5 Tips for Preventing Accounts Payable Fraud
February 19, 2020
What is AP fraud?
Accounts payable (AP) fraud is one of the most common types of fraud exposing companies to risks that come with operating a business. Finance flowing out from any business has to go through accounts payable, making this a vulnerable space for the company and a lucrative spot for criminals to conduct fraud, internally or externally. Fraud can be conducted by an employee, a group of employees, an external party or collaboratively by an employee/s and an external party.
6 Most Common Types of AP Fraud
Here are the kinds of fraud that take place within the AP space:
|Fraud||What is it?||Example|
|Duplicate payments||This is one of the top payments-related pain points for companies, according to a 2019 Levvel research report. A vendor might be getting paid more than once because they received the same invoice in different formats or due to an employee error.||The Dept. of Health & Human Services’ Inspector General estimated that Medicare made US$89M in potential duplicate payments.|
|False billing||Employees might be creating false invoices which lead to unauthorized payments.||Last year in Ohio, a former Honda employee was found to defraud the company out of more than US$750K by creating fake purchase orders.∗|
|Fraudulent payments||Initiated by employees, usually via check or ACH, which are two of the most commonly used formats of Business-to-Business (B2B) payments.||In 2019, a woman was found guilty of stealing US$1M from her employer in Idaho, over a 14 year period, where she used a fraudulent check scheme to divert payments into her own bank accounts. ±|
|Unapproved vendors||False payments to those who should not be receiving them. These payments might be going to a fictitious or unauthorized vendor, or an employee might be processing payments for non-existent or fraudulent goods and services.||An Oregon company employee embezzled US$4.5 between 2004-2019 by submitting fraudulent invoices for a fictitious vendor. She generated checks in AP to pay the false vendor, and then directed those payments to her personal account. ‡|
|Tampered financial reporting||An employee may change the company’s financial data after payments have been completed.||In New York, an employee profited by over US$48,000 by altering the invoices suppliers made and inflating the charges. º|
|Phishing Scam||Phishing is an attempt to access a company’s account or fraudulently gain access to confidential information.||In 2017, the University of Edmonton lost CAD$11.8M in an online phishing scam. In the midst of a massive construction project, an AP employee received an email from someone impersonating an existing construction client, asking for bank account updates from the university. ≠|
According to research done by the Association of Financial Professionals (AFP), 82% of financial professionals in North America reported that their organizations experienced attempted or successful payments fraud.
Accounts payable fraud is one of the most common types of fraud, exposing companies to risks that come with operating a business. Knowing how to identify these risks through internal controls can empower organizations to manage their workflow and limit financial losses.
Without active controls against accounts payable (AP) fraud, a company’s financial management can go haywire.
AP remains one of most manual processes in accounting, with 71% of organizations claiming that manual data entry and inefficient processes are their top concern when it comes to accounts payable. Traditional manual processes make it easier to tamper with records, forge check endorsements, and fabricate approvals.
A technology-backed AP process can provide sophisticated controls over internal and external fraud such as duplicate payments, false billing, fraudulent payments, unapproved vendors, and tampered financial reporting.
Financial teams can eliminate opportunities for such crimes, and with the help of technology, detect and prevent AP fraud, identify anomalies, and establish accountability across multiple layers of the accounting process.
Here are 5 tips to prevent accounts payable fraud:
- Verify your vendors: AP and finance professionals can reduce fraud risk by using preventative and detective controls. For example, a risk management software can help track repeated contact information, suspicious addresses, etc.
- Automate approval processes: An automated approval process gives accounting teams better visibility into when invoices and payments were approved and by whom. It also improves control by ensuring invoices are routed to the right approvers at the right stage in the approval workflow. With better control of the approval process, financial leaders can manage risks and financial losses at a broader level.
- Conduct regular, unscheduled audits and digitize audit trails: Auditors benefit from real-time monitoring for accurate data. Organizations can install AP and risk management solutions that can report on AP transactions while creating a digital trail of invoices and payments. This approach provides ready reporting on transactions to satisfy compliance obligations.
- Use artificial intelligence (AI) or machine learning (ML)-powered automation software: Advanced software can remove manual controls and minimize human involvement by using AI capabilities to identify any duplicate invoices, extra charges, or suspicious activity, as well as complete regular spend analyses.
- Automate invoice to payment matching: Accounts payable invoice matching is the process of matching vendor invoice, purchase order, and product receipt information. Matching each invoice to a purchase order and receipt will help you prevent paying for fraudulent invoices. By matching you can match orders with receivables accurately, so that you will only pay for what you get.
Watch Out Business Owners: Accounting Scandals Are Getting More Sophisticated
For too long, businesses have held auditors responsible for finding financial red flags. But with only 4% of fraud cases being detected by auditors, it may be time for organizations to shift gears and focus on internal controls instead.
When Crisis Strikes, Resilient AP Systems Are Crucial
While the pandemic has accelerated the need for businesses to prepare for uncertainty, arming your AP team with the right technology ensures your finances are a lot more secure.
2020’s Biggest Accounting Fails – And What We Can Learn From Them
Despite last year’s shocking headlines, accounting failures continued to happen – and we were taking notes. How many do you remember?
Straight To Your Inbox
Stay up-to-date on top accounting and finance trends
Sign up for our newsletter and receive our latest resources, news and insights.
Learn More About Beanworks
Discover how AP automation can free your accounting team from manual data entry, delays, and paper-based processes.