How to identify and tackle accounts payable fraud
Accounts payable fraud, which sometimes is referred to as AP fraud, is one of the biggest challenges for finance teams in businesses all over the world. In fact, according to research underwritten by J.P Morgan, 82% of organisations were victims of attempted or actual fraud in 2018.
The report goes onto to state that 65% of payments fraud is committed by individuals outside of your business. It’s important for any successful accounts payable team and business, to be able to identify and initiate strategies to tackle the fraudulent practice.
In this resource, we’ll explain everything you need to know about accounts payable fraud, illustrate what constitutes AP fraud as well as provide tips to help you spot, eliminate and prevent it from happening in the first place.
What is accounts payable fraud?
Accounts payable fraud is a practice where money is extracted from an organisation using illegal or duplicitous tactics. Typically, the accounts payable team is exploited, and money is stolen from the business. There are many ways AP fraud can take place and we’ll detail the most common in the next section.
Types of accounts payable fraud
There are numerous technique fraudsters use to disguise their illicit activities from accounts payable teams. We’ve detailed the most common below:
A type of fraud that attacks the payment systems of your business. It’s set up to deceive you to make fraudulent payments to an employee, while disguising the payment as a legitimate business cost.
They’re extremely difficult to track and isolate, as often, the fraudster is well-versed at covering their tracks. Here are some typical scenarios:
- A fake company submits an invoice for work that hasn’t been completed, and your business ends up paying out;
- Fraudster identifies one of your suppliers and changes the account details on your system to their own, therefore, wrongly receiving your cash;
- Someone sets up a fake supplier on your system and requests payment, which you then pay out;
- Working with a third party, passing invoices through an account or company a fraudulent employee controls and taking a cut of the payment;
- And finally, processing duplicate payments to a vendor, and when the duplicate is returned from the supplier, the employee keeps it. Or processing duplicate payments to create a credit with the vendor then keeping the suppliers next payment.
Faster payments fraud
Faster payments fraud is becoming increasingly common in the UK, because of the speed associated with the transaction. It requires an employee working in the AP team to put their own account details into your billing system.
An employee might set up a new payee and send funds, or even divert funds, to a new account using an existing payee account but change the details.
One of the more well-known types of fraud, expense fraud centres around an employee being dishonest about the costs their incur that are reimbursable under company policy. Usually, expense fraud happens through one of a combination of the following:
- Made up expenses
- Double claims
- Employee exaggerates actual expenses incurred
Imagine if one of your suppliers bribes a member of staff to purchase, or at least influence buying, their products or services?
That’s exactly what happens when someone is being bribed by a vendor. They’re trying to curry favour, in exchange for a lucrative contract with your organisation. Typically, bribes will be in cash, but can be in the form of cars, travel, gifts or other entertainment that might fall outside of the ethical sourcing processes.
Conflict of interest
This is where one of your employees has a stake or interest in a company, you’re doing business with. It can, potentially, lead to a form of fraud if an employee benefits financially from a contract being awarded to that supplier if the supplier is deemed to have won the contract unfairly, without a transparent process being documented as to why they won the contract, and with the employee’s relationship to that supplier having not been declared.
How to investigate accounts payable fraud
Getting to the bottom of accounts payable fraud requires patience, skill and some detective work. In most cases, you won’t need expert help as you’ll be able to tackle the initial phases of the investigation on your own.
Your first port of call should be to establish a whistle-blower policy, where members of your team can anonymously report fraud. It can either be a telephone number or an email address.
Next, interview staff that have information about those suspected of wrongdoing, as well as communicating with HR personnel that might have details relevant to the case.
In terms of suppliers, you’d want to get written transcripts about the fraudulent activity as well other people who might have evidence in the case.
Finally, you might want to contact third parties that haven’t committed but are indirectly involved with the fraud. Sometimes, people or businesses are involved unwittingly and may be forthcoming with help and information so you can get to the root cause of the issue.
We’ve prepared a list of documents you should consider reviewing, once you have established the type of fraud you think may have been taking place:
- Supplier contracts
- Email communications
- Journal entries
- Company bank statements
- Payments register
- Vendor master files
- Any other information you think relevant from your ERP/Procurement system
Things you should look out for
AP fraud is something that’s notoriously difficult to identify. The fraudster will have set up sophisticated measures to carefully conceal their activities amongst your regular payments. They’ll know exactly how to hide their transactions among the many thousands of legitimate transactions – but you shouldn’t let this put you off.
Broadly speaking, AP fraud looks very similar to other types of fraud. So, it’s important to pay attention to any anomalies and the small details. So, for instance, if you were trying to investigate why you have an ant infestation at home, you’d start by figuring out how and where the ants are first getting into your home, before coming up with a way to tackle the problem.
With accounts payable fraud, there are some specific things you can look for and we’ve prepared this list to help you spot some of the warning signs:
- Suppliers that seem unusual, or haven’t been previously approved
- Large payments to one particular vendor
- Payments that consistently fall just under the amount needing authorisation
- Increases in payments to certain vendors without an equivalent increase in goods or services
- Strange purchases on an employee’s business credit card
- Invoices that don’t look professional
- Invoices that don’t have key information such as an address or a telephone number
- Invoices in sequence
- A vendor that doesn’t use a work email address, and instead uses a free provider such as Yahoo
- Multiple invoices paid together or on the same date
- Supplier addresses that match up with an employees’ address
- Vendor address that seem to be residential addresses
- Merchants with a similar name
- Large spend on entertainment or other frivolous purchases
- Incomplete, missing or non-original purchase documents
- Duplicate payments to the same vendor
- Supplier purchase prices that seem high or low
- Unusually close relationships between an employee and supplier
- Repeated purchases from a vendor with a poor record of goods/services
How to prevent accounts payable fraud
To tackle AP fraud, it’s best to have measures in place to prevent it from happening in the first place. It’s easier said than done to manage this initial instance, because setting up and embedding processes can take time. Either way, we’ve prepared some useful ideas to help you get started.
Check your suppliers
Set up processes to scrutinise all suppliers added to your approved supplier list. To ensure impartiality, the person that checks your suppliers when on-boarded should be someone different to the person that negotiated the deal in the initial instance.
If there’s anything that looks suspicious, try emailing or telephoning your suppliers to clarify any inconsistencies.
Schedule accounts reconciliation to take place monthly
Rotate reconciliation responsibilities around your team to ensure that money leaving your accounts vs spend requisitions made by employees matches up
Scrutinise all your transactions
Examine transactions to look for indicators of fraud.
Check for the red flags listed above, such as round numbers, gaps in invoice numbers, unusual transactions, unusual frequencies or amounts.
Undertake unscheduled audits
Set dates randomly throughout the year to conduct an audit of all your accounts. That way fraudsters won’t be able to cover their tracks so readily.
Rotate Employees Through the AP Function
You might need to spend more time training your team, but rotating staff across the AP function will prevent established AP fraud schemes from forming.
Create alerts if supplier bank details are changed
eProcurement technology can create alerts that are triggered if a supplier’s bank details are changed. These alerts can be sent to several internal stakeholders who can query the change if they feel necessary.