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How to Detect Accounts Payable Fraud

Apr 20th 2017
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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.

2. Verify all vendors. Conducting regular vendor reviews is essential to detecting AP fraud. As an initial step, approve every new vendor before they are included in your accounting system.

If you don’t recognize a vendor, manually verify who they are and what you are buying from them. Verification can be as simple as picking up the phone – call to make sure the number of the vendor is in service and check online to verify the number is connected to the business in question.

Other signs to look out for include vendor addresses that match employee home addresses, checks sent to local post office boxes or residential addresses, vendors that have the same contact information, and new vendors with names that resemble current vendors.

3. Test transactions. When reviewing transactions, look for indicators of fraudulent activity, such as checks issued for round amounts without cents, payments going to cities that have nothing to do with the business, unusual transactions occurring during off-hours, or dramatic increases in the average size or frequency of payments to a certain vendor. These analyses can easily be done on a regular basis with a data mining tool. 

To avoid future cases of fraud, make sure to have a formal review system in place so that your list of checks is being monitored before they are issued. You can then review that every week to make sure the numbers are continuous. It’s also a good idea to require additional review or a second signature on checks over a certain threshold amount.

The 2016 ACFE report notes that check tampering, billing, and expense reimbursement schemes last an average of two years before being detected. Don’t let your clients be a part of that statistic.

Know the signs and put the processes in place to identify fraud from the onset to save your company and co-workers from the potential consequences. Continuous monitoring and timely detection can deter employees from committing fraud and ultimately reduce losses for an organization.

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