What Is 3-Way Matching in Accounts Payable? How to Automate It with AI?

The typical business reportedly loses about 5% of its annual revenue to fraud and unauthorized transactions, with only about 14% of them recovering these financial losses. Three-way matching in accounts payable is one of the best ways to mitigate against these risks. As we’ll explore in this article, it pushes businesses to double and triple-check all transactions so that discrepancies get caught before they become problems.

However, the way in which three-way matching is integrated and operated hugely shapes its accuracy. That’s where AI technology comes in. Keep reading for not only a guide to three-way matching in accounts payable, but also how AI can be used to automate and bolster its most effective characteristics so that businesses can rest assured that transactions are fraud and error-free.

3-way matching in accounts payable is a system intended to thoroughly check transaction details for payment authorization. It gets its name not because it’s just three steps, but because it requires that the details in all three of the following documents match up before payment:

1. The Purchase Order: Confirmation from the buyer to the vendor authorizing the purchase. For a closer look at processing purchase orders specifically, click here.
2. The Supplier’s Invoice: This is sent from the vendor detailing what’s been ordered and needs paying.
3. The Delivery Receipt: Also from the vendor, this document should include the date of delivery and an itemized list of what was included in the delivery.

In contrast, a 2-way match would only check the details of the purchase order against the supplier’s invoice. The reason for checking against the receipt as well is that it stops businesses from accidentally paying for items that were never delivered. It also makes it harder for fraudulent invoices to be slipped in as each needs a corresponding delivery receipt for a transaction to be authorized.

The details that must be matched across the documents include not only the amount payable but the items or services being paid for and when they were actually delivered. Three-way matching in accounts payable is essentially a vetting process for all transactions to limit the occurrence of fraud, compliance issues, or errors.

As mentioned, the 3-way matching in accounts payable may focus on three documents, but the actual process goes a little further than just three steps.

Here’s a full breakdown of 3-way AP:

1. Send the purchase order to the supplier detailing what’s to be ordered.
2. Receive the goods or services with an accompanying delivery receipt. The invoice is sometimes sent just before delivery, or with it.
3. Check the amount that’s outstanding across the PO, invoice, and delivery receipt, as well as the items being charged for, the business referenced, etc. All the crucial details that pertain to the transaction must be cross-checked.
4. If any aspects don’t match, the whole process needs to go back a step. This is when an accounting department will check in with the vendor and investigate any discrepancies further.
5. Once all three financial documents match up, only then can the transaction be sent for approval.

Example Showing Three-Way Matching in Action

For the sake of better illustrating the process, here’s an example of 3-way matching in action with Pencil’s Down, a fictional stationery store:

1. Pencil’s Down put in an order with Lighting Fire for new lights to be installed in their shop. They sent a PO outlining the lights they were ordering with the amounts quoted not only for those goods but for the labor to install them.
2. Lighting Fire came on site with the lights and at the end of installing everything, left a delivery receipt and invoice for the accounting department at the stationery store.
3. The accounting department compared all the documents relating to the work done by the lighting and electrical company and noticed a discrepancy: though the final amount due on all the documents was the same, the invoice and receipt did not include the same goods mentioned on the PO.
4. The accounting department launched an investigation and discovered that Lighting Fire had over-shot their quote and to avoid the issue, had instead just done less work than was asked for.
5. Since they had already approved the PO in an email, this was fraudulent activity as they hadn’t accurately represented themselves or the amount being asked for.
6. An agreement was made in which the stationery store would only pay for what had been delivered with the prices outlined in the PO. Once all documents had been updated and checked again, only then was the final transaction approved.

This example illustrates just how important checking seemingly insignificant details can be in protecting the integrity of a company’s finances. Had that transaction occurred without the three-way approach, the stationer would have paid for items they’d never actually received and opened themselves to further fraud if they’d used the same lighting company again.

3-way matching in accounts payable can seem like a lengthy task but checking payment documents against each other and being more careful about the criteria that allow a transaction to be authorized, certainly offers advantages to businesses:

Reduces Risk of Incorrect Payments

Beyond the amount being paid, every transaction has a fee. There’s the banking charge and the staff time dedicated to making it happen. That’s all fine when it’s what’s required to keep up with financial commitments but can be frustrating when incorrect payments are constantly creating unnecessary administrative costs and delays.

The only way to get around this is with stricter checking. Three-way matching significantly lowers the risk of paying the incorrect amount to a supplier because it enforces a more thorough criterion for what an approved payment can even look like. The amount paid isn’t simply a number glanced at on a page, but something checked against two other documents to ensure total accuracy.

Protects Business Relationships

Incorrect payments aren’t just an administrative issue. If payments are constantly late or incorrect, it can damage the sense of trust and goodwill with a vendor which could cause issues down the line. Financial inconsistencies, however harmless they might seem in the moment, can be hugely damaging to a business’s reputation.

It can also cause delays which impact client relationships. For example, a contractor that accidentally underpays for a brick delivery might find themselves with too few materials to complete a project, thus souring things with the client.

