Accounts Payable fraud is a common type of fraud that targets a company’s accounts payable department, which is responsible for paying suppliers and vendors. Accounts Payable fraud can take shape in multiple forms and can be committed internally by employees, externally by vendors, internal and external parties working together to commit fraud, or internal/external hackers. The Association of Certified Fraud Examiners (ACFE) estimates that 5% of all revenue is lost due to fraud.
Here are some signs and tips to detect fraud:
- Invoices that list the same address as a company employee
Invoices with addresses listed that match that of an employee, only have a PO box listed or list even-numbered (clean) total amounts. These invoices commonly are submitted with no PO number or Tax ID.
- Inactive or Duplicate Suppliers
Monitor your list of vendors closely, watch for new suppliers with large total amounts or duplicate suppliers with differing data. Fraudulent duplicate supplier invoices are usually received with addresses that differ from the usual.
- Missing Checks and Atypical Signatures
Checks that have gone missing and signatures that look atypical are possible signs of fraud. Merging bank statements with AP payments made is an excellent way to identify any awry payments.
- Complaints from Vendors
Complaints from vendors about late payments when you have already paid can be an indicator of fraud. Investigate every late claim thoroughly.
- Red Flags from Employees
One of the biggest indicators of employee fraud is noticing atypical employee behavior. It is important to vet every employee’s financial status before hiring them for a company financial position and take note of questionable behaviors.
- Duplicate Payments
It is estimated that 2% of invoices paid are duplicate invoices.
Monitor your payments closely, four AP fields that can help you determine duped invoices include the vendor number, invoice number, invoice date, and invoice amount.
- Predictable Payment Schedules:
Consider a scenario where X company receives monthly shipments of ice from Z company. X company should monitor Z company’s incoming invoices to ensure they are not making payments more than once a month. Setting a threshold of ex. 3 weeks can assist in identifying if you have made multiple payments to Z company during the current month. On average, X company should be paying Z company once a month.
- Fuzzy-Matching Fields:
Monitor for invoices that contain the same line items – the total amounts typically reside within 5% of recent invoices, invoices that are exactly double the amount of recent invoices, contain similar digits, etc.
- Benford’s Law
Over time, payment amounts can become predictable from suppliers. Beneford’s law helps to predict the likelihood that a particular digit in a number belongs. Take for example, the amount $20,485. One may say that the likelihood that the first digit, 2 in the amount has a 1/9 chance or 12.5% chance of being a 2. This proves untrue when a collection of supplier invoices is obtained over time. If the supplier submits invoices frequently around the $20,000 range, the likelihood of an invoice amount in the $80,000 range becomes less likely. Another common way of identifying outliers is performing standard deviations against new invoices vs a data set for the same supplier.
- Rounded-Amount Invoices
Most people who commit fraud usually round their invoice amounts to not include change, however this is sometimes common from vendors as well. The best way to identify fraudulent invoices is to determine which suppliers frequently have rounded invoices and those that do not. Flag any invoices from suppliers that have rounded amounts in line items and the total amount if this behavior is atypical for them.
- Invoices Just Below Approval Amounts
Flag and investigate any invoices that lie dangerously close to AP team member’s or manager’s approval amounts.
- Abnormal Volume of Invoices
Map out the average amount of invoices received from a vendor over a period and flag and abnormal influx of invoices.
- Vendors with Canceled or Returned Checks
Canceled checks are usually legitimate transactions, however many instances have been caught where canceled checks have been returned to AP clerks. AP clerks have then modified the check payee field to ‘Supplier’ or ‘AP Clerk’ and attempted to cash them. The easiest way to conduct an audit on canceled or returned checks is to flag and investigate any vendors with a high number of canceled transactions.
Conclusion
Catching AP fraud starts with conducting regular audits of data and segregating the duties of members of accounting. Using EZ Cloud’s audit trail mechanism is an effective and cost-effective way to prevent fraud. By implementing quality security controls, employees are able to work in an environment that is conducive to consistently monitor and review. Without detection or with limited visibility into the process, incidents of fraud can span over years. Contact us today to learn more about how to use EZ Cloud AP automation to look into audit logs and maintain accountability.
