3 way matching in Accounts Payable

What is 3-way matching?

Before finding the best way to implement the process, it is vital to understand precisely what 3-way matching is.
Essentially, 3-way matching is a method of verification that companies use to validate invoices before making any payments. It involves matching the corresponding fields from three different documents to ensure that everything is correct. 

These three documents are the invoice itself, the purchase order, and the receipt for the goods. This means that one invoice will have three separate documents that must be verified before the payment can be made. If any of the information from one of the documents does not match the others, then the invoice may be fraudulent, or you may have yet to receive the correct number of goods.

3-way matching vs. 2-way matching

What is 2-way and 3-way matching in Accounts Payable? The 2-way match process is what most businesses use regularly, but this process is not as capable of detecting fraud as the 3-way match. 

In a 2-way match, the invoice is matched with the purchase order to ensure that the number of goods purchased and the amount to be paid are the same on both documents. A 3-way match will include the receipt of the goods and these two documents. While a 2-way match helps ensure that you only pay for what you purchased, a 3-way match ensures that you only pay for what you received.

Three-way matching accounting solutions can include manual methods and automation. Manually performing a 3-way match requires repetitive work subject to human error. Automating the 3-way matching process with software like Rossum is the most efficient way. 

Rossum is an AI-powered, cloud-based platform that automatically matches invoices to purchase orders and receipts. Using cognitive data capture tools, Rossum can read the data from these documents and match them with little human effort.

The importance of 3-way matching in Accounts Payable

Not long ago, some European con artists could email fake invoices to both Google and Facebook. Over two years, these two tech companies paid out more than $100 million to the defrauders, believing these invoices to be authentic. Why did this happen?

Simply put, the Google and Facebook accounting departments needed the proper procedures to prevent scams like this. While they might have approved these fake invoices for a myriad of reasons, there is one step that companies can take to ensure that this does not happen to them. 

By requiring invoice matching before every invoice approval in the Accounts Payable (AP) department, businesses can protect against fraud and know whether the invoice should be paid in full or only partly, depending on the number of goods received. 

One way to match invoices is with 2-way matching. In this process, an invoice is compared with the purchase order to ensure that both line up correctly. This is a helpful way to detect duplicate invoices or differences in the amounts of either the invoice or purchase order. 

The only problem with this form of matching is that it does not consider the goods received by the business. This is why 3-way matching in Accounts Payable can be a more effective way to prevent fraudulent invoices from being paid and ensure your company only pays for what it receives.

Companies implementing a 3-way match process in their AP department must keep 3-way match journal entries. Employees could do these journal entries manually, but automation is far more efficient. 

Since the department is working with three documents rather than a single invoice, the effort and time required to match these three documents can almost outweigh the risks of fraud. However, with an automated 3-way matching process that utilizes Artificial Intelligence (AI), like Rossum, companies can pay only for what they receive, detect fraud, and save valuable time.

Examples of 3-way matching

Between June 2016 and December 2021, the FBI reported that there were 241,206 different incidents globally of scams that target businesses and individuals who perform transfers of funds. These scams are part of the Business Email Compromise, and the Google/Facebook incident was an example of this fraud. 

With fraudulent invoices on the rise, companies must have processes to detect fraud early on. Companies can lose millions of dollars paying fake invoices, but with the proper process, they can reduce this risk. 3-way matching is a helpful tool that businesses can use to ensure they do not pay defrauders.

It can be beneficial to look at examples of 3-way matching to get a better understanding of how it works.

In a hypothetical example, assume that Company A receives an invoice from Company B requesting a $1,000 payment for purchased goods. Company A has a copy of their purchase order for five computer chips at $200.

Additionally, Company A has a receipt from their inventory department that outlines the recent arrival of computer chips. 

These three documents are then compared in a 3-way match process. The data regarding Company A and Company B match, as do the dates and price-per-item. Unfortunately, the inventory department’s receipt of goods only states that four computer chips arrived. 

This information does not match the other two documents. Therefore, after extra verification, Company A sends $800 to Company B for the receipt of four of five computer chips at the rate of $200 apiece.

The above example outlines how a simple 3-way matching process can prevent companies from paying for goods they did not receive. Preventing fraud can be seen in another hypothetical example. Using the same scenario above, assume that Company A received an invoice from Company B requesting a $1,000 payment. 

The Accounts Payable department matches this invoice with the correct purchase order. Company A’s AP department finds no purchase order to match the invoice, and it is determined that the invoice is fraudulent. 

Examples like these demonstrate how 3-way matching benefits businesses. With software that can automate this process, like Rossum, 3-way matching can be performed for every invoice a company receives without requiring an excessive amount of time from employees.

3-way matching concept

The 3-way matching concept is based on the idea that if the data for the invoice, purchase order, and receipt of goods lines up, then the invoice can be approved and paid. While a 2-way matching process can help companies detect when the invoice does not match purchase order details, it must be capable of informing the company whether they received the items from the purchase order. 

This is where the 3-way matching concept can be more effective in preventing fraud than the simpler 2-way match. Even if the invoice matches the purchase order, if the company only received a portion of the items ordered, they should only pay for that portion and not the entire purchase.

This concept is also called a 3-way match internal control. Internal controls are the processes and procedures that a company puts in place as safeguards against fraud and errors in the accounting department. 

A 3-way match is an example of internal controls because it is a process whose primary purpose is to prevent fraud and ensure accurate payments for goods received. A 3-way match process also makes auditing easier because the work of comparing and verifying the data on the three different documents has already been completed. 

Performing 3-way matching in the AP department can take time. Still, with an automation tool like Rossum, this matching process can be completed quickly, accurately, and with less cost to the company.

2-way vs. 3-way vs. 4-way matching in Accounts Payable

Knowing 2-way matching in Accounts Payable and 3-way matching can help companies understand the best matching process for their unique needs. In addition to these two forms of matching, there is another called 4-way matching. 

While 2-way matching is the simplest and fastest way to verify invoices, 3-way matching provides an extra layer of security by matching the receipt of the goods to the invoice and purchase order. 

4-way matching in Accounts Payable builds off of the 3-way match process. In a 4-way match, the invoice is compared with the purchase order, then with the receipt of goods, and finally with a quality inspection document. This addition to the matching process ensures that a business only pays for items of acceptable quality. 

A 4-way match may appear to be the most secure way to verify invoices before approving them, but it may not be necessary for every invoice. 4-way matching takes extra time, and, in most cases, a 3-way match will suffice. Performing a 3-way game can be done manually, but automation can be a far more efficient choice. 

With an AI-powered Intelligent Document Processing platform like Rossum, companies can automatically perform a 3-way match for invoices to protect against fraud, pay the correct amount, and save time and money.