How the Accounts Payable Three-Way Match Process Reduces Errors and Fraud

When managing accounts payable (AP), accuracy and security are Important. Any errors or fraud in this process can lead to significant financial loss, damage to supplier relationships, and even legal issues. That’s where the three-way match comes in, a method designed to prevent errors and fraud while ensuring your payments are processed correctly. 

In this blog, we will explore how the accounts payable matching process works, how it helps to reduce errors with three-way match, and how it can prevent fraud with accounts payable three-way match. We’ll also discuss best practices and how to automate the three-way match process to improve accounts payable accuracy and reduce payment errors.

What is the Accounts Payable Three-Way Match Process? 

The Accounts Payable Three-Way Match Process is a method used by companies to verify and validate supplier invoices before authorizing payments. It involves matching three key documents—Purchase Order, Receiving Report, and Invoice—to ensure accuracy, prevent errors, and avoid fraudulent payments. Here’s a breakdown of each component of the three-way match process and how it functions:

Purchase Order (PO) Matching

The PO is the document created by the buyer that outlines what was ordered from the supplier, including details like item descriptions, quantities, agreed prices, and delivery timelines. During the three-way match, the information on the PO is compared with the receiving report and the invoice to confirm that the correct items were ordered and at the agreed-upon terms.

Receiving Report (or Goods Receipt) Matching

This document, created by the receiving team, confirms that the items or services ordered were delivered, listing the actual quantity and condition of goods received. The receiving report is matched with the PO to verify that what was ordered was actually received, and with the invoice to ensure that the supplier is only billing for items delivered.

Invoice Matching

The supplier’s invoice requests payment for goods or services delivered, detailing quantities, prices, and any additional charges. The invoice is matched with both the PO and the receiving report to check that it aligns with what was ordered and what was received. 

Matching Process: Alignment Across All Three Documents 

The core of the three-way match process involves verifying that all three documents (PO, receiving report, and invoice) match critical details, such as item quantities, pricing, and total amounts. If any discrepancies are found—such as a difference in the quantity ordered and received, or an incorrect price on the invoice—the match fails, and payment is held until the issue is resolved. 

Approval and Payment 

Only when all three documents align is the payment approved, ensuring that the organization is only paying for goods or services that were properly ordered, delivered, and invoiced at agreed-upon terms. This reduces the risk of overpayment, incorrect payments, and fraudulent billing. 

How the Three-Way Match Process Helps Reduce Errors 

The three-way match process is a critical step in accounts payable that directly reduces errors by ensuring the alignment of key documents—Purchase Order (PO), Receiving Report, and Invoice—before any payment is authorized. Here’s a breakdown of how it helps prevent errors: 

Ensures Consistency Across Documents

• The three-way match verifies that the purchase order, receiving report, and invoice all match on specific details like quantity, price, and product description. If there is any inconsistency, such as a price discrepancy or mismatched quantity, it flags these for review. 

Prevents Duplicate Payments

• In high-volume AP departments, duplicate invoices or duplicate entries are a common source of errors. By requiring a match across all three documents, the system helps identify and eliminate any duplicates before they are paid. 

• Automated matching systems often have built-in checks for invoice duplicates, which significantly reduces the risk of paying the same invoice twice. 

Validates Receipt of Goods or Services

• The three-way match requires confirmation that the goods or services were actually received as ordered. If items were ordered but not delivered (or partially delivered), the receiving report won’t match the purchase order and invoice, stopping the payment until the discrepancy is resolved. 

• This is particularly important in cases where there might be delays or partial shipments, helping to prevent payments for goods that were never received. 

Improves Data Entry Accuracy

• The process cross-checks data between three separate sources, making it more likely to catch human errors in data entry, such as inputting the wrong amount or unit price on the invoice. 

• If the information entered doesn’t match across all three documents, it prompts further review. This reduces the chance of data-entry errors impacting payment accuracy. 

Reduces Manual Errors with Automation

• Many companies automate the three-way match process, which not only speeds up matching but also reduces the manual effort involved in verification. Automation significantly reduces the likelihood of errors that stem from human oversight. 

• By using automation, errors such as incorrect quantities or prices are flagged instantly, and the system prompts an alert for verification. 

Preventing Fraud with Accounts Payable Three-Way Match 

Identifies Unmatched Invoices: 

• Fraud often occurs when unauthorized invoices are submitted for payment. The three-way match process requires that invoices match both the purchase order (PO) and receiving report. If an invoice is submitted without a matching PO or receiving report, it raises a red flag, helping to catch potentially fraudulent invoices. 

