Bridging the GAAP Podcast Series: Fraud: detecting deceit in finance

Speaker 1

Hello, and welcome to Medius' new podcast series, Bridging the GAAP. Together with Spend Matters, we've put together a podcast series exploring a wide range of topics from the evolution of technology and finance to tax compliance to sourcing strategies to fraud risk and mitigation.

In today's episode 'Fraud: detecting deceit in finance' Nick Heinzmann, VP of Research at Spend Matters, talks to Branden Jenkins, Chief Operating Officer at Medius, about what is driving customers to look more closely at AP fraud, how fraud has evolved recently, and Medius' new fraud solution.

Speaker 2

Hi there, and welcome to our discussion today. We are talking deceit in finance, fraud and its relationship to invoicing, procure to pay, and the general procurement technology landscape. My name is Nick Heinzmann. I'm VP of Research at Spend Matters, where, among other things, I researched things like fraud, fraud analytics, and its relationship to, procurement technology. And with us today, we have someone from Medius to discuss the latest and greatest and what they're doing in the fraud space as well as related to their own solution.

Speaker 3

Yep. Thanks, Nick. Yep. My name is Branden Jenkins. I'm the Chief Operating Officer here at Medius and looking forward to this topic.

It's very timely. It's definitely an important thing to talk about. I've been servicing, businesses, B2B, businesses for pretty much my whole adult life, working in ERP and accounts payable automation.

Speaker 2

Great. Should be a great discussion because this is something we have been seeing continuously, but especially over the last three years, start of the COVID pandemic is when the topic of fraud became a top of mind issue. That was the big thing we heard when the pandemic hit, especially was the shift to sourcing things like PPE or rapidly having to shift or move sources of supply all of a sudden, not just supply availability, but also the availability of real actual people who could get things or supplies to you in a timely manner became all of a sudden the issue of the day. So I'm really curious what is driving you to serve fraud today? What is driving customers to you to look at it? And what are you hearing from customers? Has it evolved, or is it still a lot of the same and more?

Speaker 3

Yeah. No. Absolutely. So I think, you know, COVID definitely has highlighted this issue. I mean, I think businesses have been facing fraud and risk forever.

Right? But COVID definitely highlighted this challenge as the workforce became more distributed, things that were physical became digital, and just new processes and systems kind of had to be rethought, reengineered, redeployed. Medius just actually did a survey. We call it our Financial Census survey where we surveyed about 2,700 financial executives in major markets across the globe.

These are mid-sized to large enterprises.

And what we found to our surprise is that these businesses on average were losing about $300,000 a year in fraud. I mean, this is astonishing that, like, you know, on average, every business in this survey reported that they were losing approximately $300,000 a year in fraud. And I mean, I do attribute it to the fact that they just can't keep up with this modern work, this new way of work, and the fraudsters are just outsmarting these businesses.

Speaker 2

It's amazing to hear because even with more advanced forms of technology, whether that's the basics or an AP automation or some of the more advanced analytics around fraud, this is a persistent issue. So I'm actually curious to hear when customers come to you, especially having already lost almost $300k a year, probably, are they aware of the issue, or are they even trying to get ahead of future ones, Or is it still something they were trying to react to and catch up to every time it happens?

Speaker 3

Yeah. Well, I mean so this is the fraud that they know about. Right? So what about the fraud they don't know about? And, you know, the the thing is is a lot of businesses don't necessarily talk about this. I mean, when when they are attacked from a fraudulent perspective, you know, this creates, you know, headlines in the news. It creates concerns with shareholders, investors, their vendors.

So, you know, I think having honest conversations is an important part of it. But, you know, on top of this, a lot of the people that are actually doing the the work, you know, actually in accounts payable and the finance department, You know, this survey also kinda highlighted that, you know, they're not actually happy. You know, 37 of the people actually doing this work are are kinda just frustrated and and not satisfied with their role or the work.

And, you know, it's kind of endless. Right? You know, the bills are always coming in. The payments always have to be made. They're spending a lot of time answering questions from vendors. Where's my payment? You know, dealing with reconciliation.

And 34% of them say that they see the same error over and over in the process. So that's just like maddening, frustrating. And another 37%, back to this survey of 2,700 people, 37% said they have little or no insight or control over this process. So this is just kind of ripe for fraud and risk, right? Like, I mean, when the folks that are doing the work are just kind of a little bit at their wit's end, they feel like they don't have control over it, this is when fraudsters come in and take advantage of the situation.

