7 warning signs of accounts payable fraud and how to address them
According to stats from the Association for Financial Professionals, 80% of organizations were victims of payments fraud attacks/attempts in 2023. This is a 15-percentage point increase over the previous year. Accounts payable fraud can quietly undermine the financial stability of organizations, leading to devastating losses if not properly addressed. Understanding the nuances of this type of fraud is essential for safeguarding assets and maintaining trust.
Accounts payable (AP) fraud can manifest in both internal and external ways, complicating the detection process for businesses of all sizes.
Internal AP fraud is a significant concern for businesses, often involving deceptive billing schemes run by employees inside the organization. These schemes include submitting fake invoices for nonexistent goods or services through ghost vendors, allowing fraudsters to divert funds covertly. Check fraud, which involves forgery, altering checks, or theft, is also common.
External AP fraud primarily involves scams by outsiders targeting supplier payment processes. Besides check fraud, tactics like ACH payment fraud can drain corporate resources through unauthorized electronic fund transfers using illicit access to banking information. Invoice fraud, a common external scheme, entails submitting fake invoices for undelivered goods or services, often via false supplier accounts or impersonation of legitimate suppliers.
In this article we’ll look at seven warning signs of AP fraud and provide effective strategies for addressing these issues.
Types of AP fraud
AP fraud can have severe ramifications for businesses, leading to undesired financial losses and damaging the integrity of financial records. Identifying these types of fraud can help organizations act swiftly to control and reduce the risk of fraud. Here are the seven most common warning signs.
Warning 1: Duplicate payments
Duplicate payments are a significant risk within accounts payable processes. These occur when an invoice is mistakenly processed and paid more than once, which can arise either through administrative oversight or as a result of deliberate fraudulent intent. To counter this invoice fraud, vigilant examination of financial records and transaction histories is key to detecting fraudulent payments. Leveraging automated invoice matching systems like Corcentric’s Intelligent AP solutions can significantly aid in detecting mismatched payments and signal for potential duplicates. Companies must ensure a robust payable system is in place with sound controls tailored to detect and prevent duplicate payments from eroding financial assets. Data analytics tools can be exceptionally valuable, executing tests that scrutinize invoice details such as numbers, supplier names, dates, and amounts, to uncover any instances of duplication.
Warning 2: Unusual supplier activity
Activity that deviates from the norm within supplier interactions can frequently signify underlying fraud. Signs such as new suppliers rapidly acquiring large contracts or inconsistent invoice details as compared to the vendor master file could be potential indicators of fraudulent activities and deceptive behavior. A vendor master file populated with myriad inactive or duplicate vendors could be reflective of manipulation for fraudulent purposes. Additionally, secretive employee behavior concerning supplier relations or contracts should be monitored, as it may be indicative of collusion or internal fraud. Payments that are extraordinarily late or don’t align with service delivery schedules can also be symptomatic of fraudulent dealings.
Warning 3: Discrepancies in invoice matching
When the documents in the accounts payable process—including invoices, purchase orders, and receiving reports—do not align, it could signify collusion between an employee and a vendor, ushering in fraudulent payments. Automated solutions can be instrumental in flagging invoices that lack the necessary receipts for goods and services, thereby prompting a manual review to address the discrepancies. Regular reconciliation of payable records with physical deliveries ensures discrepancies are caught in a timely manner and reduces the risk of false invoices. Anomalies in the timing of documentation may point to potential fraud, reinforcing the need for stringent invoice matching protocols.
Warning 4: Supplier account updates
Changes to supplier accounts may present an opportunity for fraudulent actions. Fraudulent attempts can include phishing emails meant to trick staff into updating account information, siphoning funds away from their legitimate destinations. Fraud can also manifest in the alteration of remittance addresses, causing checks to be misdirected and cashed by unauthorized parties. An effective defense involves regularly reconciling supplier information with purchase records and actual goods received—an additional layer of scrutiny to flag any inconsistencies. Using a system like Corcentric StopFraud validation solution is pivotal for authenticating supplier legitimacy and preventing unauthorized account changes.
