Accounts Payable Fraud: Types And How To Prevent It
Posted by Fazal Sayyed
Fraud has a significant impact on every firm. According to the Association of Certified Fraud Examiners, a typical organisation loses 5% of its income to fraud each year, with a median loss of $125,000. (ACFE). Fraud often stays undetected over 14 months, resulting in monthly losses of $8,300.
What Is Accounts Payable Fraud?
Accounts payable (AP) fraud is one of the most prevalent kinds of fraud, exposing businesses to the risks of doing business. Financing from any firm must pass via accounts payable, making this a vulnerable area for the organization and an attractive location for thieves to commit fraud, either internally or externally. An individual, a group of workers, an external party, or an employee/s and an external party working together can commit fraud.
The Top 5 Most Typical Accounts Payable Fraud Schemes
The types of fraud that occur in the AP space include the following:
1. Billing Fraud:In this situation, an employee creates a bogus supplier, usually through a shell business, in order to obtain money from the firm via invoice fraud. They may also use duplicate invoices to pay legitimate vendors in order to drain money. The purpose is to use this bogus account to reimburse themselves and any other collaborators for the stolen money.
2. ACH Fraud:ACH fraud happens when funds are improperly accessed while they are being processed by an automated clearing house, which is designed to handle electronic transactions. If fraudsters (workers or hackers) get access to the vital documents, they may commit vendor impersonation fraud to redirect funds to their own accounts.
3. Check Fraud:Check tampering is one of the most popular methods of committing AP fraud. While it might be difficult to notice, if the checks are improperly adjusted, investigators can track the fraudulent activity back to its source.
4. Kickback schemes:employees and their suppliers collaborate to make money on the side in a kickback scheme. For example, the supplier drives up an invoice, the AP clerk writes the check, and they split the difference.
4. Conflict of interest:Kickback schemes are frequently the result of conflicts of interest, which might arise if someone in the organization is linked to the supplier or receives major gifts from the vendor. Conflicts of interest can arise when someone leverages their professional or official authority for a personal or business advantage.
The following are 5 recommendations for avoiding fraud with accounts payable:
1.Verify your suppliers:Professionals in AP and finance can lower the risk of fraud by utilizing preventative and investigative procedures. An example would be the tracking of recurrent contact information, questionable addresses, etc. by risk management software.
2. Employee Monitoring and Tracking of Malicious Intent:Employees who commit accounts payable fraud frequently act alone or in small groups after learning operational strategy. To prevent dishonest conduct, technology tools, such as ML-based anomaly detection, can track and monitor employee interactions in the AP process in real time. Employee awareness can be raised by providing training on such practices. Creating a loyalty program can also guide one toward moral behaviour.
3. AP Automation Can Help You Avoid Fraud:Automating the AP process protects against fraud by generating audit trails, segregating tasks, and integrating with procurement systems to ensure three-way matching and compliance with buying standards. Furthermore, an AP automation system may automatically spot irregularities that seem fraudulent and convert data into reports that make it easy to observe variations in spending. Most accounting software can automate most of the AP labor and provide the above-mentioned safeguards. Technology not only makes it more difficult to commit fraud, but it also enhances the likelihood that any attempted deceit will be discovered swiftly.
4. Automated Approval Process:The time-consuming manual approval processes are reduced by automated approvals. By leaving a digital trail of the actions taken at each stage, approval automation ensures compliance. Employee training and awareness can help to reduce the risk of malicious intent.