Accounts Payable Fraud:
Detection and Prevention
Published on: 21 August 2023
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Accounts Payable Fraud
Despite organizations recognizing the threat and actively implementing controls to reduce payments fraud, tactics are becoming more sophisticated and success more frequent.
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You have probably read about Evaldas Rimasauskas, a Lithuanian man who orchestrated a scheme to scam Google and Facebook out of $120 million by impersonating a company they were doing business with. But it is not just the big sophisticated companies that are being targeted.
According to Federal Bureau of Investigation BEC is a growing crime—with a staggering price tag. Between 2013 and 2019, the Internet Crime Complaint Center received complaints of more than $10 billion in losses. The BEC scam continues to grow and evolve, targeting small, medium, and large business transactions – among other AP fraud threats.
What is AP fraud?
AP fraud, or Accounts Payable fraud, is a type of financial deception that involves manipulating or exploiting the accounts payable process within an organization for illicit gain. It typically revolves around fraudulent activities related to the payment of invoices and bills. This threat goes by many names – AP fraud, accounts payable fraud, invoice fraud – and it has the potential to inflict substantial damage upon organizations of all sizes and industries.
Worldwide, the Association of Certified Fraud Examiners (ACFE) 2022 occupational fraud study has found that the average loss per case is $1,783,000, and 5% of revenue each year. Nearly half of cases occurred due to lack of internal controls, or the overriding of existing controls.
This highlights the need for businesses to increase focus on protecting their bottom line by implementing and maintaining controls for accounts payable and payroll frauds – especially during periods of growth or economic challenges where oversight of indirect spend tends to be less rigid.
Accounts Payable Fraud Schemes: How Does it Work/What are the Root causes?
In a purchase to pay environment, both procurement and payment processes are susceptible to fraud. Common types of AP fraud include:
Phantom vendors
Often colluding with third parties, occupational fraudsters approve purchase orders, vendor master changes, and payments on behalf of non-existent or fake suppliers. This is one of the more popular forms of accounts payable fraud schemes.
Impersonation
The fraudster sends official-looking correspondence—or makes a phone call in person—representing a genuine supplier and representing a genuine supplier and requesting a bank account or address change to redirect payments.
While AP fraud of this nature may have a relatively short lifespan before payment demands arrive from the real supplier, large amounts may have already have been siphoned off from company funds.
Dormant POs
Inactive purchase orders with outstanding balances may be reopened by insiders, the bank account changed, and fraudulent invoices submitted against the PO. As long as amounts remain below the audit threshold, fraud of this type may remain undetected indefinitely.
Fake invoices
One-off invoices may be submitted to exploit the lack of controls required to manage the exception process. In many cases, the unsuspecting accounts payables clerk will create a new vendor record to make the payment without verifying the vendor or goods received.
Multiple Methods
All these forms of fraud can be traced to inadequate controls in the areas of indirect purchasing, account payables, vendor management, human data entry, and audits.
Addressing these areas reduces the risk of your being one of the over 50% of companies who experience losses due to AP fraud each year.
Accounts payable fraud prevention controls
According to ACFE’s findings, “fraudsters tend to start small and increase their frauds rapidly over the first three years.”
Frauds detected using proactive accounts payable fraud detection tend to last five months with average losses of only $39,000, while schemes that went undetected jumped to almost $1 million at the two-year mark. Reducing accounts payable fraud risks begins with the following steps:
1. Close the gap
Control spend with 100% purchase utilization, partnering with purchasing to enforce vendor vetting, the input of PO and contract numbers for traceability—including for one-off purchases.
2. Automate data capture
Implement enhanced requisitioning and purchase order matching with an automated data capture system that’s accurate, inexpensive, and easy to deploy, reducing human touchpoints and increasing accuracy.
Capturing invoice data with software also reduces the amount work involved with keying data manually.
3. Implement workflows
Enforce controls through catalogs, punchouts, workflow, and permissions to prevent data from being entered, altered, or deleted without authorization, ensuring audit trails are in place to track all changes.
4. Enforce multi-level approvals
Impose a multi-person approvals matrix for all payments as part of the standard workflow, reducing dependence on a single individual for authorization.
5. Transform audit processes
Change audits from being based on line item amounts to random samplings independent of monetary value or time, increasing the chance of quickly identifying fraudulent activities. ACFE’s research indicates that implementing surprise audits reduces losses in 51% of cases, and resulted in faster detection of attempted fraud 52% of the time.
6. Use intelligence
Leverage AI to detect patterns, irrespective of fraud schemes or time elapsed. According to studies, data monitoring and analytics accelerates detection by 58% and reduces losses by 52%.
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FAQ
How to Find / Identify Fraud in Your AP Department?
There are various controls you can put in place, to easier detect suspicious invoices and fraudulent vendors. For instance, make it mandatory for the Purchasing department to check all new vendors, require pre-approved POs for all purchases and use multi-level approvals for invoices above a certain amount.
Another way to identify fraud in accounts payable is using automation, such as automated invoice capture which identifies duplicates and new vendors in few seconds, or intelligence (AI) to detect suspicious patterns in incoming invoices and workflows.
How can I prevent accounts payable frauds in small business?
If you are running a small business and manages vendor invoices and payments manually, it may be wise to invest in an accounts payable automation software. An AP software will take care of the invoice capture for you (no manual keying required!) and it will flag or notify you every time you get invoices from a new vendor and/or duplicate invoices. The software also supports digital approval workflows and can be configured to send invoices, based on vendor, reference or amount, into a specific approval workflow – with one or several approvers.
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