchase order and goods/services receipt before any payments are authorized to be sent out. This process is effective but slow without the right tools.  

• Match progress against total to financial statements: Supplier invoices must be verified to be charged to the right department, align with the financial statements and tracked against budgets. Large purchases may be broken down into several smaller charges, for enterprises, which must be tracked against order totals and accounted for against project milestones.   

• Verification that costs are allocated appropriately: Spend must be allocated to the right budget, GL accounts, project etc.  

• Purchase order approvals: The procurement department will issue a purchase order (PO) for all purchases to ensure spending aligns with company budgets. Departments also use Purchase Requisitions to request additional purchases that may need to be made.  

• Record payment before approval: This control ensures all invoices are entered into the system together so accurate budgeting can be done.  

• Segregation of Duties: Ensuring the team member person who creates the transaction (i.e.. purchase requisition, goods receipt) is not the person who approves it, and multiple cheque signers are used when necessary. 

• Vendor compliance: Creating requirements for issue resolution and order expectations for the vendors that your company frequently works with.  

• Fraud detection: Continuing to monitor and maintain all internal controls to ensure employees are properly following all procedures and are not actively seeking out workarounds. 

These examples are likely already outlined in your organization’s compliance binder, which is a great first step to creating effective controls. But, what you might have noticed is that these processes can be lengthy and require your team to engage in a series of tedious steps. As a result, they may not be following the steps that have been carefully crafted and documented.  

So, how can your business determine the effectiveness of these controls?  

Assessing the Effectiveness of Internal Controls in the Procurement Process 

Businesses typically all have a unique approach to managing their internal purchasing controls. However, determining how effective they are maybe another story. Here are a few questions your business can ask to determine the health of your existing controls.  

1. Is Your Process Documentation an Actual Representation of The Processes Your Team Follows?

Adequate documentation is necessary for the foundation of developing an internal control framework in your business. But are your employees following what is written in the binder, or are they finding what they believe to be easier ways of completing these same tasks? Aside from this being an area for potential human errors, it also indicates that the processes outlined are complicated and difficult for workers to follow.   

2. Are Repetitive Steps Automated? 

Although several verifications are needed in the procure to pay process, this doesn’t mean they should be done manually. Repeating several steps consecutively can become tedious to workers and waste time that could have been spent on value-added activities. If your procurement compliance binder still carries repetitive steps, it might be time to re-evaluate.  

3. Are Policies Simple and Easy to Comply With? 

IT systems are fully integrated and provide transparency into compliance. If several different solutions or portals are used at each step of the purchasing process, your team will require training refresher courses to ensure that they are:  

• Complying with policies, and   

• Using the tool properly  

However, an even more straightforward way to kick off the process with the purchase requisitioning processes is to ensure that tools are easy to use and that all recieving policies are seamlessly integrated. Although upfront costs may be required, making this investment will ensure that the procurement system is as consolidated as possible. Simultaneously, employees charged with purchasing decisions should be made aware and trained in these systems. Since many Accounts Payable departments already have controls in place, optimization comes down not to restructuring or creating controls but rather improving efficiency.  

4. How Often Are Internal Controls Evaluated? 

Is your management team providing feedback on internal controls regularly, or just when an audit is about to take place? Managers must be careful to evaluate where errors are coming from and what steps in the process might need some tweaking. These fixes can ensure your procurement compliance policies are actively being followed and can be relatively low cost. Especially if you purchase subscription SAP partner apps that have a responsive customer experience team that can help make minor adjustments on the fly. 

5. Is Your Purchasing System Set to Include All The Necessary Information?  

Whether you use SAP or another e-procurement solution, creating any procure to pay documentation should include all the necessary information needed for the purchasing and Accounts Payable teams. This eliminates the back and forth for missing information or errors in the completion of the intake documents. Checking the health of your system can also be done by reviewing monthly reports to determine how quickly they can be generated and if they are relatively-error free. If not, minor tweaks to your system may be needed. 

Automating Internal Purchasing Controls to Improve Efficiency  

Even with the best intentions, instituting internal procurement controls that your teams will adhere to can be challenging in the face of complicated processes, lengthy policies, and overwhelmed managers. A ConvergentIS team member can guide you through a design thinking workshop where your current methods are considered. Out-of-the-box apps targeted at the procure to pay process can be identified to help improve the process. These apps cover various functions, including purchase requisitions, purchase orders, and goods and service receipts, to ensure the process is well-optimized for accuracy, speed, and completeness.  

Optimizing processes is much easier with a human centered approach that can be further tailored as processes and policies change. It all begins with ensuring processes align with policies the first time.

Learn why in our free whitepaper, available for download using the form below.