Common types of Accounts Payable (AP) Fraud & How to Prevent?

Common types of Accounts Payable (AP) Fraud & How to Prevent?

June 28, 2021

According to a report published by the Association of Certified Fraud Examiners (ACFE), organizations lose an estimated 5% of annual revenue due to fraud. Account Payable (AP) departments are often perceived as a poorly guarded cashbox to organized scammers intending to orchestrate scams or malicious attacks. As most of the time, payments are processed through these departments. It makes the functions most vulnerable and a prime target for theft. This article will entail details on the common types of AP frauds - well in advance and the measures organizations can take to reduce fraud.

Let's look at some of the most frequently observed routes to AP fraud.

Fake Vendor

Most companies have long-term business contracts with vendors and suppliers. These are routine purchases; payments are often pre-approved without much inspection and scrutiny. Fake companies can mimic the actual vendors and send fake invoices.

According to ACFE, fake billing is hard to detect and poses a risk - North of $100,00 per instance to business.

An employee can also engage in malicious activities by creating fake vendors and sending fake invoices. An Oregon woman used this technique to siphon over $4.5 million from a real estate investment company in Weyerhaeuser.

False Billing

Scammers can also work with internal employees to create payment requests for goods/services that the company did not receive – And keeping the processed payment for themselves.

Former Honda employee from Ohio defrauded the company of $750,000.

Overbilling / Overpayment

There could also be instances when a vendor can deliberately introduce new line items to inflate the amount owed. When an AP process is manual-driven and witnesses, a surge in invoice volume, these wrongly added line items can go unnoticed - resulting in the company getting overbilled.

Situations leading to multiple payments on a single invoice are also observed. Processing numerous payments to the vendors based on the same invoice. A situation where more than two copies of the invoice are floating inside the system - And an AP team member initiates payment for all the copies.

It can happen due to various reasons - AP staff often make mistakes or have done it based on some prior malicious arrangements. However, in both scenarios, it negatively affects the company and its interests.

Newer ways to scam AP departments are emerging at a rapid pace. Thankfully, with the advancements in AI-powered technologies, it has become possible for companies to develop preventive strategies and mitigate risks.

Automated invoice review powered by AI

Developing essential protection against accounts payable fraud involves matching key documents generated across the procurement stages. It includes matching invoice line-item information with purchase order details, reviewing receipts to ensure goods and services have been delivered, or often involves scanning other communications which might have happened with the vendor.

The entire reconciliation cycle can happen in minutes through the deployment of AI powered automation, which would otherwise take days when done manually.

Employee malintent monitoring and tracking

Employees engaged with accounts payable fraud often operate as individuals or small groups, having gained strategic information about operations.

Deployment of technology systems that can track and monitor employee engagements in real-time can stagger a malicious mind and intent through technologies like anomaly detection. Training employees on such procedures can increase awareness. Building a loyalty program can also help charter a course towards ethical actions.

Building Vendor match Capability

AP departments can encounter invoices generated by fake companies. It becomes increasingly important to detect such activity at its initial stages. Detection can be done through fuzzy matching technology - where the system scans multiple repositories and looks through the existing vendor database, checks various documents to detect fakes.

Automated approval workflow

Automated approvals reduce the time-consuming manual approval processes. Automation ensures compliance by leaving a digital trail of the actions performed across each stage. Training and generating awareness can help charter off any malicious intent.

Digital Solutions to Enforce Compliance

Digitizing the entire invoice processing workflow can reduce AP fraud. Digitization calibrates actions with timestamps, which can later be used to conduct system audits.

Such digital systems can be designed to generate automated reports - where employee activities can be monitored, and subsequent areas of improvement can be identified. Also, real time alerts provide administrators with holistic insights into process operations.

About the author

Aritro Chatterjee, Product Management,

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