Accounts Payable (AP) Fraud refers to a wide variety of schemes, scams and cons, including billing fraud, check fraud, vendor schemes and computer based payments fraud. AP fraud may be committed by individuals within an organization such as employees and management (internal fraud) or individuals outside the organization including suppliers, vendors, customers and hackers (external fraud). Employee fraud most frequently involves embezzlement, inventory theft and theft of confidential data. Management fraud often involves “cooking the books,” bribery and kickback schemes, conflicts of interest and bidding fraud. Employees and management may also engage in travel and entertainment expense fraud, purchase card fraud, billing fraud and check fraud. This article will enumerate some red flags of AP fraud and provide some suggestions on how to prevent and detect AP fraud in your organization.
AP fraud “red flags”
- Employees appear to be “living above their means” or are having financial problems
- Unusually large purchases of inventory or items on an employee’s p-card (some items may be used for legitimate business and the remainder stolen and sold on-line)
- Phony invoices- invoices appear unprofessionally printed or prepared
- Invoices are missing key details such as date and quantity ordered
- Invoices do not match purchase order details
- Consecutive invoice numbers on invoices received weeks or months apart
- Invoices are missing key information such as phone numbers, address, EIN
- The vendor’s email address is a “public” one such as Gmail, Yahoo, Hotmail.
- A vendor’s address is the same as an employee’s address (audit software can identify this)
- A vendor’s address seems to be a residential address or PO Box rather than a commercial address
- A vendor’s address is in a high risk zip code (Florida, New York and New Jersey are states with high frequency of AP fraud)
- Two or more vendors have the same address, phone number or email (audit software can identify this)
- New vendors have names similar to current vendors
- Purchase discounts are taken, but not recorded (the amount of the discount is stolen)
- A longtime vendor’s prices appear unusually high or low (may indicate a kickback scheme)
- A vendor submits an unusual number of invoices in one month
- Don’t become too trusting of long term employees. Most employees who commit fraud have been employed with the company for over five years.
- Take up a lot of space on your checks.
- A check is harder to tamper with when there are more characters written on the check. Ensure that your check writer (whether an individual or a computer) fills the payee line completely. For example, if John Smith is the payee, write John Smith and fill the remaining space with a line or series of asterisks. Write checks to the full name of the payee. For individuals, include, first, middle and last name. For companies, include the full name, not an abbreviation. Use the largest font possible. Avoid using the X/100 convention for cents. Write out the numbers. Try to leave as little blank space as possible.
- Lock up your check stock and ensure only authorized staff have access
- Do not sign checks in a hurry. Take the time to carefully review a folder of checks and the accompanying support. A fraudster may take advantage of your hasty review and insert into the folder a hidden check made out to an employee or a phony vendor.
- Security cameras may prevent skimming schemes in which cash is stolen from an organization before it is recorded on the organization’s books. A common skimming scheme involves employees pocketing the cash received in a cash transaction and not recording the sale.
- Employee’s also tend to behave more ethically when they know they are being watched.
- Schemes involving the purchase of toner are increasingly common. Be alert to large purchases of toner or a change in toner vendors.
- Ensure that individuals submit receipts or chits when they take money from petty cash accounts
- Ensure that the person maintaining the petty cash account is not the same person reimbursing the petty cash account
- Consider implementing a positive pay system with you bank. Under a positive pay system, you provide your bank with a list of the checks that you’ve issued so that no checks are cashed twice. The bank will also verify that the checks presented to the bank match the check number you have provided. Positive pay can also be used for ACH transactions.
- Perform surprise inventories or cash counts
- Verify all vendors using state incorporation records. In Massachusetts, search the Secretary of
- State’s Corporate Division’s Database at http://www.sec.state.ma.us/cor/
- Use Google Maps and Google Street View to verify a vendor’s address (is it in a commercial area? Can you see the company’s sign? Is there a legitimate storefront or is a mailing center or
- residential address?)
- Monitor your financial ratios.
- An unusual drop in the current ratio may signal check fraud or another internal AP
- A jump in inventory turnover may indicate inventory theft or a kickback scheme
- An unusual increase in total liabilities to total equity, along with an increase in accounts payable, may signal a phony invoicing scheme or other type of AP fraud
- Unusually low margins may result from an increase in cost of goods sold
If you suspect fraud, it’s important to get a third party involved in the resolution right away. Your CPA or another trusted advisor can help you undercover fraud, effectively document the fraud and help you weigh the costs and benefits of litigation.
Written by Sarah Abbott