With increasing access to technology, it is easier than ever for fraud perpetrators to forge signatures, generate false invoices and manipulate accounting software systems.
Companies must remain vigilant in protecting their financial systems by implementing strict procedures for verifying payments and account entries, as well as regularly conducting internal audits. Neglecting these security protocols exposes companies to the exploitation of their AP department, which could cost them thousands and thousands of dollars.
Accounts payable fraud can be very harmful to business, as it can damage financials, reputation, and trust. In this blog post, we’ll reveal what is accounts payable fraud, how it works, and how to prevent it.
What Is Accounts Payable Fraud?
Accounts payable fraud is a type of financial fraud that exploits a company’s AP (accounts payable) department. This can include creating fake invoices or vendor accounts, altering payment amounts or dates, or embezzling funds that are supposed to be used for payments.
This kind of fraud is often carried out internally by an employee, or by some other external third party that misrepresents as a vendor. Typical examples of accounts payable fraud include billing schemes, check fraud, and reimbursement fraud.
Spotting this type of fraud can be difficult, as it often involves the manipulation of financial documents and records. Being aware of activities taking place within accounts payable departments can help organizations prevent such fraudulent activities. Companies must establish strict internal controls as well as regularly audit and review their financial records to safeguard against any possibility of accounts payable fraud.
How Does Accounts Payable Fraud Work?
AP fraud can happen when an employee or a third party manipulates accounts payable processes for personal gain. It often revolves around the in-house person receiving some form of reimbursement from a company, like an employee getting reimbursed for expenses that didn’t occur but are presented by an invoice.
In other cases, a shell company can pretend to be a vendor and issue an invoice for the goods or services that weren’t delivered.
Accounts payable fraud is incredibly difficult to detect as all documents appear to be valid and above-board at first glance – so it pays to have robust processes in place that flag up any red flags or irregularities in payments.
Types of Accounts Payable Fraud
Billing schemes are a type of accounts payable fraud that involves the submission of false invoices for payment. Establishing a shell company to generate fictitious invoices and make payments to external accounts is an increasingly common form of fraud.
Billing schemes include phantom billing, the submission of false invoices for goods or services that were never received, or billing for a more expensive product or service than was provided. For example, an individual or a shell company can continuously bill for a service that wasn’t provided, but if the company’s AP department manages a lot of invoices, it can easily go under the radar for a significant time.
Check frauds are another common type of accounts payable fraud. It involves the manipulation or misuse of checks to extract money from the company. There are a few ways how check fraud could be used:
- Altering the payee or payment amount on a check
- Forging signatures
- Creating fake checks
- Stealing checks
ACH fraud is the unauthorized use of the Automated Clearing House (ACH) network to transfer funds. The ACH is a nationwide electronic network that is used to process financial transactions, including direct deposits, bill payments, and other types of electronic payments. Typically, ACH fraud can occur through the use of malware to access financial accounts, the theft of login credentials, or the use of phishing scams to obtain sensitive information.
In the context of accounts payable, ACH fraud could involve the unauthorized transfer of funds from a company’s accounts payable system to an individual’s account. To prevent it, companies need to have strong security measures in place, such as secure login protocols and antivirus software. It is also important To remain alert and aware of potentially suspicious activity, like unauthorized transactions, or changes to payment details.
Reimbursement fraud is a common type of AP fraud that’s usually carried out internally by an employee. It simply involves the submission of false or inflated claims for reimbursement.
For example, an employee can submit a false or inflated expense report to receive a larger reimbursement than is due. Or, an individual may create fake receipts or other supporting documentation in order to support a fraudulent reimbursement claim.
Kickback schemes are “an inside” job when an employee works together with an external third party to drain money out of the company.
For example, a vendor can increase the amounts on the invoice and split the profits with an employee, whose task as an insider is to assure that the invoice is cleared for payment.
Why It Is Important To Prevent Accounts Payable Fraud?
There are several reasons why the company must have a set of procedures to prevent accounts payable fraud:
- Financial losses: The payment of fake invoices, the alteration of payment amounts, or the embezzlement of funds can lead to significant financial losses for a company.
- Reputational damage: Companies depend heavily on their reputation. If there is any doubt about a business’s financial practices, this can cause immense damage by denting its credibility and ultimately hampering its future operations.
- Legal consequences: Accounts payable fraud can bring about severe repercussions, including fines and penalties, as well as potentially a criminal charge to those who commit it.
- Loss of trust: If accounts payable fraud is discovered, it can lead to a loss of trust among employees, customers, and other stakeholders. This can be difficult to regain and can have long-term negative effects on the company.
What Are The Red Flags to Spot Accounts Payable Fraud?
Here are some of the red flags that may indicate the presence of accounts payable fraud:
- Abnormal or repetitive discrepancies in invoices and vendor accounts: If there is a continuous or considerable deviation between the invoice/vendor account and its corresponding documentation, it could potentially be an indication of fraud.
- Unauthorized or unusual payment patterns: If payments are being made to vendors or individuals that are not authorized or do not follow the usual payment patterns.
- Lack of supporting documentation: Inadequate documentation for invoices or vendor accounts can be a tell-tale sign that the records may have been fabricated or manipulated.
- Changes in vendor payment patterns: If a vendor significantly fluctuates in their payment habits, it could be indicative of suspicious activity.
- Insufficient internal controls: If a company does not have strong internal controls in place, such as regular audits and reviews of financial records, it may be more vulnerable to accounts payable fraud.
How AP Automation Can Help Prevent Accounts Payable Fraud?
The use of accounts payable automation brings benefits that can help to prevent AP fraud Some of the benefits include:
- Improved accuracy and efficiency: AP automation can reduce the risk of errors and discrepancies in financial records, making it more difficult for individuals to commit fraud.
- Enhanced security: AP automation systems often have built-in security features, like secure login protocols, and fraud detection algorithms, that can help prevent unauthorized access to financial information.
- Improved transparency: AP automation systems can provide a clear and comprehensive view of the accounts payable process, making it easier and faster to detect any unusual or suspicious activity.
- Greater control: AP automation systems can provide greater control over the accounts payable process, allowing companies to set limits and restrictions on who can access and modify financial information.