Warning 5: Large payments to a single supplier
A noticeable rise in payments to a single supplier, without an associated increase in supplies or services, can be a warning signal for accounts payable fraud, implying improper diversion of funds. Large, unexplained transactions could stem from sham companies or a kickback scheme, where inflated prices are agreed upon in exchange for a slice of the proceeds. On occasion, repeated invoices might suggest exploitation of the payment system, counting on negligence for multiple payment approvals. Excessively high costs for products or services might also imply an inside job, where an employee has conspired with a supplier for mutual benefit.
Warning 6: Invoices lacking receiving support
Invoices presented without accompanying proof of receipt can be a red flag for AP fraud, pointing to a potential void between billed and actually received goods or services. Conspiracy between employees and vendors may lead to invoices for nonexistent transactions, resulting in unmerited payments. A sound system to verify receipt of items is fundamental in preventing fraud opportunities. Imperative to this is the establishment of thorough record-keeping practices, which can reveal discrepancies through unverified invoices, highlighting attempts to mask fraudulent transactions.
Warning 7: Unexplained changes in payment patterns
Shifts in payment patterns that lack a logical explanation, such as abrupt increases or irregular fluctuations, can indicate instances of AP fraud. An uptick in questionable invoices might correspond with unusual payment behaviors, marking them as fraud indicators. New, or inexperienced supplierss landing unexpectedly large contracts can cause disruptions in standard payment practices and could be suggestive of fraudulent motives. Monitoring fiscal ratios and trends is crucial in pinpointing anomalies in payable transactions that could signal inexplicable changes in payment behavior.
Strategies to reduce AP fraud
Accounts payable fraud can inflict severe financial losses on organizations of all sizes. To combat this issue, companies must adopt a multifaceted approach that addresses potential vulnerabilities within the payable systems. Incorporating strategies such as unusual financial ratio monitoring can expose deviations from standard financial patterns that may signify irregularities. Open channels for whistleblowers provide a critical platform for internal reports of misconduct that could preempt fraudulent breakdowns. Artificial intelligence (AI) and automation are modern allies in the fight against fraud, offering real-time analysis of vast datasets that can detect and flag irregularities. Central to ensuring the integrity of the accounts payable process is the practice of conducting regular audits and manager reviews, instilling a culture of accountability that serves as both deterrent and detection mechanism. It’s also important to ensure that internal teams are trained to notice signs of accounts payable fraud. These strategies, complemented by embracing technological advancements, can greatly minimize the risk of falling prey to accounts payable fraud.
Implementing robust internal controls
Robust internal controls are the bedrock of fraud prevention within the accounts payable department. Measures such as establishing a chain of command close loopholes that might otherwise be exploited for fraud. Internal audits serve to consistently inspect and reinforce the strength of the AP system. Critical controls, like mandating dual signatures for check approvals, specifically target check fraud—one of the more common forms of AP fraud. Regular monitoring and diligent record-keeping enable earlier detection of any discrepancies that may indicate an intention to conceal unscrupulous transactions, thereby helping to preserve the integrity of financial records.
Conducting regular audits
The regular execution of audits is an indispensable strategy for unearthing irregularities within financial transactions. Such audits can detect incongruities and anomalies within the vendor master file or within the ledger that might otherwise go unnoticed. By engaging third-party auditors, companies benefit from an external, impartial perspective, thus enhancing the audit effectiveness. The inclusion of periodic payment record reviews offers ongoing assessment opportunities and sustains conformities with corporate financial controls. Moreover, habitual audits propagate an atmosphere of transparency and conscientiousness—encouraging vigilance and the reporting of any questionable activities that could lead to financial losses through fraudulent activities.
