How to Prevent Invoice Frauds
September 26, 2021
|
8 min
ACCOUNTS-PAYABLE
FRAUD-DETECTION
MACHINE-LEARNING
ARTIFICIAL-INTELLIGENCE
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A typical business can lose up to 5% of its gains to Accounts Payable frauds each year. This 5% results in a median loss of $104,000 for a company with more than 100+ employees, as per the Association of Certified Fraud Examiners (ACFE). As per the same report, businesses globally lost a whopping $7 billion in 2018 to frauds. In this article, we discuss some common AP frauds and steps to take to prevent such frauds.

AP Frauds - Financial setbacks for businesses

Accounts payable fraud is a deception that aims at a company’s accounts payable department, which handles payments of suppliers and other vendors.

AP fraud can be committed internally by employees, externally by merchants, or even by a third party intending to acquire access to the company’s accounts payable systems.

AP Frauds - Types and Perpetrators 

Here are the five most common types of AP expense frauds as well as the bodies responsible for the atrocities committed -

1. Billing schemes 

Billing schemes are perpetrated by employees using their knowledge of the Accounts Payable of the company. For instance, an employee might generate a duplicate invoice and have it paid for services or products that never got delivered.

An AP employee might double pay for an invoice by signing and mailing two checks. Before the arrival of the second check, AP informs the vendor that they accidentally cut two checks and requests them to send one back to a particular address.

That specific individual in AP then visits the bank and creates an account in the vendors' name, deposits the check, and converts it to cash. This individual, an authorized signer, writes themselves a check or wires the funds to their personal bank account.

2. Check fraud

A recent study discovered that over three-quarters of all businesses impacted by AP fraud were victims of check-related fraud. The typical perpetrators of this fraud are either Individuals, Small Fraud Rings, or Large Fraud Rings.

The perpetrators create fake receipts and typically adjust the amount of the check, change the recipient, or sign duplicate receipts for expense reports and add personal expenditures from a business account.

3. ACH fraud

ACH payments fraud occurs when business employees or hackers gain access to finances while passing through an automated clearing house set up to process electronic fund transfers. The fraudster gains access to files via a keylogger or other means.

Once the perpetrator receives access to files, they might engage in Vendor Impersonation Fraud (VIF), which occurs when a fraudster tweaks a current vendor profile to divert legitimate payments to their personal bank account.

4. Expense reimbursement fraud

Expense-related frauds occur when an employee conducts purchases on a personal card. The employee then proposes an expense report, exaggerates expenses, intentionally submits duplicate reports, or sets up false expenditures for items never bought. 

Another expense fraud type is when an employee carries out a purchase on their personal card, collects payment from their employer, returns the item, and obtains a refund.

5. Kickback schemes

Kickback schemes are one of the most damaging types of fraud because these scams involve the help of an insider and the bypassing of protocols.

Such schemes get executed when a third party offers an employee cash to influence business agreements that might include vendor selection. Kickback schemes also result in other frauds, such as billing schemes.

6. Document fraud 

Document fraud in AP is when an employee or a third-party forges an invoice and acquires funds from its own company in its personal bank account by -

  • Altering the variable information
  • Removing pages or crucial information
  • Adding original pages from another document
  • Falsely stamping or applying fake watermarks
  • Digitally altering or adding false information to an image of an authentic document

Tips to prevent AP frauds

After going through the most common types of AP frauds, here are some practices that you must implement to counter a potential AP fraud aimed at your business -

1. Conduct background checks on employees

The background check must be the final step undertaken by employers to ensure a wise hiring decision and safeguard the employer from several potential risks and frauds that might degrade the company's resources.

Employers can spot exaggerated academic and employment records or critical data not revealed by the candidate, such as criminal felonies.

Employment screening also exposes your prospective employee’s income tax liens, past litigations, bankruptcy (if any), as well as other business dealings. 

2. Review policy of reimbursement

An employee expense reimbursement policy is the process followed by an employee to get paid back by their recruiter when incurring business-related expenses. 

