Some common forms of organizational fraud include vendor fraud, payment fraud, invoice fraud, and employee fraud.
Preventing accounts payable fraud is challenging even under the best circumstances. However, implementing AP automation can significantly enhance your ability to detect and prevent fraudulent payment activities by verifying information right from the start. Ensuring the accuracy of critical data such as payment amounts, expenses, and addresses helps to safeguard your documents, ensure secure processing, and improve strategic decision-making.
Why is AP Fraud a Concern for Businesses?
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Failure to detect and prevent payable fraud can result in significant financial losses and damage to a company’s reputation in addition to severe legal repercussions. According to the Association of Certified Fraud Examiners (ACFE), fraud typically goes unnoticed for 14 months, resulting in average losses of $8,300 per month.
What is Accounts Payable Fraud
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Billing Schemes: Employees create shell companies and submit false invoices for goods and services that never existed.
Check Tampering: Employees steal and forge checks from the employee, keeping the money for personal gain.
Expense Reimbursement Schemes: Employees submit fraudulent expense reports, claiming expenses that never occurred such as inflated meal costs, nonexistent supplies, or even overordering supplies and taking them.
External accounts payable fraud refers to fraudulent activities committed from outside the organization's accounts payable system, including:
Vendor Overcharge: Vendors may intentionally overcharge or bill twice for the same item or service.
Business email compromise (BEC) or Email account compromise (EAC): scammers use deceptive emails to impersonate employees, vendors, or partners. They may request things like money transfers, unauthorized payments, or sensitive information.
6 Things that Increase the Risk of Fraud
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While trust in employees is crucial, excessive reliance on it can create opportunities for internal fraud. Things like financial difficulties, the allure of easy money, or even unrealistic performance targets may drive unethical or fraudulent behavior. This is especially true when an opportunity arises and the perceived risk of detection is low. Implementing internal fraud controls can effectively mitigate this risk.
Weak internal controls, inadequate segregation of duties, and poor oversight all increase the chance to commit financial fraud. Implementing clear roles and responsibilities combined with regular reviews and internal audits all makes it harder for an individual to commit and conceal fraudulent activities.
Complicated processes and systems can create vulnerabilities. A lack of transparency or elaborate workflows provide opportunities for a fraudster to exploit any gap or weak point.
Relying on manual signoffs, whether using rubber stamps or handwritten signatures, creates an opportunity for fraud. Stamps can be misused, signatures can change, and both can be forged. Implementing more secure approval methods such as digital signatures or automated workflows can help mitigate this risk.
Fraudulent activities are both crimes of opportunity and omission. Employees should have proper training on accounts payable fraud prevention including different types of fraudulent payments and fraud attempts, ethical behavior, and reporting procedures. A lack of awareness can lead to unintentional assistance to fraudulent activities.
Common Types of Accounts Payable Fraud
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Vendor fraud occurs when a company is deceived by individuals posing as legitimate vendors or when vendors work with company employees to defraud the organizations. Common types include:
Fictitious vendors - Vendors create fake accounts and submit invoices for goods and services that were never provided.
Vendor collusion - Employees and suppliers work together to defraud the company, often through inflating prices or submitting invoices for non-existent goods or services.
Overpayment - Fraudsters intentionally overpay vendors, then request a refund to be paid into their own account.
Payment fraud involves illicit activities related to processing and dispersing funds, particularly check fraud. These are especially prevalent in organizations that rely heavily on checks or ACH payments. Common forms include:
Check tampering - Altering a check to change the payee's name, account, or amount.
Check theft - Stealing company checks and forging signatures to deposit funds into a fraudster-controlled account.
Check forgery - Creating counterfeit checks to withdraw money from the organization's account.
ACH Payments - Fraudulent Automated Clearing House (ACH) transactions involve unauthorized electronic payments, often through access to company banking details.
Invoice fraud involves manipulating billing documents for funds. Some typical examples include:
Fake invoices - Submitting invoices for goods or services that were never provided, often through fake vendor accounts.
Duplicate invoices - Submitting the same invoice multiple times to receive multiple payments for the same service or product. This may include changing accounts numbers or similar details.
Inflated invoices - Altering invoice amounts to receive more money that what is owed.
Employee fraud occurs when employees deceive their employer for personal gain. Examples of expense fraud include:
False expense reports - Expense reimbursement fraud involves falsifying receipts or overstating expenses including mileage to receive unwarranted reimbursements.
Misuse of company cards - When employees use company cards for personal purchases that then attempt to disguise as business-related.
Kickback schemes - Employees and vendors collaborate to inflate contract prices or submit falsified invoices, with the profit split between them.
Conflict of interest - When employees exploit their professional roles for personal gain, such as awarding contracts to businesses in which they have a financial interest or favoring a personal acquaintance.
Investigating AP Fraud
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According to the Association of Certified Fraud Examiners (ACFE), organizations lose 5% of annual revenue to fraud every year, with a median loss of $125,000 before detection. In addition, fraud typically goes unnoticed for an average of 14 months, although the timelines vary depending on the type of fraud.
Fraud detection often begins with a simple review of accounts payable records and processes to uncover potential evidence and indicators. Some key signs include missing checks, inactive or duplicate supplier payments, and unexplained discrepancies in records. Investigating suspicious transactions and consistently verifying vendor information are also crucial measures in identifying and combatting fraud.
There are various techniques to detect AP fraud, including Benford's Law, monitoring and auditing, advanced data analytics, and implementing segregation of duties. However, relying on a single method is insufficient; combining multiple techniques is essential for effectively detecting AP fraud.
What if You Find Fraud?
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If you find evidence of payable fraud, take immediate action to mitigate damage and prevent further losses of financial assets. Report the fraud to the appropriate authorities and conduct a thorough investigation.
7 Ways to Prevent Accounts Payable Fraud
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Regular audits are essential for detecting payable fraud by uncovering anomalies and inconsistencies in financial records. Additionally, verifying vendor information including tax ID numbers and purchase orders, plays a crucial role in preventing fraudulent payments.
Using technology solutions is crucial for both preventing and investigating accounts payable fraud. Automated invoice and payment processing systems can quickly detect anomalies and flag suspicious data and transactions in real-time.
Furthermore, implementing secure electronic payments and encryption protocols enhances data protection, effectively safeguarding sensitive financial information against unauthorized access or manipulation.
Payment sanction screening can help detect and prevent fraudulent payments by screening against sanction lists. Utilizing SWIFT’s transaction screening service can effectively identify suspicious transactions and quickly alert finance teams to potential risks.
Establishing clear rules and best practices for payment processes is essential in preventing payable fraud. Confusion and potential fraud can be avoided simply by verifying payment amounts and confirming that vendors received payment.
Implementing a fraud awareness program educates employees about the risks of payable fraud and empower them to prevent it by recognizing red flags and emphasizing the use of secure connections when handling sensitive information. Promoting transparency and fostering open communication further motivates employees to report any suspicious activity promptly.
Staying current on fraud prevention techniques is essential for staying ahead of evolving threats. This proactive approach allows you to continuously adapt and strengthen your defenses against accounts payable fraud, safeguarding your organization. Some key steps to achieve this include continuous education on emerging fraud schemes and prevention strategies, regularly updating and optimizing your technology systems, and monitoring industry-specific accounts payable fraud trends.
Yooz end-to-end AP automation incorporates a unique combination of Artificial Intelligence (AI) and Machine Learning (ML) that safeguards your organization from the very start of the invoice process. Contact us today for a free demonstration on how advanced AP automation can help safeguard you!
