Why purchasing internal controls matter

Achieving purchasing control is challenging for organizations, large or small, without adequate visibility or technology to guide and inform spending behavior. By underpinning processes with consistent, internal purchasing controls you can strengthen your strategy and protect your organization via thorough authorization practices.

Internal purchasing controls facilitate the achievement of procurement and financial goals, such as spending policy compliance, reporting accuracy, and risk mitigation. Failure to establish robust internal controls can expose your business to financial risks and audit concerns.

Internal controls are processes put into place by management to help an organization operate efficiently to achieve its objectives. They are the mechanisms, rules, and procedures to ensure the integrity of financial and accounting information, to promote accountability, and prevent fraud [1].

Luckily, there are specific measures business leaders can take to implement and optimize internal controls to enable a compliance framework for carrying out purchasing and procurement activities.

Why purchasing internal controls matter

Internal controls are primarily divided into preventive and detective activities:

Preventive controls are the most robust and proactive means of deterring errors and fraud and it is highly recommended to prioritize these activities to promote corporate governance. These controls reduce the need for reactive or corrective action after-the-fact. Automated preventive controls further streamline processes and compliance and require less human intervention.

Detective controls alert management to issues and catch items that might have been missed by the first level of controls. These controls detect issues and provide evidence of errors or losses after they have occurred but do not prevent them from occurring. An external audit is a means of detective control to identify any irregularities.

Reducing risk exposure and financial losses are some of the primary reasons why organizations implement internal purchasing controls. They drive accountability and leave no room for:

• Spend leakages
• Rogue or unauthorized expenditure
• Unauthorized invoices
• Errors, such as duplicate payments and data inaccuracies
• Incorrect cost allocations
• Fraudulent expenses and purchasing activities 

Key indicators of effective purchasing internal controls

Regardless of the platforms, features and processes being used to achieve internal purchasing controls, finance or procurement professionals should continuously assess their effectiveness. Below are key indicators of successful internal purchasing controls.

Accurate documentation of the process

Internal purchasing controls should be communicated, documented and consistent across all departments and business locations. Every employee should follow the established processes and policies when purchasing goods and services for and on behalf of the company.

A single source of truth

Managing purchasing and procurement operations across multiple spreadsheets in SharePoint or email-based request and approval trails is inefficient in ensuring that policies and internal purchasing controls are adhered to. To drive effective purchasing controls that are consistent across your entire organization, rely on a core system for complete oversight and proactive control of procurement and purchasing processes.

An automated procure-to-pay process

Repetitive manual steps in the procure-to-pay process not only frustrate employees and eat up valuable time, but they also create room for costly errors that could be avoided. Internal purchasing controls often require several verification steps; automation simplifies these workflows and ensures compliance.

Simple, easy-to-follow policies

Are your employees following your organization’s internal purchasing policy, or are they finding workarounds they believe to be easier? If non-compliant purchasing occurs frequently, it may indicate that:

1. Employees don’t fully understand or haven’t received adequate training in the company purchasing policy.
2. Communication is lacking.
3. Manual processes are ineffective in guiding and enforcing policy compliance.

Policies should be transparent, robust and difficult to circumvent. Having comprehensive purchasing and procurement software with a user-friendly interface makes these policies simple to comply with, while ensuring accountability and empowering a culture of responsible spending.

Regular evaluation of internal controls

Consistent and regular evaluation is fundamental to ensuring that policies and internal purchasing controls are up-to-date and effective.

Purchasing and procurement software features that enable financial transparency and proactive control

Best-in-class purchasing and procurement software accelerates digital purchasing and approval processes and provides a framework for effective internal control.

Here are examples of preventive controls that can be streamlined and enforced by software.

Segregation of duties

Segregation of duties raises accountability and ensures that no employee has total access or control of purchasing activities. By dispersing responsibility for your organization’s purchasing function, you can prevent conditions that lead to conflicts of interest. For instance, the employee who approves purchases in the system should be different from the employee who receives items, and system approvals can escalate to ensure that spend authorizations are overseen by more than one manager.

Approval authority

Another preventive internal control measure is the pre-approval of actions and transactions. From purchase requisitions to travel and expenses, and the authorization of invoices. Viewing the impact of spend against budgets prior to approval and escalating multi-level approval touchpoints are proactive and effective authorization practices.

Purchasing and procurement software automatically routes requests to the relevant owner at each stage of the procure-to-pay process. With this approval routing, companies can rest assured that they have checks and balances to prevent:

• Fraudulent purchases
• Unauthorized spending
• Out-of-policy expenses or travel bookings
• Overspending

3-Way matching

Although 3-way matching is necessary to avoid paying for goods not received, it’s labor-intensive and a time-consuming process when carried out manually. This leads to many hours wasted chasing down staff, often at dispersed or remote locations or attempting to locate lost documentation.

Purchasing and procurement software alleviates this administrative burden by centralizing data and enabling electronic 3-way matching to verify that all corresponding purchase orders, goods/service receipts, and supplier invoices match.

Accurate cost allocation

Cost allocation involves identifying and assigning costs to the right department, GL code or cost center, and it’s key to understanding outgoing company expenses. Although seemingly simple, finance professionals know all too well how quickly managing hundreds of transactions across individuals, departments and goods and services can turn into disarray and impact reporting accuracy.

When spend is properly allocated, your business can understand its spending activities against budgets and financial periods. This information allows your teams to budget more effectively, make informed decisions and reduce costs and wasteful spending.

Detective internal controls

The University of Florida defines detective controls as being designed to find errors or problems after the transaction has occurred. Detective controls are essential because they provide evidence that preventive controls are operating as intended, as well as offer an after-the-fact chance to detect irregularities [2].

Such best practices include monthly reconciliations of organizational transactions and budget-to-actual reporting. Purchasing and procurement software reporting tools can streamline and enable on-demand and accurate reporting based on historical purchasing, expense, and transactional data.

Purchasing and procurement software enhances this process even further with detailed audit trails that record the history of each transaction, from requests and quoting processes, to requests for supporting documentation, and rejections or approvals.

Transparent audit trails

These step-by-step records of all the activities carried out in the purchasing process drive accountability, a key factor in effective internal control. An audit trail records the life cycle of expense reports and the requisition to purchase order process flow—with the date, timestamp and users involved in completing each transaction.

This granular purchasing transparency verifies procurement activity and provides the necessary logs for auditing purposes.

Achieve financial control with purchasing and procurement software

Implementing rules and procedures for purchasing processes is best practice for companies of all sizes as they can impact your organization’s spend, profitability, employee accountability and financial health. Deploying purchasing and procurement software is a reliable and efficient method of establishing these controls and ensuring that they’re adhered to.

Fraxion digitizes purchasing, expense and approval processes, and preventive and detective internal controls, to help organizations improve operational efficiency, cost control and compliance. Interested in seeing a purchasing and procurement software demo tailored to your organization's needs? Request a demo of Fraxion today.

References:

[1] Investopedia, “What are Internal Controls?” 2021 [Online]. Available: https://www.investopedia.com/terms/i/internalcontrols.asp

[2] University of Florida | Finance & Accounting, “Types of Internal Controls” [Online]. Available: https://www.fa.ufl.edu/directives/types-of-internal-controls/

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