Concerned about accounts payable fraud? You're not alone. According to J.P. Morgan, at least 71% percent of companies fell victim to payments fraud via email in 2022.
However, by developing clear strategies and using modern technology to implement AP best practices, you can safeguard your organization against potential fraud schemes. Here's how.
What is accounts payable fraud?
Accounts payable fraud (AP fraud) refers to any fraudulent financial activity that targets or exploits an organization's accounts payable system. This can include internal fraud committed by employees, external fraud by vendors or cybercriminals, or a combination of both.
External accounts payable fraud
External accounts payable fraud involves fraudulent activities perpetrated by entities outside the organization. Examples include business email compromise, payment-related change requests, gift card scams, phishing scams, phony invoices, and check theft or tampering. These schemes can result in financial losses and can damage vendor relationships.
Internal accounts payable fraud
Internal AP fraud occurs when employees engage in fraudulent activities related to accounts payable processes. Common examples of internal fraud include check theft and tampering, colluding with suppliers, submitting false expense reports, altering invoices, setting up fake vendors, and using cards for personal gain. Internal fraud poses a significant risk due to employees' access to sensitive financial information.
What increases the risk of AP fraud?
Several factors can increase the risk of accounts payable fraud within an organization. Here are a few of the most common mistakes to avoid.
Relying too much on trust
Trusting employees is essential for a harmonious work environment. However, relying too heavily on trust can create opportunities for fraud. Financial troubles or the allure of easy money may tempt even the most trustworthy individuals to engage in fraudulent activities. Implementing fraud controls, such as regular audits and oversight, can help mitigate this risk.
Weak signature controls
In organizations where manual sign-off processes are used, such as rubber stamps or "wet signatures," there is a higher risk of fraud. Stamps can be easily misused or lost, while signatures can be forged or altered over time. To reduce this risk, implement stronger signature controls, such as digital signatures or multi-level approval processes that require more than one set of eyes on contracts and invoices.
Lack of separation of duties
Having the same individual or group responsible for multiple key duties within the accounts payable process can increase the risk of fraud. Instead, implementing clear roles and responsibilities can prevent individual employees from having too much control over financial transactions, making it harder for them to commit and conceal fraudulent activities.
Control gaps
Control gaps often let fraud go undetected for extended periods of time. Failing to conduct regular checks and reviews of financial processes can create opportunities for fraudsters to exploit weaknesses in the system. To close those control gaps and help prevent fraud, establish a clear chain of command, conduct internal audits, and implement a regular schedule for reconciling accounts.
Lack of automation in accounts payable processes
Manual accounts payable processes are not only inefficient and time-consuming but also increase the risk of fraud. Physical invoices and documents are easier to forge or alter, making it harder to detect fraudulent activities. Implementing automated accounts payable systems can streamline processes, improve accuracy, and provide instant visibility into financial transactions.
Common types of accounts payable fraud
Below is a list of AP fraud methods you're most likely to encounter. By being aware of these common types of AP fraud, such as check fraud, and taking proactive steps to prevent and detect them, you can help safeguard your financial assets and reputation.
Check theft and tampering: Fraudsters may steal checks and alter the payee or amount to redirect funds into their own accounts. To prevent check fraud and other billing schemes, businesses rely on strong internal controls, such as requiring dual signatures on checks and conducting regular audits of accounts payable transactions.
Submitting false expense reports: Employees may inflate expenses or submit reimbursement requests for personal expenses, leading to financial loss for the company through expense reimbursement fraud. To mitigate this risk, establish clear expense policies and procedures, conduct regular audits of expense reports, and use expense management software to track and monitor spend.
Altering invoices: Fraudsters may alter invoices to artificially inflate amounts or redirect funds into illegitimate accounts. Be sure to verify invoices against purchase orders, conduct regular audits of invoices, and implement segregation of duties to ensure that multiple employees are involved in the invoice approval process.
Setting up fake vendors: Fraudsters may create fictitious vendors and submit false invoices for products or services that were never delivered. For better fraud detection and prevention, conduct due diligence on new vendors, verify vendor information before making payments, and implement vendor management processes to flag fraudulent invoices and monitor vendor activity.
