Detecting and Preventing Internal Accounts Payable Fraud: Understanding the Essential Questions Behind Fraud in the AP Department
Money missing within a company may be the result of miscalculations. But there’s also the chance it could be fraud from within the company. You may never want to suspect an employee of fraud, but it does happen and if it does you’ll need to know exactly how to detect and prevent this type of fraud.
Fraud is a surprisingly common occurrence from fraudsters both inside and outside the company. On top of that, accounts payable is one of the most common targets. This department is where money leaves the company for legitimate reasons and fraudsters may see this as an opportunity to take money for illegitimate reasons.
While fraud is a big problem it’s not one that you’re powerless against. You can take steps to detect and prevent internal accounts payable fraud. Here are a few tips to recognizing fraud and preventing it from happening in the future.
Who is doing it?
First, it’s important to know who the culprits typically are in these situations and how they are able to smuggle money out of the company. KPMG’s 2016 report Global Profiles of the Fraudster found that “65 percent of fraudsters are employed by the victim organization and a further 21 percent are former employees.” Not only that, but 38 percent of the fraudsters who were current employees had worked there for more than six years. This study also found that most people don’t commit fraud alone, with 62 percent of frauds likely perpetrated in collusion with others.
According to the Association of Certified Fraud Examiners, most instances of fraud in a business are committed by associates based in the accounting department. This can be largely attributed to their intimate knowledge of the company finances. Other potential culprits can include upper management as they may have an air of authority that employees in lower positions tend not to question. In fact, the KPMG study found that 35 percent of fraudsters held an executive or director level position.
Why commit fraud?
The motive for committing fraud seems fairly obvious – financial gain. Findings in the Global Profiles of the Fraudster support this assumption. The study found that 60 percent of fraudsters are motivated by personal gain and 36 percent by greed. However, 27 percent of the fraudsters in this study reported their motive was a sense of “because I can.”
Understanding the motives for fraud and acknowledging the very real threat from within your organization can be an enormous help in detecting and preventing accounts payable fraud. You need a realistic view of the potential threat in order to prepare for the dangers of fraud.
How do employees commit fraud?
Asset misappropriation fraud is by far the most common way of committing fraud. The 2016 Report To The Nations On Occupational Fraud And Abuse found that asset misappropriation accounts for 83 percent of all reported fraud. This category includes frauds that target the AP department, such as billing and check tampering schemes.
The most common way employees sneak out money without being detected is called an accounts payable scheme. This sort of scheme is more complicated than just writing themselves a check from the company or using the company card. Under the guise of a legitimate transaction, fraudsters can transfer money to an unnamed account. The more transactions there are in a company, the easier it is to let one illegitimate transaction slip through the cracks without anyone noticing.
How do you catch internal fraud?
Internal controls for accounts payable are important in preventing and catching fraud. We’ll talk more about those later in the article. However, it’s important to keep in mind that these aren’t the only ways to stop fraud. Of the fraudsters that KPMG surveyed, 44 percent were caught because of a tip, complaint, or formal whistleblowing hotline. This is by far the most common way of catching fraud.
Don’t forget that even though most fraudsters are employed by the victim organization, that does not mean most of your employees will commit fraud. In fact, your employees are your best defense against fraud. You don’t want an aura of mistrust and suspicion to take over the department while you’re taking action to prevent fraud in accounts payable. Rather, you’ll want to cultivate a company culture where employees have positive feelings toward your company. Making sure employees are comfortable reporting suspicious behavior is a big step toward fraud prevention.
What about security in your accounting system?
KPMG’s survey found that internal audits and management review were also common methods for catching fraud. Account reconciliation, document examination, surveillance/monitoring, and IT controls also helped in certain cases, but more rarely. That does not mean, however, that it’s useless to utilize internal controls. These statistics only refer to methods for catching fraud that has already happened. Internal controls still help prevent fraud. The right accounting system can also help you detect fraud if its tools are used properly.
When you’re using a reliable accounts payable system, this type of security is built into the system. It will help prevent accounts payable fraud unless you don’t use it. Such a lapse in security might occur due to an improper delegation of duties. It might also happen due to a general lack of awareness or know-how on the part of management. Make certain that you educate yourself and employees about the security system and ensure that it is always used effectively.
How do you make internal control policies effective?
If you establish a system within the company that outlines certain rules, regulations, and expectations, employees will be much more likely to strictly adhere to them. And if you enforce these policies when someone breaks them, the chances of it happening again become slimmer. Random inspections throughout the year may also help to remind employees of the importance of adhering to these regulations.
One of the ways to help enforce internal controls is to implement or upgrade accounts payable automation. Modern AP automation systems like the one from NextProcess include customizable controls that let you automatically enforce company policy. This makes it much easier for employees to make sure they’re compliant with your company’s controls. It also makes updating controls simple.
What does proper delegation of duties look like?
Proper segregation and delegation of duties is a key part of preventing accounts payable fraud. To quote an article from the University of Pennsylvania, “Segregation of duties is a key internal control intended to minimize the occurrence of errors or fraud by ensuring that no employee has the ability to both perpetrate and conceal errors or fraud in the normal course of their duties.”
Things can get lost in the shuffle when you don’t know who is in charge of what. If you don’t know exactly what each accounts payable employee’s job description is, make sure you review that. You might even rewrite their job descriptions to include proper delegation of duties. With clear delegation of duties, everyone knows what their role is. This also makes it easier to hold people accountable if you find them doing something that is not in their job description.
How can internal reviews help?
Before you submit an email, you reread it to be sure there are no typos or misspellings. The same applies to accounts payable transactions, but even more so because you are dealing with the company’s money. With an internal control expert on staff, you can get an annual review of your accounts payable function. This will help make mistakes a thing of the past.
In addition to regular reviews run by human staff, you can also use third-party data mining tools to analyze your accounts payable transactions regularly. No more painstakingly going through all the data and numbers yourself or worrying about fraud slipping through when you’re not looking.
For example, fraudsters often do their dirty work off the clock on a weekend, evening, or holiday when no one is looking. Data mining tools can easily make note of this and catch any culprits. The data mining tool will filter through the data and determine what is going to the right place, at the right time, in the right amount, and what is not.
What are the payoffs of fraud prevention?
Businesses both big and small should have preventative measures in place to properly deal with instances of fraud and to prevent it from happening. According to an article from AllBusiness, “The typical occupational fraud will cost a company between $10,000 and $500,000.” This number only includes direct costs of the money stolen, not the additional costs in time, money, productivity, and reputation.
The cost and lengths it takes to protect your business are a fraction of the cost you might have to pay in the event of fraud. By taking preventative measures, your company will be able to stay safe from fraudsters and earn the money that the company, your employees, and you deserve. Your business will continue to grow and eventually set the standard for fraud prevention.
Are you ready to put automation to work fighting fraud?
Accounts payable automation can help catch and prevent invoice fraud in several ways. It catches fake invoices by recognizing when an invoice arrives unexpectedly and flagging it for manual review. The system also automates 2-way and 3-way matching to make it easy to match invoices with purchase orders and (when necessary) a goods received document.
Automating also controls access to invoices by letting legitimate suppliers submit invoices directly to the system. On top of all that, the system keeps detailed records. These records provide your employees and/or audit teams with the insight needed to quickly catch anything out of the ordinary.
If you’re ready to take advantage of the tools modern accounts payable automation offers for detecting and preventing fraud, contact NextProcess today. Our cutting-edge automation system will help you strengthen internal controls and prevent issues in accounts payable. And we’ll also help you set-up and customize the system so you’re making the most of all the available tools for keeping fraud from damaging your company.