Read between the lines: how to detect potential fraud in Accounts Payable
- 03 Jun 2020
Accounting fraud can strike any business. A system of checks and balances is crucial to avoid losses. Most companies strive to build a culture of trust. However, long-term employees are equally as likely to commit fraud as contractors. Reports reveal organizations lose 5 percent of their annual revenue each year to fraud. Recent changes in organizational procedure due to the COVID-19 pandemic could potentially open the door to additional fraud in manual AP process flows, too, as a result of less centralized oversight. Accounts payable automation provides the unified system necessary to reduce or eliminate potential fraud in the AP department.
Focus on the AP Department
From small businesses to mega-corporations, every dollar spent must go through the AP department. Internal and external fraud are possibilities when companies consider vendor, rent payments, third-party suppliers, and more. Accounts payable fraud represents nearly half of all reported fraud cases. It is crucial to monitor AP for fraud such as false billing, fraudulent expense reimbursements and check tampering. Accounts payable automation provides the highest level of accountability. From the C-suite to an AP clerk, everyone has access to updates in real-time, making it difficult to get away with fraud.
How Accounts Payable Fraud Happens
An AP team member can hide fraudulent transactions among legitimate ones. Fake vendor accounts can be used to funnel money into the pockets of a fraudster. False supplier accounts might be established for an employee to divert the cash into another account. Round number payments and duplicate payments, as well as very small or large payments, could be causes for concern. Know the face of the typical fraudster, who is typically in a position of authority and employed by the company for five years or more. Often those who commit fraud are in a senior or middle management position. The C-suite and its executive representatives should also get to know accounts payable employees and the morale in the department. Happy employees are less likely to commit acts of fraud.
Establish a Secure System
Management must establish a secure system to make accounting fraud difficult or impossible. Vet your vendors to ensure they have legitimate phone numbers, contact info, and addresses. Cross-reference vendor addresses to employee addresses on record. Watch for frequent payments to specific vendors, transactions at odd hours of the day, and faraway transactions in foreign lands. Robust accounts payable automation makes it easy to establish an airtight system. For example, employee and vendor files can be merged to double-check addresses, contact phone numbers, bank account info, and more. Recurring reports can be set up to flag the largest transactions flowing through AP or the suppliers receiving the most frequent payments. And vendors should always be verified to ensure they are not pretenders.
Follow a Protocol
Manual AP processing is time-consuming, tedious, and leaves plenty of room for error and fraud. Few people have instant access to manual AP records. If suspicions arise, the records could be manually adjusted to avoid detection. Accounts payable automation follows a specific protocol. The system can be customized to ensure all steps are taken to verify vendors, legitimize transactions, trace steps in the workflow, and approve payments. Clearly define who can spend money in the organization and who must authorize payments. With AP automation, the approval process is fast and easy. Designated approvers can access the system in real-time from any place via a computer, laptop, or mobile device - a crucial advantage during times when working remotely is the only option.
Unfortunately, accounting fraud is an inevitable part of doing business. Where there is money, there is the potential for fraud. Much of this fraud occurs in the AP department, where every transaction is processed. AP automation makes everyone accountable. Transactions are transparent, accessible, and verifiable. The team knows where the money is in real-time, which means accounts payable fraud can be detected sooner to avoid significant losses.