Can The Same Person Do Accounts Payable And Accounts Receivable?
In simple developed businesses especially those with few employees, there is normally a sharing of roles where one employee may be in charge of the accounting and finance department. This entails the AP and AR roles such as processing, recording, reconciling, and tracking. However, there are certain risks in one employee doing both the Accounts Payable And Accounts Receivable activities as well.
Accounts Payable and Accounts Receivable are methods of bookkeeping.
First, let’s define each of these key accounting roles:
Accounts Payable (AP): This entails the process of sending money to a company’s creditors to pay the bills and invoices from the vendors and suppliers. The main AP responsibilities are to pay the bills, pay the vendors, match check payments to the invoices, and keep records of money due.
Accounts Receivable (AR): This includes debts receivable from customers who buy goods and services on credit. The main responsibilities that relate to AR include issuing invoices, tracking cash receipts, recording the customers’ payments, accounting for the accounts, and managing customer’s slow pay.
When looked at in simple terms, AP and AR may very well appear to be two sides of the same coin. However, there are some essential controls and a clear division of responsibilities that must exist between the two.
The Risks of Segregation of Duties Involving AP and AR
While it may be expedient to have one bookkeeper or financial clerk handle both AP and AR functions, there are risks to be aware of, including:
- Fraud risk: In this case, two crucial responsibilities of checking customer payments and paying the vendors expose the company to fraud like embezzlement. This situation may make it possible for a single individual to manipulate both ends of cash flows and possibly embezzle funds.
- Collusion opportunities: This is especially so in cases where the same person handles both the AP and AR responsibilities; the personnel involved can easily collude with either the suppliers or customers to defraud the business.
- Accounting errors: Increased work volume results in an increased likelihood of accidental accounting errors that can otherwise not be easily spotted without appropriate supervision and check mechanisms in place.
- Payment errors: Because AP personnel give out checks that are outbound while AR staff receive inbound payments there is a higher probability of making clerical errors and duplicate payments.
Recommended Internal Controls
To mitigate risks around an employee handling both AP and AR duties, businesses should implement important safeguards like:
- Managerial oversight: Another important check-and-balance should involve a controller or accounting manager who would need to closely supervise the AP/AR functions.
- System controls/reporting: More could be achieved by using access restrictions of the accounting software and detailed reports of AP/AR transactions.
- Payment controls: To ensure that all large checks that are above a certain dollar amount are signed by the owner/executive of the company. Implement check signing controls for amounts exceeding a defined amount based on parallel signing.
- Reconciliations: Particularly, make it a habit to make bank account reconciliations, credit card reconciliations, and balance sheet reconciliations often to discover irregularities.
- Audits: Perform internal control tests at least once in a financial year unannounced and external CPA audits once every year to confirm the correctness of the financial reporting.
Overall Recommendation
Ideally, the AP and the AR functions should be handled by different employees or even different departments; however, this is possible only for relatively big businesses. If there is some integration of these responsibilities due to changes in staffing requirements, then it is best to ensure there is no blurred line between these two contrary responsibilities which significantly minimizes fraud/error probabilities.
What is some extra expense for an extra accounting clerk for a week or help for a temporary in AP/AR when compared to the financial loss and legal responsibility if embezzlement or fraudulent reporting is not detected? Given that, the controls and risks of integrating these central functions of financial management should be given critical consideration. An occasional overlap of the AP/AR responsibilities may not be problematic as long as the roles and responsibilities are under supervision and other control measures are in place. However, as the business advances, proper segmentation of the roles should be practiced to ensure probity in financial management.
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