Proactive Detection & Prevention of Accounts Payable Fraud: A Detailed Guide

Just one slip-up in the accounts payable (AP) process could cost your organization millions. Easy to miss and hard to catch, AP fraud affects all kinds of businesses and makes up a big chunk of the 5% of revenue businesses lose to fraud each year. Fighting this type of fraud is often difficult for busy and overburdened accounting departments because it mimics real transactions.

While it’s usually the biggest accounts payable fraud that reaches the news, small businesses often suffer the most. With limited resources and small teams, scrutinizing the details of every financial transaction is tough, so they can easily fall prey. There is a lot to learn about the proactive detection of accounts payable fraud in all of its forms. To prevent it effectively before it can take root, organizations should implement the best practices for optimizing accounts payable to create an orderly environment where anomalies will stand out. Even then, there are so many ways AP fraud can occur, and proactively preventing it is no simple matter.

5 Most Common Types of Accounts Payable Fraud

• ACH Fraud: Automated clearing house (ACH) payments are sent automatically from one organization to another, making it an easy target for fraudsters to impersonate a legitimate business and fool the ACH into sending them funds. This can be done by an insider or an outsider with stolen authentication information.
• Billing Fraud: Usually involving fake invoices or fraudulent payment information, billing fraud involves impersonating a legitimate beneficiary to receive a payment meant for them. Insiders can also create fake vendors and invoices for nonexistent goods and services.
• Bribery & Kickbacks: An internal employee can be convinced to inflate invoices or favor a certain supplier in business decisions in return for financial rewards, often to the detriment of the organization.
• Check Fraud: Checks are easily altered to increase the amount, change the recipient, or misrepresent what the check is paying for. Both insiders and outsiders can produce counterfeit checks or adjust financial details to benefit them.
• Reimbursement Fraud: When an employee overstates expenses, creates fictitious expenses, or misrepresents personal expenses as business-related, they are committing reimbursement fraud. This fraud is often committed using an employee credit card.

Top 5 Red Flags for Accounts Payable Fraud

• Atypical Employee Behavior: Employees are usually not financial experts and may unwittingly drop hints while committing fraud.
• External Complaints About Payment Issues: An external company that has been impersonated to redirect payments won’t be receiving payments as they should have been, causing them to complain about non-payment.
• Missing Checks & Signatures: Missing checks and signatures may reveal where fraud is taking place, especially if one employee is committing fraud without the assistance of other authorized parties.
• Specific Vendor Master File Activity: Insider fraud can involve changes in a vendor’s financial records at an organization, such as bank details, invoice amounts, or payment history.
• Unusual Invoice Details: Inconsistencies in invoice numbers, payments, or volumes are a sure red flag for fraud because fraud is anomalous.

7 Ways to Detect Accounts Payable Fraud

1. Conduct Randomized Audits

Fraud stands out like a sore thumb against a background of legitimate financials, so it’s important to proactively and randomly audit financial records in the AP process before the fraud can find root and blend in.

2. Define a Clear Reimbursement Policy

Employees should adhere to a clear process when requesting reimbursements. They must provide cash slips, invoices, and any other relevant documentation, especially when employee credit cards are used. All reimbursements must be verified to determine whether the expense was justifiably a business expense and not higher than it should be.

3. Establish a Tip Network

Provide a way for employees and even outsiders to anonymously tip off the organization about fraud. This way, an environment of accountability is established and tipoffs can even be incentivized.

4. Implement Employee Rotation

Rotate employees in important financial positions in the AP process. Otherwise, they can leverage their stable position to exploit loopholes. Financial records can be analyzed with each rotation to help spot inconsistencies.

5. Implement Mandatory Vacations

Similar to rotating employees, mandating vacations will interrupt the employee’s role in business activity and give an opportunity for financial analysis to take place, which can highlight fraud when certain invoices or checks stop during the vacation.

6. Leverage Automated Solutions

Automated computer algorithms can analyze all invoices and payments coming in and going out. An unbiased check and balance like this will keep employees accountable and catch errors or fraudulent activity.

7. Update Master Vendor Data Regularly

Verifying vendor data and updating all applicable information will provide a record of inventory and procurement data to check against the financial record. The agreement between master vendor data and invoice information is vital.

4 Ways to Prevent Accounts Payable Fraud

1. Automate the Approval Process

An automation system streamlines the approval process and eliminates the human factor by matching expenses to payments with consistency. Using virtual cards enables fraud prevention, since they are only issued for an approved payment and cannot be reused for fraud afterward. The organization can implement a system where funds are automatically approved to a virtual card for a specific expense alone.

2. Compare Payments to Recorded Expenses

It may be difficult for financial controllers to keep track of expenses, but the best place to start is to compare payments directly with recorded expenses. If there’s a mismatch in amounts or a payment for an expense that shouldn’t exist, it may likely be fraud. Business credit card fraud can happen very easily since they can be used anywhere at any time with the fraudulent payment being reported as an expense.

3. Formalize Vendor Verification

Employees shouldn’t be able to enter or change vendor details into the system without verification. Every new vendor must be scrutinized to determine whether they are legitimately providing a good or service to the company and how their invoicing works. Changes in payment details, invoice amounts, or other financial details must be verified by at least two employees and the vendor themselves.

4. Leverage Advanced Machine-Learning Solutions

Automated AI software can be trained with financial records to catch inconsistencies and fraud. Machine learning systems don’t carry any risk of human error and can instantly analyze payments, invoices, and other information, matching it up with your internal records.

The Case for Digital Transformation

The digital world is providing new and innovative ways to fight fraud. From spend management software to accounts payable optimization tools, a digital transformation does more than just digitize your organization: it catches errors, reduces costs, and helps humans do their jobs better. You’re not replacing people—you’re helping them perform better by automating the monotonous parts of their work (which are a big contributor to employee errors) and freeing them up to focus on more important and strategic tasks.

When it comes to catching accounts payable fraud, it’s difficult to manually keep track of all of the financial transactions happening in an organization—big businesses struggle with work overload and wading through a ton of data, while smaller companies struggle with limited teams and resources. Using machine learning, you can catch pesky fraudsters in real time and protect your business from unauthorized transactions.

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Mesh Content Team