Vendor Validation Is Not Enough – You Need an Audit Strategy

Compliance. Control. Confidence.

These form the foundation of any well-functioning accounts payable department.

This is especially true when onboarding and managing your vendors. Part of protecting your business and maintaining good relationships with dependable vendors relies on proper validation and auditing processes.

In this blog post, we’ll look at the importance of auditing AP vendor validations and the benefits it can bring your business.

What is Vendor Validation?

Vendor validation is the process of confirming the legitimacy of any vendor you plan to do business with – hopefully accomplished before they’re paid for services or supplies.

Your AP team should perform a detailed inquiry into every vendor’s basic information along with legal, financial, and regulatory compliance status.

Thoroughly validating can be time-consuming, but there’s a lot at stake if you neglect it: See Why Your Accounts Payable Team Needs a Strategy for Vendor Compliance.

AP teams get into trouble because validation is not a one-and-done process. We recommend regular audits of your Vendor Master File, and here’s why:

Importance of Auditing AP Vendor Validations

A fundamental truth of life and business is that THINGS CHANGE. Of course, this also applies to your vendors – addresses, banking information, legal status can shift in the blink of an eye. That means the validations you perform when first interacting could give very different results three months later.

Compliance with Regulatory Requirements

Regular audits should include activities like screening through the Office of Foreign Assets Control (OFAC), verifying Tax-Identification Numbers (TIN), and more. You need to be certain your potential and existing vendors are not involved in any illegal activities, or flagged as an entity you should not be involved with. Auditing validations can identify any vendors who may not be compliant with these regulations so you can take action.

Mitigate Risks

Working with unvalidated vendors can pose significant risks to your business, such as fraud, supply chain disruptions, or legal issues. Auditing AP vendor validations can help identify any potential risks that vendors may pose. Regular audits ensure that the vendors you work with continue to meet your criteria and remain trustworthy partners.

Improved Efficiency

Auditing AP vendor validations can also lead to improved efficiency within your organization. By auditing vendor compliance regularly, you can streamline your vendor management processes (imagine having all vendor TINs confirmed when you’re ready to file 1099s!), reduce the number of vendor inquiries or disputes, and improve your accounts payable processes.

Cost Savings

Auditing your vendors for compliance can result in cost savings for your business – most importantly by helping you avoid potential fines doled out by the IRS or US government! By working with validated vendors, you also reduce the risk of fraud or supply chain disruptions. Additionally, by streamlining your vendor management processes, you can reduce the time and resources required to manage your vendors, resulting in cost savings.

Develop an Ongoing Vendor Validation Strategy

You’ll want to record the results of all validations performed and digitally store those in a safe place. These records serve as “reasonable cause,” or the ability to provide proof that your business makes sustained efforts to comply with tax law and other regulations.

Here are some questions that will help you define a successful auditing strategy:

1. What are your vendor compliance standards? Make sure your AP team is up to date on federal and local regulations. Provide ongoing education through organizations like the Institute of Financial Management (IOFM).
2. How often should you review for accuracy? For example, if you work with a lot of non-US vendors, you may want to perform OFAC screenings more regularly. Perhaps TIN match verifications can be performed annually, well in advance of 1099 filing deadlines.
3. How will you maintain good records of validations performed? As with many business functions today, there’s the hard way – manual checks performed one vendor at a time, documented with screenshots; or the automated way – find a third-party or software solution that can complete the review and provide an audit trail.
4. What actions need to be taken if validations are not successful? Let’s say you run an OFAC check and a vendor is flagged. What are the next steps and who should perform them? You’ll want to outline this as part of your AP Processes and Procedures.

Conclusion

In conclusion, auditing AP vendor validations is essential. Making audits part of your routine workflow can help ensure compliance with regulatory requirements, mitigate risk, improve efficiency, and result in cost savings for your business. By conducting regular audits and validation of your vendors, you can be confident that the vendors you work with are trustworthy and meet your business requirements.

Additional Resources

• 1099 Fines and Penalties and How to Avoid Them
• OFAC Penalties and Fines and How to Avoid Them