Validates Goods or Services Received: 

• The three-way match confirms that goods or services were actually delivered and received. For instance, if a fraudster submits an invoice for nonexistent goods, the system will flag the mismatch, as there will be no corresponding receiving report. This validation process makes it harder for false invoices to be approved. 

Prevents Duplicate Payments: 

• Some fraudulent schemes involve submitting duplicate invoices or billing the company multiple times for the same service or product. By comparing the invoice, PO, and receiving report, the three-way match prevents duplicate invoices from slipping through, reducing the chance of overpayments and fraud. 

Requires Authorization and Approval: 

• The three-way match requires that all three documents are approved by different parties, reducing the chance of collusion or unauthorized payments. By having these checks and balances in place, the AP team can ensure that no single individual has the authority to approve a payment on their own, mitigating fraud risks. 

How to Implement Three-Way Match in Accounts Payable 

Implementing a three-way match in your accounts payable (AP) process involves a series of steps that ensure a smooth and effective setup. Here’s a more detailed explanation of each step in the implementation process: 

Review Your Existing Workflow 

• Begin by examining your current AP processes to understand where common errors or discrepancies occur. This helps you identify specific areas where the three-way match can be most impactful. Look at your purchase orders (POs), receiving reports, and invoices to see how they’re currently processed and verified. Identify any existing bottlenecks or inefficiencies that a three-way match could help eliminate. 

Integrate Key Documents: Purchase Orders, Receiving Reports, and Invoices 

• Centralize the three documents—the purchase order, receiving report, and invoice—to make them easily accessible and standardized across your organization. Ensure these documents contain consistent details like item descriptions, quantities, prices, and terms. Any mismatches in these fields will need to be resolved. Many companies use ERP (Enterprise Resource Planning) systems to store and organize these documents, making them accessible for easy matching. 

Set Up Document Matching Rules 

• If you’re using an automated system, configure the system to follow certain rules for matching, such as comparing quantities, prices, and item descriptions across the three documents. Define tolerance levels for discrepancies (e.g., a slight difference in quantity might be acceptable while large discrepancies will flag for review). Establish what happens if a match fails: the system should flag the transaction, alert the appropriate personnel, and suspend payment until the issue is resolved. 

Establish a Clear Approval Workflow for Exceptions 

• Create a clear workflow for handling discrepancies when they arise. Decide who is responsible for reviewing and resolving flagged transactions and discrepancies. Set up notifications so that the designated person or team is immediately informed when the three-way match identifies a mismatch. Establish protocols on how to handle frequent errors or specific vendors that frequently cause discrepancies to improve efficiency over time. 

Automate the Three-Way Match Process 

• Automating the three-way match process can save time, increase accuracy, and reduce the manual work required. Automation tools can match documents, flag discrepancies, and notify relevant personnel in real-time, helping to prevent delays and speed up the approval process. Many AP automation tools like Zapro offer integrated three-way match capabilities, streamlining the process and ensuring consistent application of matching rules. 

Train Your Accounts Payable Team 

• Educate your AP team on the three-way match process so they understand how it works, why it’s important, and how to resolve discrepancies effectively. Conduct regular training sessions and refresher courses to keep everyone up-to-date on any changes or new features, especially when new automation tools are introduced. Encourage team members to communicate and share best practices, as collaboration is crucial for a successful AP matching process. 

Monitor Performance and Refine the Process 

• Track metrics such as the number of flagged transactions, resolution times, and accuracy rates to measure the effectiveness of your three-way match process. Conduct regular audits to ensure the three-way match is functioning as intended and that any recurring issues are addressed. Continuously improve the process by gathering feedback from your AP team, adjusting matching rules, and optimizing workflows based on performance data. 

Conclusion 

The accounts payable three-way match process is an essential part of ensuring accuracy, reducing errors, and preventing fraud in your business. By cross-referencing purchase orders, goods receipts, and invoices, you can improve the overall efficiency and reliability of your AP department. 

Implementing best practices, leveraging automation, and training your team can help you reduce errors with the three-way match and prevent fraud with accounts payable three-way match. The benefits of accounts payable three-way match are clear: increased accuracy, better vendor relationships, and reduced operational costs. 

If you’re looking to further streamline your accounts payable process, Zapro offers a powerful solution for automating the three-way match process and improving AP accuracy. book a  demo to see how Zapro can help your business manage its accounts payable more efficiently and effectively.