Accounts payable fraud, also known as AP fraud, has been growing in frequency, becoming more sophisticated over time, such that a typical AP fraud scheme may not be easily noticeable at all.
AP fraud is simply the dishonest and illegal stealing of funds from a business's payment system, typically involving employees and other authorized staff hiding fraudulent transactions among thousands of legitimate transactions.
The Association of Certified Fraud Examiners estimates that a standard organization loses around 5% of its revenue annually to AP fraud. Every business, big and small, that conducts financial transactions is vulnerable to AP fraud.
The account payable is like an open cash box for fraudsters, making it a frequent target for scammers. The perpetrators of AP fraud may comprise of employees, vendors, and external fraudsters who can pull off the heists single-handedly or as a group.
Common Types of AP Fraud
According to an ACFE’s Global Fraud Study, the three most common types of accounts payable (AP) fraud, which account for the largest percentage of reported fraud cases, are: check tampering, billing schemes, and fraudulent expense reimbursements.
Some of the many ways these types of AP fraud take place include:
- Duplicate payments to vendors due to employee errors or multiple invoices
- Making payments to false invoices issued by employees
- Fraudulent payments to diverted checks,
- Rounded dollar amounts, and
- Malicious phishing scams.
While AP fraud can take many forms, if you know what to look for and where to look, you can detect account payable fraud and stop it from happening in your business.
How to Detect and and Stop AP Fraud Schemes
Here is are some of the best and most effective ways to prevent account payable fraud:
1. Verify Vendor data
Review your vendor information such as email addresses, bank accounts, commercial addresses and phone numbers regularly. Check for inconsistencies or any matching information to that of your employee records. Public email addresses instead of company domains, residential addresses, and phone numbers matching your employees' records should raise a red flag.
You can begin investigating to verify every vendor detail you get. It is also helpful to adopt fraud detection software that can double-check your vendor records against employee records to check for overlaps. Companies that have adopted data monitoring and analysis tools have a reduced percentage of AP fraud cases.
2. Study Fraud Patterns
The most common account payable frauds have suspicious attributes, such as high-risk addresses, private mailboxes, far-off countries, night transactions, and consecutive invoice numbers that can alert you of possible ongoing financial fraud.
You can use fraud detection software to analyze your transactions before payments or perform an internal accounts audit to uncover ongoing fraud activities. Either way, knowing what to look out for is vital is discovering hidden schemes.
3. Close Stale Purchase Orders and Vendor Records
An inactive purchase order (PO) is an open door for fraudulent accounts payments. Check POs that are still open even after suppliers have completed work for your company and close them. The same applies to vendor records that have been inactive for, say, 13 or more months.
4. Stop check payments
Checks are still a common payment methods from one business to another, and also a frequent culprit in fraudulent payments. According to the Association for Financial Professionals, checks represent a whopping 82% of payments fraud targets.
Scammers can easily alter checks to create counterfeits, while fraudulent employees can issue them to nonexistent vendors. Since following back on check payments can be a rigorous and time-consuming process, it is best to simply avoid using checks where possible.
If you must use checks, adopt positive pay – an automated cash-management service financial institutions use to deter check fraud. You collaborate with your bank so that whenever there is a check to be run, you forward a check issue file to them.
The bank can match a check against your check issue file before they honor it. If they notice inconsistencies such as higher amounts, check numbers, or if not listed in your issue file, the bank can notify you to decline or authorize the payment.
5. Tighten Payments Approvals
Most businesses require extra approval for payments, like an additional authorizing email for checks above $2,500. However, fraud payments tend to cash in an amount just a little lower than the range that requires approval to quickly pass undetected.
Keep an eye out for amounts that are just below the range that requires additional review for approval. If you see such figures, follow up immediately and verify the information before issuing payments. Moreover, requiring extra approval points can help to review information before approving large or frequent payments.
6. Conduct Surprise Audits
By conducting surprise and random audits, you can not only deter financial frauds, but also examine the company's internal controls more closely to detect and prevent any fraud schemes.
Review your accounts payable systems, policies, and procedures regularly, and gather data on their fraud prevention preparedness, as well as any weaknesses that could make your accounts and assets vulnerable. You can then identify any gaps in your systems and take appropriate action if anyone has already exploited the weaknesses.
7. Digitize Operations and Accounting
Digitizing your business operations, accounting, and audits is an effective way to prevent AP fraud and have an accurate trail of transaction reports for your business.
Adopting Artificial Intelligence (AI) and Machine Learning (ML) software can help detect errors where a human eye could have missed. AI and ML can also see duplicate invoices and vendors, extra charges, and suspicious trends in your payment system.
Advanced automation software can also verify invoice processing, track the invoice's activities, and match it to a vendor. This software can help tie orders to receivables to prevent paying fraudulent invoices.
Most employees are honest, but you must take proactive steps to prevent AP fraud, including incorporating the steps listed above. Add another layer of protection against AP fraud by ensuring the same employee(s) are not responsible for issuing all payments and reconciling accounts.