Account payable fraud is a common thing in most companies but the fact is that most people do not recognize this as a major thing unless something big happens. In fact, most companies do not want to invest in a system that tracks down such frauds because they think that it is too expensive. However, it is much more cost-effective in the long run, especially if it manages to catch some big frauds. Therefore, implementing internal control systems is necessary to ensure that you safeguard your company from such discrepancies.
The best way to tackle such incidents is by installing software that deals with specific occurrences and lets you know when there has been inconsistency. Here, we have listed a few points that you should keep in mind to curb such frauds in your system.
Identify Duplicate invoices
The first step to undertake is to identify the duplicate invoices or payments that are being made in your system. According to Mark Van Holsbeck, Director of Enterprise Network Security for Avery-Dennison, almost 2% of the payments made by a company happen because of duplicate invoices. Even though it might not sound too big, if your company makes payments in millions of dollars, then this does result in you losing a huge amount of money.
It is easy to find out such discrepancies in some cases, such as cases where an invoice is an exact duplicate of the previous invoice. However, there are instances when vendors just change an alphabet in the invoice ID number or change the payable amount by a dollar, so that the automatic system is not able to find such frauds. This is where you need to have a software that implements “fuzzy-matching” algorithms, instead of “exact matching” ones to flag such “similar” invoices as well.
Look deeply into Invoices with rounded-amounts
You should be aware of vendors that submit invoices with rounded-amounts, as they are much more likely to be a fraudulent one than a legitimate one. Additionally, you should identify the vendors who come up with such invoices the most. For this, you just need to count the number of rounded-amount invoices and divide it by the total number of invoices sent by the vendor. If the resulting percentage is more than your tolerable margin, then you should get rid of that vendor.
Look for Invoices which are just below the approval amount
One of the common ways to perform account payable frauds is by raising invoices with an amount that is just below the approval amount. This is an easy way for employees to trick the company and skim off a few dollars for their own benefit. For example, if an employee has the power to approve an expenditure of $5000, then he/she can raise an invoice worth $4995, irrespective of the actual amount, and keep the extra bucks to themselves.
To tackle such issues, you can set a tolerance level up to 3% of the total amount, so that any invoice that falls outside of this category will be raised as suspicious activity. Once identified, you can directly ask the employee and see if there was actually any fraud or not.
Search for Cheque Thefts
You should perform a monthly reconciliation of the accounts payable stats with the monthly bank statement to identify if there are any mismatches between the two. In fact, it is extremely helpful in identifying cheque thefts, as you will be able to see if there are any missing cheque numbers or gaps in them. For this, you just need to combine your cheque register, accounts payable file and the bank statements to get a clear picture of the missing cheque. You need to create an algorithm in your software that determines the cheque numbers that are present in one database and not the other.
Check for the abnormal hike in the number of invoices
You should check if there is any sudden hike in the number of invoices raised by a vendor in a particular month. Yes, it might be due to the increased business but either way, you should be aware of such an event. For example, if a vendor who usually raises 2 or 3 invoices in a month suddenly raises 50 invoices, then that very well might be a case of fraud. You need to make specific additions in your software to check for such discrepancies but by keeping a threshold in place, so that you do not flag the legitimate vendors as well.
Beware of vendors with regular cancelled or returned cheques
Even though a cancelled cheque is a legitimate transaction, one thing to remember is that the amount can go into the wrong hands. Therefore, you need to check for vendors who regularly practice sending such cheques. Here, you just need to calculate the percentage of cancelled cheques sent by the vendors and then observe the activities of the vendors, who make it to the top of the list, in the coming months to find the fraudsters.
Look out for incidents where there is an above-average payment for vendor
There are instances when there is an above-average payment made to a vendor and there can only be two reasons for that – increased business or fraudulent invoice. For example, if there is a vendor whose monthly invoice stays between $5,000 and $7,000 and then suddenly there comes an invoice with a payable amount of $25,000, then it should be flagged.
Cross-check Vendor/Employee Ring
One of the least-occurring frauds in the world of account payable frauds is that of payments going to a fictitious vendor. However, one thing to note here is that such an approach is highly beneficial for any employee who manages to pull this off and hence people do try to take this road. By saying this, we do not mean to say that you should not trust your employees – but there is no harm in verifying their activities every now and then.
To check for such a possibility, you need to merge the files of both the vendor and employee and then look for variables like address, Tax ID number, phone number and bank routing number. You should perform “fuzzy matching” on these data points and see if any of it link backs to the employee. If yes, then it should raise a case of suspicion at the very least.
Having read all these points, you must have got an idea of the different ways in which an account payable fraud can take place. Your account payable system has to be a robust and automated one and should be able to flag such frauds to save you potentially thousands of dollars. Therefore, you should always rely on efficient disbursement systems like ClearCycle to clear off all your payments.