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What is Accounts Payable Fraud and How Can Businesses Prevent It?

By: Dan Alvin

 

fraud-is-no-small-business

As if there wasn’t enough to worry about when running a business, you also need to constantly monitor your payments to ensure no one is trying to defraud you. A common type of fraud affecting businesses of all sizes is accounts payable fraud.

Accounts payable, also called AP or A/P, is your business’s short-term debt. In other words, it’s all the upcoming bills that need to be paid to creditors. For example, you purchase supplies on credit and have 30 days to pay your supplier. This debt is part of your accounts payable, and its payment is the responsibility of your accounts payable team.

Accounts payable fraud refers to any attempt to deceive a company’s accounts payable department in order to trigger illegal or false payments. When you think about it, accounts payable is a logical place to target a business. It’s responsible for the money leaving the company. It generates significant paper trails, with invoices being sent back and forth containing valuable financial information that can be obtained for misuse.

Confusingly, the Association of Certified Fraud Examiners (ACFE) considers accounts payable fraud as a type of “asset misappropriation.” This may lead you to ask, is accounts payable an asset? However, when doing your accounting, you should always mark accounts payable as a liability. It is money owed to another party and is not actually an asset.

Before learning tips to help prevent accounts payable fraud, let’s first understand the possible forms it can take.

Common types of AP fraud

We can separate AP fraud into two main categories: internal (e.g., the company’s own employees) and external (e.g., vendors, cybercriminals, scammers, etc.). Some instances combine members of both, with employees and third parties working together to scam the company.

Internal AP fraud examples include:

  • Billing schemes: Employees make fraudulent transactions to themselves disguised as legitimate payments. Employees can hide their actions in many different ways. A common tactic is to set up a shell company and create false invoices pretending to be a legitimate supplier.
  • Reimbursements: Employees generate fake or inflated expense claims such that they make a profit when reimbursed.
  • Kickback: An employee and supplier work together to deliver goods or services the company needs but at an inflated price. The supplier and employer then share profits.

These three examples all require a dishonest employee with payment privileges willing to take advantage of the company for their own gain.

External AP fraud examples include:

  • Wire transfer scams: Scammers pretend to be a trusted vendor or business partner and ask for a direct wire transfer.
  • Phishing attacks: A type of social engineering attack typically using emails to obtain sensitive information from accounts payable employees. The email, which appears to be from a trusted sender, tricks employees into willingly sharing sensitive data (login details/financial information) or unknowingly clicking on a link that injects malware into the company’s system.
  • Account takeover: This malware can be used to steal employee credentials and take over a business’s account. Once in control, the scammers can wreak havoc with fraudulent transactions that empty your accounts and max out your credit cards.

Catching fraudsters

To find fraud, you need to build the right relationships and know where to be on the lookout. A report from ACFE found the most common way to detect fraud isn’t some clever investigative trick; it’s due to people coming forward and whistleblowing on guilty parties.

With this in mind, businesses of all sizes need a procedure to protect and encourage whistleblowing. People are more likely to do the right thing and come forward if they have a good relationship with the business, and particularly with their boss. Ensure supervisors develop open and honest relationships with their employees and are trained to handle whistleblower complaints. Keep in mind, however, that people often don’t want to communicate sensitive information face to face, so ensure multiple channels are open to receive whistleblower information.

Internal audits and management reviews are the second and third most common ways of catching fraudsters. Potential fraudsters are more confident of their scam going undetected if the business doesn’t regularly audit or review the company finances.

Therefore, take time to ensure the numbers make sense and everything is as it should be. Carefully review bank statements, invoices, checks, and any other financial documentation you have. You want to look for fraud red flags such as:

  • Duplicate payments
  • Missing invoice details
  • Payments to new or previously inactive suppliers
  • Unusual or missing signatures
  • Vendors complaining about late or non-payment

Finally, while you can quickly get lost in the numbers and financial side of AP fraud, remember there are always people behind it. Watch for any suspicious employee behavior that could be the result of fraud. Perhaps a new employee seems to be living beyond their means, or they have an especially close relationship with one of your vendors.

Proactively preventing accounts payable fraud

While trying to catch fraud is essential, you should prevent it from happening in the first place. Thankfully, a lot of fraud prevention comes down to having proper oversight of your accounts payable processes and installing best practices among employees.

Whistleblower policies and regular audits can help catch fraud after it has occurred, but they are also critical to fraud prevention. Many financial crimes occur due to opportunity. People see a way of making money and think they’ll get away with it. With strong accounts payable processes in place, you can deter opportunistic fraud by making it harder for instances to go undetected.

Policies your business can implement to help prevent AP fraud:

  1. Create a tip line for employees and outsiders to report instances of fraud or suspicious behavior.
  2. Perform background checks when hiring new employees.
  3. Create strong accounts payable approval processes such that multiple people are needed to approve a payment. Requiring more robust approval processes when working with larger sums of money or new suppliers is also a good idea.
  4. Implement strict verification procedures when the financial information for vendors is updated.
  5. Define clear policies to prevent fraudulent expense reimbursement, with each payout requiring receipts and a reason for the expenditure.
  6. Educate employees on effective cybersecurity practices, particularly what to look for regarding phishing emails.

Many of these policies can be implemented and enhanced through the use of accounts payable software. This creates a simple, accessible record of every transaction and its associated invoice. Payments can be quickly found to aid investigations, and approval processes can be automated to save time while also ensuring fraud prevention.

Don’t pay the price for poor accounts payable practices

You may think accounts payable fraud only targets bigger businesses. Unfortunately, fraudsters don’t discriminate – they’ll take money from anyone. Every company has to be aware of the real threat it poses.

Finally, if you uncover AP fraud at your business, contact the relevant authorities to protect yourself and increase the chances of a criminal conviction.

Published: March 13, 2023
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