Any kind of fraud can deliver a huge blow to your business’s finance and reputation. Often, it is attempted in the form of fraudulent invoices being submitted for payment. Organizations of all sizes can fall victim to these canny tactics.
Criminals and fraudsters target small and medium business companies hoping that the lack of employees will result in negligence. They target large enterprises hoping things will be lost in the bureaucratic shuffle. Accounts payable (AP) should be constantly vigilant in order to avoid processing the fake charges.
The end-to-end transparency, and the ability to process every invoice knowing its entire context is the key to avoid paying fraudulent charges. Synchronization between approvers accounts payable and receivers of goods and services offered by the supplier is crucial to a successful fraud prevention strategy.
Here are some of the major accounts payable (AP) risks to watch out for:
1. External Accounts Payable Fraud
Fraud comes to mind when considering accounts payable risks, and there are certain ways this can happen.
According to ACFE, fraudulent activities represent a 6 percent loss on average in many organizations that globally calculate to a 3.8 trillion-dollar problem, when factoring the world GDP. External fraud, which exploits the accounts payable method, can be packaged in several ways.
An internal staff who has payment controls works in collaboration with an external vendor to arrange for illicit payments to the provider. It can take place via a payment exploiting duplicate payments or completely fabricated payments.
Once payments are received by the vendor, money would be split into a twisted type of profit-sharing endeavor. Invoices are overpaid to a co-conspirator, and the amount is siphoned off for personal benefit.
2. Internal Accounts Payable Fraud
When making legitimate payments to suppliers, a phony vendor is generated and paid. It means the agent making payments is sending themselves the money to a third-party address that they have access to.
There are some other types of internal fraud as well that can take place. Like the ones involving check fraud where somebody tampers a check payment and funds are redirected to the personal cash box.
ACH fraud is the other ugly means by which unpleasant individuals manipulate a corporate payment methodology to route payment funds to personal accounts.
Also, it is prevalent that in such cases, repetitive payments are made from a prospective amount and often run under the radar from an approval threshold perspective.
For instance, if the amount of the fraudulent payment were to be enhanced, it may necessitate the intervention and approval of a higher-level approver or executive within the paying company and draw attention to the deceitful activity.
One of the ways to combat accounts payable risks is to create transparency around payment issuers, including payments history analysis by amount, supplier, date, and examining for nearness and frequency to the approval threshold.
3. Missed or Late Payments
One of the major challenges that account payable teams face is the maintenance of a good payables’ method. If invoices fail to flow seamlessly into the processing funnel or take lots of time to trickle in from outlying situations to wherever accounts payable is processing the expense, all kinds of things can be incorrect.
For several organizations, a lack of companies around the juncture leads to invoices that disappear altogether, which causes the supplier to examine late payment penalties on top of the owed invoice. For several companies, it could be averted by getting instant, upfront insight to the stream of payable that empowers them to take suitable action then and pay timely.
Beyond the agony of having to pay up the late fees, the pain of going back and forth with the supplier’s accounts receivable team and have it out can occur a place strain on the accounts payable employees and generate less than optimal vendor relations.
It would be the recommendation that AP managers and finance teams consider ways to enhance the process via accounts payable automation.
4. Missed Accruals
The other implication of a sloppy accounts payable process is the lack of clarity around financial forecasting of spend. For several businesses, the month-end closing presents the challenges of accruing pending spend by the team.
If you do not have insight with a high degree of accuracy in the method, then you are at best going to have to resort to guesswork to piece together accruals.
Mitigating through the upstream conversion of invoices to data is the only remedy as it becomes the factor of generating dynamic visibility within the method. Once it is resolved, the burden of having to go out and acquire accruals and forecasting by the team is bypassed.
This type of reporting can be done virtually instantly via reporting, and as such, tighter control is placed over the method that ensures a higher degree of quality from an accurate standpoint.
5. No Audit Trail
When invoice processing is anchored in manual method and supporting documentation are traditionally moved or are bound in online communication processes, it can be challenging to assemble an appropriate picture of how a decision was made and why a payable was approved and paid ultimately.
It can pretend a host of problems for the paying companies and is something that must be addressed proactively. By not having solid visibility into the approval chain of custody on an invoice, you are opening the door to problems, specifically of fraud type.
If somebody is aware that there are inadequate controls over the method, they may be likely to exploit them in an attempt to enrich themselves. If you can fetch insight with a high degree of appropriateness to this area, it will be more likely to discourage an evil actor from attempting something illicit.
The best way to do this is to engage the use of automated document management software layered with both workflow capabilities and a corporate intelligence engine- whereby route and escalate invoice approvals based on the business rules.
In doing this, retain the invoice history from the time it offers to AP via processing, and then through invoice posting to the ERP, and thus, it ultimately reconciles payment details to invoice, for an end-to-end lifecycle of the document.
When you get something like this, it is powerful as a holistic view of the method and a safeguard from future fraud activities. Further, it is the kind of bedrock data that an auditor is going to search for while examining a method to ensure quality controls and safeguards are being attached to and enforced.
6. Making Errant Payments
Errant payments can be compromised of extraneous, overpayments, or duplicate made to a supplier for many reasons.
It could be that invoices were submitted various times by recipients in accounts payable and by requisitioners, depending on the invoices that arrive for processing. As that is innocuous, the unfortunate realities of the pains made by this kind of error are nonetheless real.
In another situation, payments made are over the number of services, received or billed due to flawed pricing details or some other variance even down to fluctuations in tax and freight charge processing. In a good accounts payable automation solution, it is possible to query out against previously processed invoices to avoid duplicate payments before they take place.
But for many companies, these types of visibility are limited. There is a strain on the invoice processors as they struggle with manual data entry. And invoice reconciliation is a struggle to keep up with the additional step of fraud detection and pursue in a manageable way.
Moreover, it is possible that if invoices are getting processed from a sheer data entry effort, the entered data can result in payment amounts being off due to human negligence. It can be rectified via the use of advanced optical character recognition (OCR) for data conversion or even e-invoicing processes, which digitizes transactions and removes error-prone data fields from happening.
7. Expense Related Fraudulent Activities
Expense-related fraudulent activities can be challenging to uncover and may often last for years.
These kinds of frauds can take place when staff makes purchases on the personal card and submits the expense report, overstates expenses, submits duplicate reports purposely, and even makes fictitious costs for goods that are never purchased.
While these amounts may be small to begin, they can add up over time quickly if the fraud doesn’t get uncovered.
The other type can happen when a worker makes a purchase on their personal card and gets payment from their manager. Later returns the item and receives a refund.
At times, this takes place out of good trust, and the staff simply forgets. This is why many companies prefer to leverage business credit cards so that they can receive a refund.
There are multiple factors to consider while examining and eliminating accounts payable risks within the business. Adopting cloud-based accounts payable software can make enforcing controls and ushering visibility to the accounts payable data in reality.
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Marissa Levin is a marketing consultant, freelance writer at SutiAP, who regularly writes articles on Business, Finance, ERP, and Cloud/SaaS trends