Speaker 2

And the interesting thing is that fraud can come from so many different sources. We often think of a bad actor sitting outside the organization breaking their way in, but reality is fraud can come from inside the organization too, whether that's petty little things like, you know, small threshold increases on an invoice to take and skim some off the top, all the way to executives who go to these elaborate means to shut up shell companies that might produce real-looking invoices and taking whatever the actual proceeds for themselves. So I'm curious, both in the survey and your experience with customers, what are you seeing most often today or say something rising up above others? Because, obviously, things like business email compromise are a top point of risk for most organizations. But are you seeing any new trends or anything worth noting on where the fraud comes from?

Speaker 3

Yeah. I mean, you know, you hit on definitely some of the the sources. Right? You know, we see these main sources being it comes down to, like, the vendor identity, validating the vendor.

Is this actually a real vendor? Is this someone we're doing business with? Then there's the management of those relationships and then the approvals. And this vendor relationship, this vendor identity gets manipulated, either externally by bad actors or internally, right, if it's an in-house job.

And when these invoices and these vendors are set up in a way where they have to go through multiple departments, and they got to go kind of through multiple systems on top of that, like, is there collaboration happening between these departments and these systems? That's where the gaps come, and the risk gets introduced.

In a lot of businesses, you just don't have the complete visibility of the process from the capture to the payment. And when you don't have that visibility, that's, again, when the fraud and risk is introduced. So I think some of the most common types of fraud, to your question specifically, what we see consistently when people are coming to us looking to change their system out and kind of get their arms around how to really solve for things like accounts payable and spend management, It's dealing with illegitimate vendors, these bad actors, these vendors that shouldn't be being paid or being purchased from, invoice spoofing or fake invoices that come in.

It's just amazing how clever these fraudsters are, where they can send invoices in, where they kind of know that you're buying from these businesses, especially if you're in a global supply chain. I mean, there's public data where these fraudsters can see where you're sourcing goods from and know what port of entries are coming through and and they have that visibility to kind of supply chain. And they know who you're buying from, and they kind of give you an invoice that looks just like you get, you know, every week, every month, and your team's consistently processing, but they change something about it, They change the remit to, they change the bank information, they change the email, and they find the crack and they work their way through it.

So invoice spoofing and fake invoices. And here's the other crazy thing, and this is a little more North America specific, but intercepting mail checks. In North America, we're still mailing just a ridiculous amount of paper checks, which can be fraudulently changed. They could be stolen.

And that just is not necessary in a world where we can do this digitally through either things like ACH, enhanced ACH, or virtual cards.

Speaker 2

You're bringing up a good point, actually. You have, at Medius, in the past year, actually built and launched and been using the fraud solution. Certainly not the first. It's only one that's last. But given that you are in the midst of building into this area, I'm curious if you had any different takes on it than maybe you'd seen in the past. And what were you trying to do differently by your customers, especially given the AP focused scope of some of your systems and the broader scope that you can address across your suite of solutions?

Speaker 3

Yeah. I mean, you know, Medius has been at this for for a good period of time. We've got a lot of customers, and, you know, we've always been very focused on just the best capturing of the invoice and getting it down to the line level and the, detail and matching that up with purchase orders and receipts. And that's where the errors occur.

And that's where the process becomes burdensome. So we have just a solid foundation there. And then this last year, we really did take a hard look at how do we elevate fraud and risk? How do we empower our users to get at the alerts, to get that at the risk scores, to get at the exceptions right?

And a big piece of it is really educating our customers and prospective customers that you've got to own this process from cradle to grave, from capture to payment. And a lot of businesses try to solve accounts payable with multiple solutions, like their ERP does some of it. Maybe they add some type of invoice capture solution.

Maybe they add a workflow solution, and then, you know, they have their bank integrated. But that kind of whack a mole approach creates, you know, data in multiple places, you know, creates processes in multiple places, and that's that's just where the fraud and risk gets introduced. So we take a view that owning this cradle of the grave creates this, you know, kind of singular thread that we're able to really track down things like fraud and risk. So a good example is payments. We did a lot of work with payments over the last year. We actually acquired a payments company earlier this year so we could just bring that into our core offering where we're actually doing the connectivity to the banks and issuing the payments directly out of Medius. And by doing that, we elevate and highlight risk and fraud throughout the process.

But when the money is ready to actually go out, when it's actually time to send money to the vendor and the money leaves your bank, that's when it really does matter.