Leveraging technology for AP automation
Automation solutions wield the power to transform accounts payable systems, enhancing precision and reducing vulnerability to fraudulent undertakings. By shifting from manual operations to AP automation software, companies gain immediate visibility and control over their payment procedures. These tools often encompass advanced machine learning capabilities that vet invoices and monitor for changes to vendor details, fortifying fraud detection mechanisms. In the migration from paper-based to digital records, businesses inherently lessen the threat posed by document forgery, thus promoting the integrity and efficiency of their accounts payable operations.
Recognizing phishing attacks
Phishing attacks remain a prevalent threat to organizational security, using email, phone calls, text messages, and malicious websites to deceive individuals. With approximately 75% of organizations experiencing phishing attacks, the risk is both common and severe. In the face of an average cost of $3.92 million per data breach sourced from phishing, the stakes are undeniably high.
These attacks aim to mislead employees into believing they are communicating with legitimate vendors, which can lead to unauthorized financial transactions. Recognizing phishing attacks involves understanding that they often mimic reputable sources and may request confidential information or immediate action. Organizations should put a priority on educating their employees about the nature of phishing attempts and reinforcing the necessary skills to identify and protect against such schemes.
Identifying ghost suppliers
Ghost suppliers are fake entities used by fraudsters to siphon funds from companies through seemingly legitimate invoice payments. These entities are crafted to blend in with real suppliers but ultimately redirect payments to illegitimate accounts. Thorough due diligence during the onboarding of new suppliers is critical, with an emphasis on verifying identities and bank account details.
Regular audits of supplier activity can assist in detecting these fictitious vendors, thereby cleansing the company’s accounts payable system from potential fraudulent entities. Ensuring that there is an effective matching of accounts payable entries to their respective checkbooks each month can highlight anomalies indicative of ghost suppliers.
A robust system for approving new vendor is crucial. Such a system should include segregation of duties to ensure that the responsibility for creating new suppliers, approving invoices, and issuing payments is divided among different individuals. This helps prevent the introduction of ghost vendors into the system and facilitates a more secure vendor master file. The implementation of these measures helps safeguard business finances and preserve the sanctity of the accounts payable process.
Using AI to detect accounts payable fraud
Artificial intelligence (AI) has a key role to play in detecting accounts payable fraud. To get started, centralize data from invoices, orders, payments, and suppliers into a unified database and ensure its accuracy by removing duplicates and errors. Next, select and train AI systems using historical transaction data to distinguish normal from suspicious activity. Continuously analyze transactions in real-time to flag unusual payment amounts, inconsistent supplier data, and duplicate payments, allowing AI to refine detection algorithms through pattern recognition. Establish rule-based alerts and a scoring system to identify high-risk transactions, prompting human oversight for investigation.
Develop protocols for investigators and incorporate their feedback into the AI system to enhance accuracy. A comprehensive AI-driven approach to accounts payable fraud detection combines technology with human insight and strong internal controls to effectively combat fraud. For an example see Corcentric’s Accounts Payable Managed Services.
Employee training and awareness programs
Equipping employees with knowledge and skills through dedicated training programs is vital to spot and prevent accounts payable fraud. An untrained workforce can involuntarily abet fraudulent activities due to ignorance of the warning signs. Regular training sessions accentuate the recognition of red flags and the protocol for reporting dubious behavior, building an informed and watchful workforce. Introducing fraud prevention principles during employee onboarding and reinforcing them through performance reviews ensure that awareness and adeptness in identifying fraudulent transactions is a continuous priority, contributing to an organization’s comprehensive fraud defense mechanism.
Reducing accounts payable fraud
As you can see, accounts payable fraud comes in many shapes and sizes. Understanding its various forms is essential for developing effective preventive measures. Once you understand where there are potential risks, it’s crucial to develop clear and robust strategies that involve people, processes and technology, and is applied across all your accounts payable processes, and reduce points of weakness. To get started, check out Corcentric’s StopFraud solution.