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Accounts Payable Fraud: 5 Things You Should Look Out For

Accounting  |  Compliance

When legendary bank robber Willie Sutton was captured in 1934, the FBI agents asked, Why do you rob banks, Willie? He replied, “because that's where the money is.”

We’re not glorifying Willie’s actions here, but unlike banks, the accounts payable and cash payments process within any business is “where the money is.” This is probably the reason why accounts payable fraud is one of the most common ways white collar criminals exploit their employer’s resources.

Every other year, the Association of Certified Fraud Examiners publishes the results from its global fraud study in the Report to the Nations on Occupational Fraud and Abuse. In the report, fraudulent disbursements include payments made from the accounts payable system, as well as from payroll processing and straight from the cash register.

 

Accounts Payable: The Easy Target

Accounts Payable is the one business function that, in many organizations, is more vulnerable to fraud than any other. That is because most funds that flow out of the organization must first pass through AP. And over time, dishonest insiders and vendors have created newer and craftier methods of stealing from organizations by exploiting control weaknesses in the AP function. 

Accounts payable is one of the processes that generates heavy paperwork, heavy labor hours, and a high risk of fraud and error.

 

Avoid Becoming A Victim of Accounts Payable Fraud

Even if you do put together a comprehensive preventive measure, one thing is certain: the less attentive you are to your accounts payable activities, the better the probability that theft attempts will be successful. 

Most importantly, learning how to catch red flags is one of the most important things you can do to protect your organization. Here are five things you should look for:

  • Duplicate Payments
    • In many cases, duplicate payments are not fraud-related. However, if a duplicate payment is accidentally made by a company, it is possible for an employee to forge an endorsement of the check. Watch this closely!
  • Excess Purchases
    • Fake payees can be used to convert funds. Be aware of excessive purchases as they could be covering a possible payoff of a purchasing agent.
  • Excessive Voids/Returned Checks
    • While they are usually legitimate transactions, a cancelled check can be returned to the wrong hands and be re-written to the fraudster. Excessive voids and cancelled or returned checks are common indications of theft and should be watched carefully.
  • Abnormal Invoice Volume
    • Rapid invoice volume increases may be due to a legitimate increase in business, but is also may point to fraudulent behavior. Monitoring vendor invoice volume and being aware of spikes is a good way to spot abnormal behavior.
  • Mail Drop Address
    • A mail drop, or ghost address, is an entity that can receive mail in your name. Companies using a mail drop as their address rather than a P.O. Box may be doing so to hide their fraudulent activity.

 

Setting Up for Success

It’s not always easy to see the signs, however, unless you know where to look. Fortunately, there are effective ways to not only spot accounts payable fraud, but to also reduce the chances of it occurring. These include:

  • Looking for invoice oddities
  • Vetting your vendors
  • Tracing transactions
  • Investing in an automated system
  • Separation of duties:
    • e.g. the person approving purchases shouldn’t be the same one requesting them.
  • Have a process in place:
    • Fraud is much harder to commit (intentionally or otherwise) when an approval process is in place and controlled. Avoid ad hoc processes, ensure you have an audit trail, and regularly review activity.

 

Conclusion

Technology is an invaluable aide for sifting through your accounts payable entries. Automated processes and systems can prevent invoice fraud. Automated systems ensure that invoices are matched with purchase orders and will automatically flag for review any invoices that do not have corresponding orders. An automated system will also create audit trails that will help highlight other potential accounts payable fraud

 

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About Jacqueline Guarino

Jacqueline supports Uplevl clients through partnering closely with development, sales, and marketing to identify and deliver solutions to meet customer needs.