Did you know that just one fraud email could cost a business $8 million dollars? Advance Publications is one of the most unfortunate examples of how a multi-billion dollar company can fall prey to accounts payable fraud that has emerged as a big challenge for businesses today. AP fraud is remarkably damaging to organisations due to the amount of money and scope involved…more importantly because it is extremely difficult to identify.
And Accounts Payable fraud is not just a problem for large enterprises; even small companies and startups get victimised – everywhere from supplier website to invoicing, procurement, documentation, or PO to invoice conversion. As a matter of fact, half of all small businesses are at risk of Accounts Payable (AP) fraud, particularly because they fail to detect the con.
In this article, we will discuss six most common AP frauds that you must be aware of:
- Cheque Fraud
According to a study, over three quarters of all companies that are affected by AP fraud have been victimised by cheque-related fraud. There are different types of cheque fraud that a business may face – altering name of the payee, changing the amount payable mentioned in the cheque, writing cheques from a business account but for personal expenses, etc.
As a business owner or CFO, you should be aware of these potential AP frauds and adopt definitive measures like implementing an automated P2P solution. A robust, cloud-based Purchase-to-Pay (P2P) solution aids in ePayment that helps mitigate the risk of cheque-related AP frauds.
- Fraud in Invoicing
Perhaps, invoices are the easiest ways for impostors to commit fraud with a company. And if not detected on time, or overlooked, the misappropriation of invoices can cause significant financial losses. A common type of fraud is creating invoice amounts that are rounded off, i.e., invoices which do not have pennies. It is crucial to identify vendors who have the most numbers of rounded-amounted invoices and immediately red flag them for suspicious activities.
Another type of invoicing fraud is creating invoices that are just below the approval amount. How does this happen? Let’s understand with an example. Suppose your company has an AP clerk who is well aware of the management’s invoice approval thresholds, i.e., a manager’s limit of approving invoices only up to £10,000 or a supervisor who can approve only £3,000.
Now if the AP clerk wants to skim off a few extra pounds through unscrupulous methods, he will create an invoice amount just below the approval level of the manager or the supervisor. For instance, making an invoice of £9,997 when the approval threshold is £10,000 and the like. The same tactic can be also applied by fraudulent vendors to make the most money. Instances of invoice fraud must be identified and flagged as mistrustful.
- Billing Schemes
Billing schemes are most often executed by employees of an organisation, using their knowledge of how invoice approvals are made or with their experience in the Accounts Payable department. For instance, an employee may create a fake invoice and then get approval for paying it for products and services that were never purchased or delivered. Another fraudulent tactic is where a person from your AP department unscrupulously double-pays for a single invoice by mailing and writing two cheques.
Even before the second cheque reaches the vendor, the AP person will call them and inform them that two cheques have been sent accidentally. He will then ask the vendor to send back one cheque to a particular person in AP at a particular office location or address. The AP person will next go to the bank and create an account in the name of the vendor, deposit the cheque and convert it into cash. Being an authorised signatory of the company, the AP person can directly wire the amount to a personal bank account.
- Expense Reimbursement Fraud
Expense related frauds are most prevalent in an organisation…and often notoriously hard to detect. These kinds of AP frauds happen when an employee purchases on their personal card but intentionally submits overstates expenses, fictitious expenses, or duplicate reports for items that were never purchased. To begin with, the amounts may be small but can add up to significant amounts when remains uncovered.
Another kind of expense-related fraud occurs when an employee purchases on their personal card and gets paid from the employer. He will then return the goods and get a refund. That is why businesses should use ePayment procedures, corporate credit cards, or p-card to ensure they receive the refund and not the employee.
- ACH Fraud
This type of AP fraud occurs when hackers or an insider of the business gain unauthorised access to the company’s funds as they move through electronic fund transfers. The fraudster may get access to business-critical files via unscrupulous ways like a keylogger. With access to such files, they may potentially commit Vendor Impersonation Fraud that allows the fraudster to edit the profile of a current vendor and direct payments to their personal account.
- Abnormal Invoice Volume
Rapid increase in invoice volume may be indicative of a growing business but it can also be the result of some fraudulent activity. For instance, if a vendor has sent you 4 invoices one month and suddenly, there is a spike in volume by 70 invoices, you must want to know the reason behind the same.
The primary challenge of Accounts Payable fraud is that it is extremely difficult to uncover without having major changes in the company’s processes. While implementing fraud-prevention measures can be complex, it is worth your time because detecting and preventing AP fraud can help reduce your costs significantly and ensure optimal business growth.
Technology is one of the key pillars of AP fraud detection, helping businesses identify loopholes and discrepancies in the process. Automated P2P solutions are often powered by Big Data, digitisation and machine learning that provide the essential tools to identify and prevent Accounts Payable fraud. Companies and CFOs can use these advanced technologies to remain ahead of the fraud and take their business to the summit of success.