Using cards for personal gain: Employees may use corporate cards for personal gain by making unauthorized purchases or cash withdrawals. Businesses can benefit from establishing clear card-usage policies, monitoring card transactions regularly, and conducting periodic reviews of card activity to prevent this type of fraud.
How to detect accounts payable fraud
Organizations can use tools like Benford's Law to identify anomalies that may indicate fraudulent activity. Monitoring financial transactions closely and conducting regular audits can uncover potential fraud schemes.
What is Benford’s Law?
Benford's Law is a mathematical principle that states that in many sets of numerical data, the leading digit is more likely to be small (1, 2, or 3) rather than large (7, 8, or 9). This law has been used as a tool to detect anomalies in financial data, including detecting AP fraud. By analyzing the distribution of leading digits in invoice amounts, organizations can identify potentially fraudulent transactions that do not conform to the expected pattern outlined by Benford's Law.
7 tips to prevent accounts payable fraud
While it's important to detect AP fraud, it's far better to prevent it. This list of actionable, common-sense measures can help improve accounts payable fraud prevention.
1. Implement strong internal controls
Address fraud prevention by implementing internal policies and procedures that make fraud a lot harder to achieve. These include proper segregation of duties, dual authorization for payments, and regular reconciliation of accounts.
2. Train employees on fraud awareness
Educate your employees on the common types of AP fraud and how to recognize red flags. Encourage them to report any suspicious activity immediately.
3. Stay up to date on fraud prevention techniques
Fraudsters are constantly evolving their tactics, so being proactive in learning about new fraud schemes can help you stay ahead. Companies that specialize in fraud awareness training can also provide resources for fraud prevention.
4. Verify changes in vendor information
Always verify any changes in vendor information, such as bank account details or contact information, through multiple channels. Never rely solely on email communication for such sensitive information.
5. Conduct regular audits
Regular audits of AP processes can help detect any irregularities or inconsistencies that could indicate fraud. Consider hiring a third-party auditor for an unbiased review in detecting accounts payable fraud.
6. Encourage a culture of transparency and accountability
Encourage open communication and reporting of any potential fraud risks, and ensure that employees understand the consequences of engaging in fraudulent activities.
7. Use automation and machine learning
Implement AP automation tools that use machine learning and AI to flag suspicious activities, such as duplicate invoices, duplicate payments, or vendor changes. These tools can streamline the AP process while providing an added layer of security.
Ready to safeguard your business with automation?
Implementing AP automation solutions can streamline invoice processing, reduce errors, and enhance fraud-prevention measures. BILL Accounts Payable offers advanced features to safeguard your finances and improve AP efficiency.
That's why Clif Family, makers of Clif bars, moved to BILL Accounts Payable—an email scam triggered the company to transition away from outdated manual processes.
Tired of playing detective? At Enlightened Equipment, the finance team often needed to hunt down purchases that weren't accounted for, sometimes requiring them to question their employees. The BILL platform gave them the visibility and documentation they needed.
Learn more about BILL Accounts Payable here.
Accounts payable fraud FAQs
Here are quick and easy answers to a few of the most common questions about AP fraud.
What are the red flags of accounts payable fraud?
There are several indicators of potential accounts payable fraud in a company. These include unusual vendor behavior like sudden changes in details without verification, receiving duplicate invoices, missing or altered documentation, and unexplained discrepancies in records. Promptly identifying and addressing these red flags can help prevent accounts payable fraud.
What to do if you find evidence of accounts payable fraud?
If you find evidence of fraud, take immediate action to mitigate damage and prevent further losses. Be sure to document any evidence, notify management, investigate the fraud, and enhance your internal controls to prevent future occurrences. Proactive measures can protect the company from financial losses and reputational damage.
How is accounts payable fraud calculated?
Calculating the financial impact includes the obvious losses from fraudulent payments as well as recovery costs and reputational damage. By understanding the risks and taking preventative measures, businesses can protect their assets and reputations.