The Most Shocking Cases of Accounting Fraud in 2021 and How To Protect Your Business
December 13, 2021
Estimated Reading Time: 6 minutes
Everyone loves a good mystery, but not when it comes to your business’s finances. Unfortunately, incidents of fraud are soaring, and the perpetrators’ attacks are becoming a lot more sophisticated. In the first quarter of 2021, digital fraud attempts rose 25.07%.
If you happen to be in the financial services industry, the number is even more alarming. A report by TransUnion found that, globally, the percentage of suspected financial services digital fraud increased by 149%. The threat of fraud is becoming so prevalent that in January, the Royal United Services institute declared that it should be considered a national security issue in the UK, where it costs as much as £190 billion a year for the country to combat.
Among the many business impacts of the COVID-19 pandemic was a shift to digital financial transactions. The same TransUnion report found that 40% of consumers with financial accounts reported using digital platforms more frequently, and 60% stated that they conducted the bulk of their transactions via mobile applications. While there are obvious advantages in the shift to digital transactions, it has created a landscape that is highly susceptible to fraud.
Let’s take a look at some notable instances of fraud that made the news in the last year, and how an AP automation solution can help protect businesses from these types of threats.
An Inside Job
In July, the U.S. Securities and Exchange Commission (SEC) charged the telecommunications and technology systems company FTE Networks with conducting a multi-year accounting scam. According to the SEC report, the company inflated their company’s revenues during certain periods by as much as 108%. The former CEO and CFO were also alleged to have misappropriated millions of dollars for personal use, in addition to concealing the then NYSE traded company’s issuance of almost US$23 million in convertible notes.
How to Avoid This: Fraudulent payments are one of the most common forms of financial fraud faced in accounts payable. To help prevent this from happening organizations can separate duties so that the person who approves invoices and the person who authorizes payments are never the same. Beanworks facilitates this process by helping you set up a detailed approval matrix so you can avoid unauthorized purchases and payments.
A Global Operation
This past fall, the U.S. Department of Justice announced that two men had been charged in relation to a massive cyberattack that spanned the globe. According to a statement released by the U.S. Attorney’s office in the Northern District of Georgia, the scheme involved phishing emails, the theft of employee access details, and the harvesting of credentials from computer servers. Using the stolen credentials, the fraudsters then sent out emails that contained fake invoices for hundreds of thousands of dollars in payments, which were made to the conspirators’ bank account. In one specific instance, nearly U.S. $1.5 million was stolen.
How To Avoid This: In addition to separating duties for approvals and purchasing, businesses can combat fraud through AP automation by controlling approval thresholds for payment amounts, allowing CFOs tighter control over who approves the invoices and when payments are made.
Some Food For Thought
In September, food and beverage company Kraft Heinz agreed to pay US$62 million as part of a settlement with the SEC.
According to the SEC, over the course of three years, “procurement employees negotiated agreements with numerous suppliers to obtain upfront cash payments and discounts in exchange for future commitments to be undertaken—while improperly documenting the agreements in ways that caused the company to prematurely and improperly recognize the expense savings.” The company then promoted these alleged savings to the market, which provided Kraft Heinz with widespread coverage.
The SEC’s order went on to state that Kraft Heinz failed to set up appropriate controls for their procurement division. Because of this, the company failed to catch where expenses were being improperly accounted for, and ignored where internal controls were being circumvented.
During the years in question, Eduardo Pelleisone, the company’s former COO, was presented with repeated signs indicating that expenses were being managed through manipulated supplier agreements. Rather than addressing the issue, the SEC states that he imposed pressure to deliver unrealistic savings targets.
The complaint went on to state that Pelleisone “failed to provide Kraft Heinz’s accountants with accurate information and caused Kraft Heinz’s reporting, books and records, and internal accounting controls violations.” They also stated that former CFO Klaus Hoffman violated anti-fraud provisions, failed to provide accurate information to accountants, and violated the books and records as well as internal accounting control provisions of the federal securities laws.
How to Avoid This: Another way to prevent fraud is to automate document matching. This will match vendor invoices, purchase orders, and payment information, which will help prevent the payment of fraudulent invoices. An AP automation solution like Beanworks also uses artificial intelligence to automate repetitive tasks in the accounts payable process, freeing up more time for high-value activities such as ensuring every transaction is legitimate. AP automation also helps deter fraud by eliminating manual processes that provide opportunities for record tampering and falsified approvals.
Cheating A Charity
Earlier this year, scammers stole more than US$830,000 from the City of Seattle’s funding for homeless programs. Over the summer, Mary’s Place, a nonprofit organization serving women, children, and families, notified the city of possible fraudulent activity. This report led to an investigation that uncovered a fake request sent to the city’s Human Services Department on behalf of Mary’s Place. The scam resulted in the city and Mary’s Place losing US$831,061 over the course of six months.
The fraudulent activity forced Seattle’s Human Services Department to bolster its security and implement new safeguards to prevent future fraud. In the meantime, the City of Seattle is in the process of reimbursing Mary’s Place for the lost payments.
How to Avoid This: In most cases, fraudulent requests will come from dubious domain names typically similar to legitimate supplier domains—but slightly different. Another sign is an invoice that lacks basic information such as an address or phone number, or contains unusually high or low dollar amounts. An additional red flag to watch for is a vendor request that comes from a personal email address instead of one with a business domain.
A Family Affair
A probe into fraudulent expense charges in the State of California’s Department of Public Health began with an investigation into a shredded Disneyland itinerary. The operation led to the uncovering of US$185,000 in expenses to Disneyland and Disney shops passed off as legitimate expenses by a state employee. And that was just the tip of the iceberg.
Court papers indicated that the employee responsible directed contractors working for a local non-profit organization to pay more than US$1.4 million in phony invoices to shell companies tied to her friends and family. An investigation by Deloitte found lax oversight and budget controls in the office.
How to Avoid This: Companies can mitigate expense fraud with a transparent expense management solution such as Beanworks, which allows employees to upload receipts and route them for approval in real-time, rather than at the end of the month. This creates a digital audit trail of all expenses and approvals, and the data flows directly into the rest of the AP system for further approvals as required.
Building Better Fraud Protection Through Automation
The numbers don’t lie. Fraud—both attempted and actual—is on the rise, and criminals are employing increasingly innovative tactics designed to dupe businesses out of large amounts of cash. Businesses must take proactive steps to protect themselves. AP Automation can help you build strong defense mechanisms against fraud by assisting your company in the following ways:
- Increasing transparency by automating manual tasks and digitizing paper records.
- Adding more controls when it comes to approvals for expenses, invoices, purchase orders, and payments.
- Segmenting the invoice approval and payment approval processes so that there is end-to-end visibility.
- Consolidating all AP workflows to run through a comprehensive system such as Beanworks, so that they are managed from a single place.
Find out how Beanworks can provide you with greater security against fraud
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