One of the most famous accounts payable fraud cases is the HealthSouth scandal. The CEO pleaded guilty to falsifying company information by adding extra operating expenses under fake procurement accounts to inflate the financial records.
Unfortunately, AP fraud continually affects organizations, with 58% of accounts payable departments falling victim to a business email scam in 2021. Prevent your organization from becoming a victim by learning about common AP frauds and how you can safeguard against them.
Trustpair prevents AP fraud by blocking payments to unknown or suspicious vendors and continuously controls the security of your payment process. Contact an expert to learn more.
What are the main types of accounts payable fraud?
There are six most common types of accounts payable fraud schemes;
- Billing schemes
- Paper check fraud
- ACH fraud
- Business email compromise
- Expense reimbursement fraud
- Kickback schemes
This can happen:
- Internally: with your employees duplicating real invoices but changing the account details to their own
- Externally: with cybercriminals intercepting your communications to real suppliers, and changing the account details on real invoices to their own
Billing schemes, if left undiscovered, can leave a huge financial impact on businesses. What’s more, relationships with real suppliers could suffer, as these are left unpaid after providing goods and services.
Paper check fraud
Paper checks are still a popular payment method here in the US, with around 81% of firms still using checks to make at least some of their payments. But the thing is – paper checks are one of the easiest ways for fraud perpetrators to con your business, using stolen details to make payments in a form of identity theft. Checks aren’t as secure as other payment methods (like bank transfers or wire payments) and can be easily forged, making check fraud more popular than card fraud.
Paper check fraud typically works by criminals cashing in a check at the bank that has been forged. Unfortunately, most businesses won’t be able to recover the funds while a fraud investigation is ongoing, meaning they will have to operate with lower cash flow until things are resolved.
If criminals can get hold of the account details and routing number for your business bank, they can commit ACH fraud. It’s broadly defined as any unauthorized money transfer. But specifically in a b2b setting, a fraudster can give your personal information to vendors to lock your business into purchases or a direct debit set-up. That’s what happened to Target when hackers stole their customer information and went on to make millions of suspicious purchases.
According to the national clearing house itself, cases of ACH fraud have continued to rise over the past few years and are now at a 12-year high. So it’s one of the top schemes that accounts payable teams need to know about.
Business Email Compromise
Business email compromise (BEC) is one of the most common examples of online fraud, thanks to all of the fake texts, emails, and links sent this year. By knowing your email address, cybercriminals send out fake emails that look legitimate.
These phishing emails could be based on:
- Fake business deals for products cloned from legitimate sites
- Stolen customer details asking for refunds
- False invoicing, as under vendor fraud
- Impersonation of the CEO or another senior executive, pressuring employees to send money or sensitive information
Usually, the fraudsters ask an employee for payment (urgently), or sensitive company information. Typically they will also include a link under a false premise, which if clicked on, could download malware onto your system.
Expense reimbursement fraud
According to studies, business expense fraud accounts for 15% of all expense reimbursements. That’s millions of dollars every single year, lost because your accounts payable team can’t verify the expenses they owe to employees.
Expense reimbursement fraud is typically committed in one of two ways:
- Inflation: employees inflate the value of the products or items they have paid for, such as increasing the mileage owed while driving for company purposes
- Invention: by forging receipts on made-up or fraudulent transactions, an employee directly steal from your business
As one of the biggest types of accounting fraud, it’s important for AP teams to know the signs of expense reimbursement scams.
Kickback schemes are more likely to relate to your senior leadership team. They are like a bribe from potential suppliers – offering extra benefits to the individual in exchange for partnering with the organizations.
Kickback schemes can involve direct payments, as well as expensive gifts, that don’t end up in the official ledger. Sometimes, the partner will even agree to put a child through college, for example, in exchange for the contract.
Accounts payable fraud detection: how does it work?
Detecting accounts payable fraud means identifying the red flags and applying statistical analysis.
What is the Benford Law and how to use it?
Benford’s Law is a mathematical law related to the expected occurrence of the leading digit in a set of data. For example, in the number 1000, 1 is the leading digit. Likewise, in the number 9830, 9 is the leading digit.
The law states that the numeral, 1, is expected to appear first 30.1% of the time. The numeral 2 is likely to appear first 17.6% of the time, and so on. Benford’s Law states that as the digit increases in value (such as 8 or 9 compared to 1), the likelihood that it will appear as the first digit decreases.
The Benford Law sets expectations and helps accounts payable teams or examiners to identify discrepancies when expectations are not reality. It can be applied to financial concepts to detect and prevent fraud.
