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Accounts Payable Fraud: Where to Spot It, and How to Prevent It

March 5, 2021, 9:01 AM

Accounts payable fraud is a silent threat faced by many companies.

Turning a blind eye creates a serious risk; the Association for Financial Professionals reports 82% of organizations were victims of attempted or actual fraud in 2018. The danger is not only to the finance department, but also to a company’s reputation and integrity if a fraud scandal is exposed.

AP fraud has come a long way. Gone are the days of pretending to buy toner for the printers. Now with increasingly sophisticated scams, and ever larger business operations, the right tools are needed to detect and protect against AP fraud. Accounts payable automation is a key tool in the fight.

Aside from its safety benefits, accounts payable automation can cut costs significantly: According to Institute of Finance and Management data, manually processing an invoice costs about $13, while the per-invoice cost of best-in-class automated processing is about $2.

Let’s dive into the AP fraud threats in the modern business world, the traditional ways to prevent them, and the modern tech savvy solutions that can offer a more robust defence.

The Threats

Most businesses will face similar threats with regards to AP fraud. Vendor management is crucial to accounts payable, and so is central to the threat of fraud. Any errors in vendor management, intentional or otherwise, will cause systemic problems. If the name or bank account of a vendor is listed incorrectly, or is fictitious, payments may fail to post to an account, or could end up in the wrong hands.

One industry where vendor management fraud can be commonplace is construction. Without accountants on site, jobsite supervisors have been known to receive kickbacks if they send a receipt for an invented service or job.

Another consistent danger area is employee expenses fraud. Whether by mistake or design, employees can claim the same receipts for expenses over and over again. One error that can arise is if employees work in one country and submit receipts in another. For example, if working for a U.S. based company, but submitting receipts in from Canada an employee can benefit handsomely, taking the U.S. dollar value home. Amid thousands of receipts, the fact of the different currencies is surprisingly easy to miss.

Checks and Balances

Given that AP fraud is as old as time, or at least as old as trade, there are a number of traditional stop guards in place to act against it. Most obviously, the accounting profession exists to ensure the integrity of business practices. In their training, accountants have to take ethics courses and will lose their accreditation if they are found to have cooked the books.

One simple but crucial rule of thumb is additional approvals. To protect a business from AP fraud it is advisable to have plenty of eyes on the process. A number of professionals should be responsible for overseeing the process, which should go through a series of stages for approval.

In some cases regulatory mechanisms can provide a protection against fraudulent practices, mainly by acting as a strong deterrent. In the U.S., for example, adding a new vendor requires an IRA form. That means even a small vendor management scam will risk the wrath of the IRS: A risk many will be unwilling to take. Another governmental mechanism which will act as a deterrent comes in the area of VAT. Any country with a VAT tax will have audits which can catch AP breaches.

While all of the traditional checks and balances mentioned have been vital to the prevention of AP fraud throughout history, there are truly more deterrents that will prevent fraudulent practices from occurring on a large scale. But for any single business looking for adequate protection, a sharper set of tools is needed.

Digital Solution

The comprehensive solution to prevent AP fraud is the digitization of the AP process. By going digital, human error can be taken out of the picture, with the process of detecting some kinds of fraud becoming an automated process.

The digital system is able to first flag duplicate payments, with accounting teams then automatically alerted. Human expertise can then enter the fray, with the human eye there to investigate whether it was a simple mistake, or indeed a fraudulent act.

An additional benefit comes in robust approval channels made available through a digital AP platform. Those allow for communication through reviewing and approving invoices before they are paid.

Accounts payable fraud is a systematic risk, with fraud or errors which could go undetected for years. It is impossible to track either the historic or yearly value of AP fraud, given that the success of AP fraud implies that it has not been detected. What is sure is that AP fraud is not uncommon, and no business will ever know the extent of AP fraud unless it safeguards itself by digitizing the process.

All of the traditional checks and balances are important. They continue to hold value and should be retained. But digitization is the only way to truly ensure the integrity of the AP process. As well as ensuring greater financial security, accounts payable automation can improve in house communication, increase efficiency and save a business a sizable sum.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Catherine Dahl, is CEO of Beanworks, an accounts payable automation software.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.

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