On the other hand, being a business that always pays properly and on time builds a sense of reliability. That’s exactly what 3-way matching in accounts payable helps with and in doing so, protects not only the financial accuracy of a business but their reputation and relationships.

Mitigates Against Fraud (Both Internal and External)

As this JP Morgan report illuminates, a business’s accounts payable department is one of the most susceptible to fraud. Email scams pose significant external threats, but internal instances of fraud are yet another issue businesses have to guard themselves against.

A three-way accounts payable process makes it far more difficult for fraud to occur from within a company, or from the actions of someone outside of it. The reason for this is that it’s simply that much harder to falsify a charge and get it approved when it’s going to be checked across three documents.

Prepares Business for Audits

In an audit, transactions and the paper trail behind them will be checked with a fine-tooth comb for compliance issues or fraudulent activity. That level of scrutiny can be quite daunting to businesses. That is unless they already have a 3-way matching system in place.

All that triple-checking brings with it a massive advantage in better preparing businesses for audits as each transaction will then have a clear trail of documentation to support it.

As you’ve probably noticed by now, 3-way matching in accounts payable is not a simple task. Going through three different documents and making sure that all necessary details line up has traditionally required staff to sit for hours painstakingly going through each document and inputting it to a central system.

It’s slow, inefficient, prone to errors that are often costly, and a little too easy for employees to fraudulently intervene on. In fact, manual approaches to three-way matching diminish some of its most advantageous aspects. Conversely, automation enhances all the best features.

Automating 3-way matching in accounts payable primarily involves automating the extraction of relevant data. Software can also be used to check information against each other but there’s usually some manual intervention needed before the final authorization. As we’ll explore more in the next section, automating data extraction in accounts payable saves businesses from the problems of manual approaches and helps them get the most out of three-way matching.

At FormX, we offer an Intelligent Document Processing (IDP) solution that uses AI technology such as machine learning, natural language processing, and large language models to scan and understand documents such as purchase orders, extract the relevant information, and add it to central systems as structured data. This makes it easier than ever to perform the checks and balances involved in 3-way matching.

Here are some of the advantages of automating three-way matching through automated, AI-powered data extraction:

Less Demand on Staff

The most demanding part of three-way matching is finding and matching the data. Automation can remove this task entirely so that staff are freed up to focus on the things that need them, rather than the fiddly, frustrating work of checking payment information.

Automation like this also means that when companies grow or face a sudden influx of accounts to process, keeping up with larger volumes of transactions no longer turns into a staffing issue. Our IDP solution at FormX can seamlessly keep up with transactions without compromising on speed or accuracy and most importantly, without demanding more staff hours or new hires.

Faster Payments

Not only does automation save staff time, but it speeds up the entire three-way matching process so that payments can be made in a timelier manner. This allows businesses to take advantage of early payment incentives that suppliers sometimes offer and generally, worry less about missing deadlines due to administrative delays.

Checking data across multiple documents is usually the slowest part of three-way matching but automation eliminates that problem entirely and helps establish a better reputation with suppliers in the process.

Fewer Errors

Human error is an unavoidable risk in any type of manual data entry system. It’s of particular concern with three-way matching as the process involves checking various documents with differing formats. Getting a digit wrong is easy when you’re going from looking at a PO to an invoice, especially when it’s your 15th of the day from a different supplier.

Our IDP solution at FormX can automatically extract data from a myriad of document formats with a far lower error rate than manual equivalents. We have a few data extractors ready to be used, such as for invoices and receipts, but are flexible enough that users can easily train their own extractors without any coding or software know-how.

Compared to manual approaches, businesses get far better accuracy with these extractors. They don’t get tired or distracted or bored – they simply get the job done. The added accuracy they provide prevents incorrect transactions from occurring and any subsequent problems.

Better Protection Against Fraud

The accuracy of automation also offers advantages in the fight against financial fraud. When information is extracted with fewer errors, it has the added benefit of ensuring that fewer fraud attempts can get through the net of three-way matching. A big part of this is that manual intervention is limited.

It curtails not just human error, but human meddling. Documents being handled by an IDP and RPA solutions make it far harder for employees or vendors to fudge invoice amounts, etc.

A Clear Auditing Trail

The ordered, accurate nature of automated data extraction in three-way matching is very useful to any business that wants to be better prepared for auditors. We mentioned previously that the structure of 3-way matching in accounts payable creates a useful auditing trail, but it’s something that automation can help lock in by digitizing things.

IDP scans, captures, and inputs data to a central system, while also saving that entire trail for auditors to view later when payments need to be verified.

Automating 3-way matching in accounts payable enhances accuracy, fraud protection, and efficiency, while also lowering cost and staff demands. Automating the AP workflow and seeing these benefits all starts with automating data extraction. However, automation of three-way matching cannot be done without data. This is where FormX comes in.

FormX’s AI-powered solutions can help you automate data extraction from relevant documents and get the best out of three-way matching, allowing you to build a more trustworthy accounts payable process that benefits your business and its reputation. To chat with someone from our team or book a demo, click here.