For example, let’s imagine that your company requires approval for invoices over the amount of $10,000. An employee might commit vendor fraud and get around this by submitting multiple invoices worth $9,000. Fortunately, Benford’s Law tells us that the number 9 is only expected to be the first digit less than 5% of the time, so when it appears significantly more, your team should become suspicious of fraud.
Benford’s Law could be applied to all types of transactions in the accounts payable function. For example, expense fraud could be detected if the line items on an expense report vary significantly from expected occurrences.
Account payables fraud risk: what are the red flags?
When detecting red flags in business fraud, the first consideration should be the fraud triangle. These are the three layers of motivation that compel someone to commit fraud:
- Pressure: employees could be bribed by external sources, or fraudsters might ‘need’ the money thanks to their life circumstances (for example, nothing left in their bank account)
- Opportunity: in order to not get caught, fraudsters must identify “a chink in the armor”, or the weaknesses that they can exploit in organizations
- Rationalization: this refers to their reasoning for targeting your business – maybe the fraudster is a disgruntled ex-employee, or they tell themselves that they will “only take what they need”, for example
These three aspects help you to detect fraud because they can be used during an audit. For each of the company processes, the fraud triangle gives investigators an understanding of the risk level and therefore where to look.
Another red flag for payment fraud is suspicious activity – like making a large volume of payments in a short period of time. Or, noticing patterns of chargeback transactions.
Finally, accounts payables teams should beware of suppliers or vendors who wish to change their account details. Most of the time, this will be a valid request, but it should always be double-checked against the relevant databases.
Trustpair performs continuous account verification for merchants by matching information about the company, location, and banking information (including whether it appears on any blacklists).
Accounts payable fraud prevention: what are the best strategies ?
Preventing accounts payable fraud is one of the most important duties for finance departments. The consequences of fraud can be brutal for SMEs and large corporations alike, with financial blows at the helm of the fallout.
But after the initial shock subsides, reputational damage can set in. That’s because associates can’t trust you to keep their businesses secure if you can’t keep your own systems intact against fraudsters. Fraud has been known to cause contract losses and partnership breakdowns, like in the case of the British company Carillion, which collapsed from a lack of business after being convicted of accounting fraud.
To prevent accounts payable fraud, your department should:
- Set up specific security measures in your AP process
- Implement AP tools and fraud prevention automation
Accounts payable fraud: set-up specific security measures
Security measures help in both the detection and prevention of accounts payable fraud and procure-to-pay threats.
Separation of duties
Perhaps the most important would be to implement the 4 eyes principle. Arguably, the finance department should be some of the most trustworthy workers in your organization, since they have control over the company finances. But having an extra set of eyes over every financial process helps to deter those thinking about committing internal fraud.
Segregating duties ensures that no single person is responsible for an entire function on their own. Failure to separate duties properly in the finance department at the Alberta Motor Association led to losses of over $8.2 million over the course of 3 years. Without transparency and accountability within finances, the second factor of the fraud triangle, opportunity, becomes much stronger.
Secondly, building audit trails for your processes can be beneficial. Regular audits are important even if you have previously been a victim of fraud because fraudsters often come back to defraud the same organizations again.
Auditors can check:
- purchase order documents
- shipping sheets
- purchase requisition forms
- financial reports
- expense reports and more
Audits introduce external financial professionals to verify the work being done. As well as ruling out the risks of fraud, these can increase investor confidence because they bring transparency around the detective controls and financial state of your business.
Fraud awareness training
Finally, fraud awareness training for employees should be accessible and regular. Regularity was a popular point of contention in our 2023 US Fraud Report, because 60% of teams consider it the best approach to minimizing fraud within the next twelve months.
But while it’s incredibly important, fraud awareness is not impenetrable since new scams are being invented all the time. So coupling education sessions for your employee with anti-fraud software is a more concrete approach to accounts payable fraud prevention.
Implement AP & fraud prevention automation
Anti-fraud platforms with a focus on AP processes are the only real way to guarantee your protection from scammers. That’s because fraud prevention solutions use automation to systematically validate the actions of your finance team, and verify external partners.
Moreover, platforms like Trustpair secures the entire payment chain. We provide a clear risk analysis so that anomalies can be identified. But we can also remove oversight for low added value tasks and processes. This way, we help your payroll team by blocking payments to accounts that show patterns of suspicious behavior. Fraudulent transactions are blocked and you also have access to key fraud risk numbers and analytics. This can help you improve your overall financial strategy.
Finally, automated AP fraud prevention systems can track traceability – showing you exactly who has changed accounts details and when. This level of accountability deters internal fraudsters and significantly reduces the risk of fraud to your business.
Address fraud risks in accounts payable by spotting deception tactics and knowing the warning signs. Equip your AP department with accounts payable automation like electronic invoicing platforms or anti-fraud platforms and prevent unsolicited financial fraud attempts.