And by having payments as part of the process, part of the solution, and what we've done, you know, with fraud and risk, you know, as the controller, as the treasurer is going out to issue, you know, these payments, it right there tells them if there's risk that's been introduced up until that point. So it's not too late, right? Where if something got changed, an address, a bank information, if this is outside of a threshold, like we've never paid this vendor this much, or from a statistical perspective, this is outside of the bands, we add risk scores so they can make, you know, a decision at the moment that matters when it's time to pay to maybe hold those payments off and do an audit or review or to pay them. Right? And that's a piece that a lot of companies just don't have. They go through the AP process, and then send it off to, you know, their banking systems, and they lose that visibility.

So, you know, our investments are making sure that we give visibility at every step where fraud and risk could occur so we can mitigate that, and then making it, you know, a natural part of the process to address it and to prevent it versus this being disparate systems. Right?

Speaker 2

Yeah. And honestly, it's highly irrelevant even today. These some of these things sound like basics, but when you look at even last week in the news, there was all this hubbub about FTX and disclosures about what they had done. Did you see this about how they were approving invoices, actually?

Speaker 3

Yeah. A little bit or the lack of. The lack thereof.

Speaker 2

Exactly. No matter how many stimulants you're taking, I think QuickBooks and Slack are not quite enough to look through every single line item of an invoice. So we did that end. And maybe as a wrap up, you've given a lot of great examples here. But what can people in the next year do to get better control and visibility of everything that goes through the systems before it gets to payment. How do you should get people get started?

Speaker 3

Yeah. Well, I mean, obviously, fraud is a real thing. Right? And we talked a lot about this today. But solutions like Medius and businesses getting focused just on their spend management in general, I mean, not only helps combat things like fraud and risk, but it actually, more importantly, gets you more in control of your spend in your business. Right? And that's what it's about, like doing this more efficiently, making sure you have the best margins, delivering to your employees good solutions to work with so their lives are better.

And some back to the survey, some of the stats I thought are interesting to this point, 98% of the companies that were surveyed say, hey, yeah, our vendors offer early discount payments. But only two out of five of those companies actually are able to take advantage of paying early, and they want to pay early.

The survey said they want to pay early, but they can't. And that means that they don't get to take advantage of saving money, right, which improves their margins, and it's all because, on average, it takes them like twenty three days, twenty three days to approve an invoice for payment. That's just too long. There's too many steps in the process, which results in, you know, employees having to work way more than they need to, you know, systems that aren't optimized and companies losing out.

Right?

You know, solutions like Medius can get that down. Our average customer, they can get an invoice approved, ready for payment within seven days. That's on average with all of our customers. We have 2,400 customers.

Best in class is one day.

But, you know, another interesting point here, right, not only, you know, putting systems in place so they can take advantage of efficiencies and saving money, like early discounts, but it's also just like when you look at your spend of, you know, what are we procuring?

How do we have better vendor relationships? Pay our vendors on time, be our best customer to our vendors so you can negotiate better terms and have better access to supply.

And that is very relevant in what we've seen in the last couple years. Right? With COVID, the impact on the supply chain and, you know, being able to keep goods so you can get them out to your customers is is very top of mind to customers that we talk about this whole supply chain resiliency. And the big part is being the best customer to your vendor, and that's paying them on time, making sure that, you know, they have visibility to your process, and that you're collaborating between finance and procurement so you can, you know, enable those types of, relationships.

Speaker 2

It may make sense. Don't be naughty. Just pay on time or maybe early.

Speaker 3

Keep it simple. Yeah.

Speaker 2

So great. Thanks for all of your thoughts today. I thought it was a very interesting discussion, and congrats to you guys for bringing more visibility to this topic. As we heard at the beginning, it's a persistent issue that deserves more focus both with fraud you know about and fraud you haven't done yet. So hoping in 2023 and beyond that we are moving the needle on going closer to zero eventually.

Speaker 3

Yep. Absolutely. Let's flip the script. Let's get ahead of the fraudsters, and let's make our employees have better lives. I'm all for it. Thanks for the time.

Speaker 2

Thank you.

Speaker 1

That was 'Fraud: detecting deceit in finance.' Special thanks to Nick and Branden for their time. If you like this podcast, please be sure to subscribe to catch our next installment of Bridging the GAAP. And to take all of your business spend managements far beyond basic automation, visit medius.com. Thanks for listening.