Accounts Payable Fraud Detection and Prevention Controls

Accounts payable fraud is widespread in enterprises that process a large number of payments and have many suppliers. This is because detecting fraudulent payments from huge data sets can be quite challenging.

In this article, we discuss accounts payable fraud, the types of AP fraud, and all about fraud detection and prevention controls in accounts payable.

What Is Accounts Payable Fraud?

Accounts payable (AP) fraud refers to fraudulent financial behaviour, triggered either internally or externally, that affects the accounts payable department of an enterprise. It is one of the most common types of fraud, exposing firms to business risks. These frauds can be committed by an individual, a group of employees, an external party, or an employee and an external party working together.

In any enterprise, payments must be routed via the accounts payable department, making this a sensitive area for the corporation and a lucrative site for thieves to conduct fraud, either internally or outside.

Common Types Of Accounts Payable Fraud

Here are five of the most common accounts payable fraud types:

• Billing schemes: Employees familiar with the company's accounts payable process commit billing scams. They are designed to make it seem like the payments are made to legitimate recipients, while the payment is actually made to benefit the unscrupulous employee. For example, they might create fake invoices for products that were never delivered.
• Cheque fraud: Here, the offenders fabricate fraudulent receipts, usually by changing the cheque amount, changing the receiver, or signing duplicate receipts for expense reports and adding personal expenditures from a company account.
• Expense reports/reimbursement fraud: Expense-related fraud occurs when an employee uses a personal credit card to make purchases. The employee then presents an expense report, exaggerates spending, submits multiple reports on purpose, or creates fake expenses for products that were never purchased. Expense-related fraud is a lot more difficult to detect compared to other types of fraud.
• Kickback schemes: Suppliers and employees collaborate to make extra money in a kickback scheme. For example, an employee might approve vendor invoices for goods or services at inflated prices and then share the extra money.
• ACH schemes: Automated clearing house (ACH) payment fraud happens when someone gains access to funds as they transit through electronic fund transfers. Once the fraudster gets access to the files, they may modify an existing vendor profile to redirect payments to their personal account.

Internal And External Examples Of Accounts Payable Fraud

According to experts, almost 90% of all AP fraud is conducted internally, i.e., someone within an organisation does it intentionally. These frauds can be difficult to identify within companies with a high volume of payment transactions, particularly since beneficiary accounts might frequently appear as legitimate suppliers.

Internal fraud can cost your firm a lot of money depending on how long it has been going on and how often and large the transactions are. For example, an employee generates fake invoices from a fictitious vendor/shell company and then diverts payments into their own bank account.

On the other hand, external fraud occurs when someone from outside an organisation attempts to steal funds. For example, a con person sends an email to a company pretending to be a vendor and letting the company know that they have switched bank accounts. The email ID looks legitimate and raises no red flags. Before the company or the actual vendor realises it, the company has transferred the entire balance due into the con person’s bank account and become a victim of external AP fraud.

How To Detect Accounts Payable Fraud In Your Enterprise?

Accounts payable fraud detection helps in identifying fraudulent payments leaving a company or those on the verge of being processed.

Here are some ways to detect accounts payable fraud in an enterprise:

• Monitor employee behaviour: According to studies, employee behaviour is a typical red flag in most fraud cases. It could include employees living beyond their means, employees who form close associations with vendors, or employees who are unwilling to share duties.
• Apply Benford’s Law: This mathematical theory states that numbers in a sequence, even if they appear random, are likely to be part of a pattern. In other words, there is a chance that each number will be used in a specific position. For instance, the probability of the number '1' appearing as the first digit in a set of numbers is about 30% of the time. The numbers ‘2’ to ‘9’ will be the first digit with decreasing frequency. 
  While not perfect, Benford's Law makes it easier for an AP department to review its payouts. For example, if the distribution of first digits differs significantly from the distribution portrayed in Benford’s Law, then it could be possible that an employee has forged their expense reports. 
• Monitor invoice amounts: Rapid increases in invoice volume may suggest a legitimate increase in business, but it may also signal that a fraudster has grown more confident in stealing money. For example, if a vendor has two invoices one month and twenty the next, an enterprise would definitely want to know why.
• Leverage automation: Accounts payable automation software assists firms in improving the AP process and preventing fraud by detecting unusual activities. It automates the process of vendor onboarding, invoice reconciliations, identifying duplicate payments, and detecting errors, and leaves a comprehensive audit trail. 

