A guide to accounts payable fraud

This article is provided courtesy of Nacha (National Automated Clearing House Association).

Accounts payable (AP) fraud is a common type of fraud that targets a company’s accounts payable department, which is responsible for paying suppliers and other vendors. It can be committed internally by employees, externally by vendors, the two parties working together, or, increasingly, by an outside fraudster looking to gain access to the company’s accounts payable systems. AP fraud is a silent threat faced by many companies.

Accounts payable fraud impacts thousands of businesses both large and small every year. This is due to several factors, including how easy fraud is under traditional AP processes and increased sophistication on the part of fraudsters. In many cases, AP fraud is perpetrated right under the noses of businesses and, in many cases, with their unknowing cooperation.

What types of accounts payable fraud should your business be on the lookout for?

Check fraud

Check fraud occurs when a criminal manipulates a physical check to redirect payments to unauthorized accounts. Check fraud might include adjusting the amount a check is made out for, changing the payee, or writing checks for personal expenses from a business account.

ACH fraud

ACH fraud is the process of electronically transferring funds from your company’s bank account to an unauthorized account through the ACH network. This can be done through phishing, business email compromise, data breaches, or installing malicious software.

Internal fraud

Internal AP fraud is when the business is defrauded by an internal employee at the company. Internal fraud can be committed through submitting false expense reports, altering invoices, setting up fake vendors, and using business funds for personal gain.

10 tips for AP fraud prevention and detection

Identifying and preventing cases of AP fraud should be a top priority for businesses across all industries. Here are ten tips for fraud prevention and detection:

1. Be proactive. Conduct regular audits, monitor key performance indicators (KPIs) closely, watch for red flags, and always check bank statements.
2. Set up a tip line and other ways for employees to report fraud. Establish a set of guidelines for protecting them once they do.
3. Conduct background checks on all employees and verify their references.
4. Implement a written code of ethics. This code should be easily digestible and resonate with the industry and business culture. It should include policies outlining conflicts of interest.
5. Implement clear policies for expense reimbursement. Enforce them at the highest levels of the organization.
6. Segregate duties and define roles. At the basic level, divide bookkeeping and check signing authority. Don’t have the same person cut the checks, sign the checks, and reconcile the bank accounts.
7. Educate employees on threats posed by phishing attempts and how to identify them.
8. Implement policies for providing appropriate verification of any changes to existing invoices, bank deposit information, and contact information.
9. Check and update the vendor files regularly to keep all vendor information current.
10. Automate the AP process to ensure security and segregation of duties.

While preventing fraud is an ongoing process for many businesses, being aware of the red flags and implementing the right internal controls can help businesses detect and prevent fraud in the future.