While accounts payable fraud is an unfortunate risk that comes with doing business, knowing the signs and implementing internal controls can help organizations detect and limit their financial loss. Accounting professionals are an integral part of this process, as they must have the skills and knowledge to recognize the warning signs of fraud during an audit.
From vendors and suppliers to utilities, rent, and loan payments, every dollar that a company spends goes through accounts payable (AP). For that reason, AP is particularly vulnerable to fraud from inside and outside the business.
These vulnerabilities can have serious consequences to every part of the business. According to the 2016 Report to the Nations on Occupational Fraud and Abuse conducted by the Association of Certified Fraud Examiners (ACFE), check tampering, billing, and fraudulent expense reimbursements – the three types of AP fraud – accounted for nearly half of all reported fraud cases. Check tampering alone results in a median loss of $158,000 per business.
Here are the top three ways that accounting professionals can detect accounts payable fraud committed within an organization:
1. Consider the human element. KPMG’s 2016 Global Profiles of the Fraudster report noted that the typical fraud perpetrator is predominantly male, between the ages of 36 and 55, holds an executive- or director-level position, and has been employed by the company for at least six years.
Most AP fraud occurs when an employee hides illegitimate transactions among thousands of legitimate ones. How can you know where to look?
First, be mindful of any employees who are known to be disgruntled over pay or other issues, as they are more likely to feel justified in stealing what they believe they deserve from their employer. Secondly, employees who seem to be living beyond their means or having financial problems may also be motivated to commit fraud. Red flags include reckless behavior, such as extensive personal debt, a lavish lifestyle, or frequent expensive vacations.