5 Ways To Prevent Accounts Payable Fraud

Here are some fraud prevention controls in accounts payable that businesses can employ:

• Using automation: Manual approval and payment processes can leave several gaps open for AP fraud. On the other hand, automated accounts payable systems can eliminate human error, reduce the possibility of tampering, and alert users to any questionable behaviour in real time. This allows you to examine and prevent potential scams.
• Vendor checks: Implementing vendor checking both pre and post-onboarding every vendor will ensure that the enterprise only deals with compliant vendors.
• Auditing AP processes: A regular audit of the AP processes in an enterprise can assist in identifying any unusual transactions; these audit trails can then be used to pinpoint the suspected source of fraud and investigate it.
• Training employees: Amongst the most important fraud concerns are employees falling for phishing or social engineering schemes. As a result, spreading awareness amongst employees through training can help significantly reduce fraud.
• Standardising processes: Standardise and regulate the vendor setup process to simplify invoice processing, payment, and information modification requests and reduce the risk of fraud.

How Does AP Automation Help Prevent Accounts Payable Fraud?

In most cases, fraud happens because the day-to-day nuances of running a business make detecting flaws and trends extremely difficult. Employees who process hundreds of monthly payments will need even more time to search for trends or double-check any changes made to existing records.

Accounts payable automation systems can help firms optimise their AP processes and avoid fraud by reporting unusual changes. They don't overlook things or make human mistakes. 

AP automation also discourages internal fraud efforts while strengthening security against external fraud. Here are some more ways how automation helps prevent accounts payable fraud:

• Automation helps centralise all activities
• It helps with vendor checks and the identification of non-compliant vendors
• It flags anomalies and sends exception reports to the management
• It builds payment controls within the AP process
• It enables shifting to electronic payment methods

Frequently Asked Questions

How do you detect AP fraud?

You can use various ways to detect AP fraud, such as using automated tools, monitoring employee behaviour, conducting internal audits, and using Benford’s Law.

What is an example of accounts payable fraud?

Cheque frauds, duplicate billings, unapproved vendors, kickback schemes, and account takeovers are common examples of accounts payable fraud. 

What are the red flags for AP fraud?

Missing cheques, frequent complaints, employee behaviour, and discrepancies in vendor profiles are some red flags that you should keep an eye on.

What are the indicators of invoice fraud?

Invoices that include employee details, have information missing, are vague, or suspiciously have round numbers, such as Rs 6,000, could be potential indicators of invoice fraud.

What are the accounting controls to prevent fraud?

Maintaining standardised financial statements, segregating employee duties, conducting physical audits, and periodically reconciling accounts are some accounting controls to prevent fraud. 

What are the next steps to prevent fraud in AP?

Integrating vendor checks into an enterprise’s vendor onboarding system, using automated AP processes, and training employees to recognise fraud symptoms are steps an enterprise can undertake to prevent fraud in AP.  

What are the different types of fraud controls?

Fraud control can be preventive, detective, or corrective. Preventive controls include vendor checks, segregating employee duties, setting up authorisation controls, and other controls that enable fraud prevention. On the other hand, detective controls help identify issues once they have occurred. For example, data reconciliations and audits. It’s so that the enterprise can spot a minor issue before it becomes a major problem. Lastly, there are corrective controls. This includes taking disciplinary action and updating policies and procedures to ensure that fraud does not take place again.