As a small business, there are a constant and growing number of challenges facing you. Whether it’s finding new customers and building brand awareness or constantly trying to get an advantage over the competition, UK businesses are having to become more agile, more intelligent, and more resilient than ever before.
However, one area that shouldn’t be a challenge is in finance, an area absolutely critical to a small business’ ability to grow and run efficiently. Small businesses can’t compete with the resources and cash reserves of large enterprises, instead relying on fast cash flow and on-time expense payments to keep operations running smoothly, as they too have suppliers and vendors further down the line to pay.
But one of the biggest threats to their success is accounts payable fraud, an area that is in fact a constant headache for businesses of all sizes. You might think that as a small business, fraudsters would choose to target larger enterprises instead as they could potentially gain more or stand a better chance of being lost in the sheer number of invoices and transactions. Yet a YouGove study found the opposite: 44 percent of small businesses had been targeted by fraudsters, with around one in four falling victim to fraud.[1] Another study suggests UK businesses lost an average of £241,000 every year due to fraud, and the majority (93 percent) were unable to recover losses.[2]
Quickly becoming one of the most common types of financial scams, accounts payable fraud is a type of deception that targets the company’s department responsible for paying vendors, suppliers, and partners. The act of committing accounts payable fraud can be committed internally by current staff members or externally from swindlers looking to gain access into a company’s financial systems to send unauthorized payments.
Whereas small businesses would traditionally have been sought out for ransomware, malware, and other types of viruses from cyber-attacks and hackers, the method and nature of fraud has changed dramatically. Phishing attempts, where fraudsters would pose as another member of staff, are becoming increasingly popular and successful, as all it takes is one fake email or a virus from a website link for fraudsters to gain access to bank details.
A specific threat to the accounts payable department is the invoice scheme, where false or invoices can charge a company for goods or services that were never issued, or never even existed in the first place. They could also take the form of inflated invoices or overcharging for services/goods, or duplicate invoices when payments have already been made to the vendor or supplier.
Particularly for small businesses, the problem stems from the fact that many companies of this size don’t make use of systems, tools, and technologies that can help reduce the risk of fraud from happening in the first place. Alternatively, they use different systems with multiple third-party providers. Finally, much of the financial processes in small businesses are done manually, such as data entry into spreadsheets or scanning through invoices to double check data against purchase orders and receipts.
Even small businesses will have a mountain of supplier and vendor invoices to get through every month which, coupled with manual processes, widens the risk area. Staff can therefore only realize a problem exists only when it’s too late, and one of the main reasons why fraud typically goes unnoticed for a long time at all sizes of organizations - from major corporations like the internal $1.8 billion Indian bank fraudulent transactions to the now defunct East Northants Council's mystery service payouts. [3][4]
As we briefly touched upon earlier, there can be many different types of accounts payable fraud that can leave a business open to attack - from malware and ransomware to phishing and even employees gaining unauthorized access to information and accounts. As a small business, it’s absolutely vital that you are equipped with the tools and technologies necessary to protect you from harm, but there are a couple of common types of accounts payable fraud to look out for:
Phishing attacks, where the imposter poses as a supplier or another member of staff to schedule payments or gain access to accounts, have quickly become one of the most popular fraud techniques used on small businesses. The lack of physical interactions in a remote working world has no doubt helped in this regard, where it can be all too easy for accounts payable staff to be tricked into thinking their CEO or CFO wants them to issue payments to (what is for them) an unrecognized source.
Phishing attacks can also come in the form of links sent via email to innocent-looking websites. Fraudsters will send thousands of emails out randomly, as it only takes one to make the entire effort worthwhile for them. Just one innocent-looking website sent from what looked like a supplier or other is a way for viruses to be installed and financial information stolen. While these are external methods, accounts payable fraud can also happen internally, especially in small businesses where employees will create fake invoices to send payments into their own accounts.
Cases of invoice fraud involves the specific targeting of invoices by fraudsters, such as notifying the paying company that supplier bank details have changed and sending ones for payment directly to their own account. As the emails could actually be sent from the vendor’s official email address, payment is often transferred instantly which drastically reduces the chances of recovering any money sent.
Unlike phishing attacks which are often a "bulk effort," Invoice fraudsters are smart, often spending time assessing the relationships between a small business and its vendors. Some might even know or guess correctly when regular payments are authorized or due and target accounts payable staff around this time. Fraudulent activity is often only uncovered through (eventual) audit reports or when the legitimate supplier follows up on late payments, causing financial loss and a deterioration in relationships.
Many small businesses have put methods and training into place to help increase employee awareness and reinforce controls around fraud. Despite these actions, small businesses continue to be a target. After all, staff are only human and can make honest mistakes when it comes to checking information and who it is they're dealing with (especially when using manual processes). Plus, as mentioned before, fraudsters can also come from inside the company or within verified suppliers and vendors and can know how to better manipulate accounts payable teams.
As a result, there have been plenty of new techniques and technologies that have been created to help reduce the risk of accounts payable fraud happening within small businesses. The most successful of which has been to reduce the amount of manual tasks and implement accounts payable systems that utilize automation, Artificial Intelligence (AI) and Machine Learning. These innovations not only prevent accounts payable fraud but also minimize the risk of broader accounting fraud.
Utilizing these technologies gives small businesses the tools required to defend themselves against modern fraud techniques. Together, the technology is able to scan invoices and financial documents, analyze the data, and automatically detect attempts to falsify information that can lead to fraudulent payments, such as bank details, goods/services ordered, and total price. The technology can also help automatically detect duplicate and inconsistent information based on historical invoices.
The benefits of a platform that can intervene attempts of fraud while providing full traceability and identity of the would-be fraudster is invaluable for small businesses, and indeed organizations of all sizes. With the accounts payable system hosted in the cloud, accounts payable staff are armed with the highest level of security on the market today, with the added benefit of always making sure they comply with regulatory measures for auditing and legal purposes.
Automated accounts payable solutions that leverage AI and Machine Learning have become critical in mitigating the risk caused by fraud. Not only do these technologies help increase the speed at which companies can react to potentially fraudulent activity, but they can also reduce the chances of payments being issued and therefore saving small businesses a sizeable amount of money.
Being able to operate with an accounts payable system gives you the confidence to do business knowing that you won’t succumb to fraud while putting in place rigorous security processes that keep your business financial accounts and information safe. Plus, the more the system is used, the more the AI and machine learning technologies can learn from more sophisticated methods of fraud, helping keep you stay one step ahead of fraudsters.