It is imperative that you plug in all loopholes in your reimbursement policy to steer clear of frauds. Here are some tips to follow -

  1. Demand original documentation to either be submitted along with the reports or maintained for a specific period for audit purposes.
  2. Establish a formal review process where the department manager or equivalent reviews employees’ reports. 
  3. Question expenditures that look exorbitant or strange. Extravagant expenses must always get accounted for in a business.
  4. Have all disbursements prepared formally through either AP or payroll. Cash must not get handed over to employees easily.
  5. Use corporate charge cards for better control. With corporate cards, businesses can track each card individually and ensure that settlements get made against them.
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3. Constantly Review KPIs, Red Flags, and Alerts

It is imperative that you constantly review KPIs because they keep objectives at the forefront of decision-making.

Here are 13 fraud KPIs that can help you stay ahead of possible fraud issues -

  1. Order Approval Rates
  2. Manual Review Rates
  3. Chargeback Rates
  4. Average Time for Order Reviews
  5. Checkout Abandonment Rates
  6. Automatic Decline Rates
  7. Total Decline Rates
  8. False Decline Rates
  9. Average Confidence Rating of Order Decisions
  10. Cost Per Analysis
  11. Account and Value Detection Rates
  12. Fraud to Sales Ratio
  13. ROI of Fraud Tool

Analyze transactions to watch out for potential signs of fraud. Check for red flags such as gaps in invoice numbers, round numbers, strange transactions, significant frequencies, or amounts.

Consider conducting regular vendor audits to corroborate the legitimacy of all vendors. Verify each vendor by telephone, online, or physically in-person, especially any questionable ones.

4. Educate employees about External AP Frauds

Educate employees on risks posed by phishing attempts and ways to identify them. To identify and counter fraud, employees must first be familiar with what to look for and then devise ways to prevent it.

Teach employees to be vigilant about -

  • Check fraud - Writing checks without authorization, or using fake checks.
  • Identity theft - An outside body steals an employee's personal or financial credentials without their consent.
  • Invoicing for undelivered products or services issued by an external body.
  • Invoicing for over-utilization of services, i.e., for services that were performed but not needed or requested by the company.
5. Automate AP Processes for Fraud Detection

Automating the AP process department protects against fraud by creating audit trails, segregating duties, and integrating with procurement systems that establish three-way matching and conformity with purchasing policies.

If the document is shared digitally in either image or scanned pdf format, Docsumo can identify these cases in real-time -

  • Black and White Images
  • Document Cropped
  • Scanned Images
  • Photo of Photo

If any of the above cases get flagged for a document, the document has most likely been tampered with. Such documents then get flagged by Docsumo and queued for review. After looking for above-mentioned conditions, Docsumo proceeds to check the invoice details:-

  • Vendor Details - Docsumo reviews the Name of the vendor, Address, and Tax Id details and alerts if any discrepancies are found.
  • Subtotal & Total Sum Checks - It verifies the sum of line items and ensures that it adds up to the subtotal. Similarly, the sum of subtotals and tax amounts should add up to the total amount. If not, the user is alerted.
  • Duplicate Invoice Numbers- Docsumo immediately raises the red flag if the same invoice number is found for two different invoices
  • 2 way matching - Docsumo matches the order number of the invoice with purchase order and verifies its line item details and total against PO tolerances. If any discrepancy is found, the user is immediately alerted.

Docsumo validates captured information against external APIs or company databases and extracts data regardless of the document type. You can implement pre-trained APIs for common document types that include invoices.

Final Words

Accounts payable fraud involves fraudulent disbursements, with the most common categories being check tampering, billing schemes, and expense reimbursement schemes. 

Perpetrators to these frauds can be third parties, vendors, or even your employees, implying that you must stay vigilant and employ the robust methods mentioned above to safeguard your revenue.

One of the best approaches to ruling out discrepancies and invoice frauds is by automating your AP processes. Docsumo is a reliable document AI software that can corroborate invoices' authenticity, raise red flags for suspicious invoices, cross-checks fields, and variable types, and delivers swift and accurate results.

Written by
Pankaj Tripathi
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How to Prevent Invoice Frauds
ACCOUNTS-PAYABLE
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April 21, 2021
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8 min
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