Your accounts payable staff are working hard to keep the payment processes running on schedule. Their tasks seem simple and straightforward enough but yet accounts payable (AP) fraud persists as a serious problem for businesses. Discovering an AP fraud problem before it gets too big, or avoiding one altogether, is the goal.
How does fraud happen? With or without internal collusion, AP fraud happens when payments are issued to a supplier that are:
- Duplicate payments
- In amounts that should be flagged as suspicious
- Issued to a fraudulent company
Internal accounts payable fraud is an issue that companies need to be aware of and prepared to deal with. The following are some of the ways fraud is engaged in and how you can avoid it.
Implement automated AND manual auditing processes to avoid duplicate payments
Your AP system can leverage an algorithm that will check for both exact duplicates and ‘similar’ entries—also known as fuzzy matching. The advantage of these automated checks against information input is that if your AP department is processing a large volume of payments, you can be sure that at least some aberrant invoices or payments will be picked up and reported.
Duplicate payments occur in one of five ways:
- Where the vendor number, invoice number, invoice date and invoice amount are EXACTLY the same.
- Where all but the invoice amount are the same.
- Where all but the invoice date are the same.
- Where all but the invoice number are the same.
- Where all but the vendor number are the same.
A set of database reports can check on all these variations and report payments that meet them.
Assuming the persons committing the fraud are at least a little bit smart, they might try and use similar information to get through the system. This is where ‘fuzzy-matching’ comes in to play. A company can set up reports that look for similar data in the AP system:
- Similar invoice numbers but where the zeros have been removed.
- Amounts issued are 5% above or below the previous amount.
- One amount is exactly double the previous amount. Example? $2,200.00 and $4,400.00.
- The amounts issued start with the same digits. Example? $456.00 for one payment and 4,567.00 for the second.
While these reports are essential, it’s also important that someone be checking them manually to discover any consistent issues.
Invoice amounts and information that should be red flags
Suppliers attempting to defraud your company will often, perhaps oddly, submit invoices in round numbers. Amounts will appear as $2,000.00 rather than $2,000.45. You can check for these by sorting data outputs to show suppliers that have a high percentage of invoices submitted in round numbers. While this in and of itself is not fraudulent, the supplier and their invoices merit a second look, through an internal audit.
Any company that has an AP department and issues payments to suppliers will have approval levels. Internal AP fraud can be at play here, as those internal approval amounts may not as easily be known to outsiders. However, an astute employee who knows that their limit is $5,000 may be issuing payments to a fake supplier set up in the system, typically in an amount within about 3% of their limit, or in this example, between $4,850.00 and 4,999.99.
Put in place audit processes that also look for payments being issued outside of normal business hours or a large increase in the number of payments going to a certain supplier, as these too can be red flags.
Manually verify vendors
Set up a process to manually verify the vendors, in order to avoid fictitious accounts being set up.
This can include verifying that they actually exist by calling the provided number and checking the address online. Be wary of businesses that use post office boxes or residential addresses for payment processing. These flags don’t mean the business isn’t legitimate, but it’s worth double checking!
Your electronic invoicing provider should also aid in mitigating risks associated with vendor fraud. Some will verify the data by requesting the GST Number (Canada) or W9/Tax ID Form (USA) from the vendor to confirm the identity of the company you are transacting with. They’re also able to digitally confirm your Vendor’s ID to your own system, to ensure they’re the same (vendor matching).
Bottom line: processes that leverage both automated and manual reviews of data mined from your AP files are essential to detect and prevent ongoing accounts payable fraud in your company.
Still have questions about AP fraud? Contact us today, we're here to help.