Accounts Payable Compliance Checklist: Key Items Your Business Can’t Ignore

Accounts payable (AP) is the key operation in any business. Managing this operation manually requires organizations to closely monitor the accounts payable process and identify any discrepancies in advance to keep the cash flow running efficiently. Besides having operational challenges, compliance issues are one of the primary concerns in any business.

Compliance in Accounts Payable (AP) refers to the adherence to laws, regulations, internal policies, and best practices to ensure financial integrity, prevent fraud, and maintain efficient payment processes. Let’s look at some of the key compliance areas in Accounts Payable:

Invoice Processing & Approval Compliance

• Three-Way Matching – Accounts payable solution matches invoices, purchase orders, and receiving reports to prevent fraudulent payments.
• Segregation of Duties (SoD) – Ensuring different individuals handle invoice approvals, AP compliance, payments, and reconciliations.
• Approval Workflows – Automated system routes invoices to authorized approvers based on predefined thresholds. Implementing proper approval hierarchies for invoice validation.
• Duplicate Invoice Detection – AI-powered tools flag duplicate invoices to prevent over payments.
• AI-Based Fraud Detection – Identifies anomalies such as sudden increase in invoice amounts or new vendors with unusual activity.

AP Audit Checklist

• Invoice Validity Checks – AP process involves verifying invoice details (supplier, amount, tax, PO reference) to reduce the risk.
• Payment Review – AP departments matches payments against approved invoices to prevent unauthorized transactions.
• Expense Report Audits – Review employee reimbursement claims for policy violations.
• System Access Logs – Regularly review who can access AP systems to detect suspicious activity.
• Internal & External Audits – Regular audits to ensure compliance with financial policies.
• Document Retention Policies – Storing invoices, payment records, and contracts as per legal requirements.
• SOX (Sarbanes-Oxley Act) Compliance – Maintaining accurate financial records and internal controls for publicly traded companies.

Fraud Prevention Measures

• Preventing Invoice Fraud – Automated accounts payable process detects fake invoices and verifying vendor authenticity.
• Expense Report Compliance – Ensuring employee expenses follow corporate policies.
• Policy Adherence – Enforcing company-specific AP policies to prevent misuse.
• AP Audit Trails – Maintain a detailed history of invoice approvals, changes, and payments for forensic audits.
• AI-Based Anomaly Detection – Flags unusual vendor payments, duplicate invoices, or altered account details.
• Mandatory Invoice Numbering – Prevents duplicate payments by requiring a unique invoice number per vendor.
• Financial Close Process – Reconcile AP accounts monthly to detect missing invoices.

Tax Compliance

• Sales Tax & Use Tax – Ensure proper collection and remittance of taxes on purchases.
• Value-Added Tax (VAT)/Goods and Services Tax (GST) – Compliance with VAT/GST regulations based on the country’s tax system.
• 1099 & W-9 Reporting (USA) – Correct classification of vendors and IRS reporting for non-employee compensation.
• Withholding Tax Compliance – Deduction and remittance of withholding taxes for specific vendors.
• Automatic Tax Calculation – Ensures correct VAT, GST, and withholding tax deduction.
• Real-Time Tax Validation – Integrates with tax authorities for TIN (Tax Identification Number) verification and compliance checks.
• E-Invoicing Compliance – Many countries mandate electronic invoicing (e.g., India, Italy, and Mexico). Automated AP systems ensure compliance.

Payment Compliance

• PCI-DSS Compliance – Secure handling of card payments to prevent fraud. Encrypts payment details to protect against fraud.
• ACH & Wire Transfer Compliance – Ensuring proper authentication and approval for electronic payments with multi-factor authentication (MFA) and approvals.
• Duplicate Payment Prevention – Avoiding duplicate invoices and payments using automated checks.
• OFAC & AML Screening – Automatically checks vendor payments against sanction lists (e.g., OFAC, FATF).

Data Privacy & Security Compliance

• GDPR (General Data Protection Regulation) – Protecting vendor and customer personal data in the EU.
• CCPA (California Consumer Privacy Act) – Ensuring data privacy rights for California-based vendors.
• SOC 1 & SOC 2 Compliance – Internal control processes for secure financial transactions.

Vendor Due Diligence

• Vendor Background Checks – Verify business registration, tax ID, and bank details. Validate supplier bank accounts and business legitimacy before making the payment.
• W-9 & 1099 Compliance (USA) – Collect W-9 forms for vendors to ensure proper IRS reporting.
• TIN (Tax Identification Number) Matching – Validate vendor TINs against government databases.

Payment Fraud Prevention

• Vendor Bank Account Verification – AP team confirms payment details via a secondary verification process.
• Multi-Factor Approval for Payments – Accounting system requires two-person approval for large transactions.
• Block High-Risk Vendors – Automatically flag new vendors without tax registration or with frequent invoice discrepancies.

Contract Compliance

• Automated Contract Matching – Ensure payments follow agreed contract terms, discounts, and schedules.
• Spend Analysis & Compliance Reports – Identify unexpected vendor spending trends for investigation.

SOX & Financial Reporting Compliance

The Sarbanes-Oxley Act (SOX) requires businesses to maintain accurate financial records and prevent fraud.

A. SOX Compliance in AP

• Invoice Approval Tracking – Maintain audit trails for all invoice approvals.
• Financial Accuracy – Ensure all expenses are properly recorded in financial statements.
• Regular Reconciliations – Compare vendor balances with AP records to detect discrepancies.
• Secure Payment Approvals – Use multi-level approvals for high-value transactions.

Conclusion

Accounts Payable Software helps enforce compliance by streamlining invoice processing, tax calculations, and fraud detection.

• Auditing & Internal Controls prevent fraud, duplicate payments, and unauthorized transactions.
• SOX Compliance ensures accurate financial reporting, reconciliations, and system access control.

Vendor & Payment Compliance safeguards against fraudulent vendors, incorrect tax reporting, and contract violations.