Guard against accounts payable fraud

PROTECTPrevent

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THINK ABOUT ALL OF THE MONEY THAT FLOWS OUT OF A BUSINESS. FROM VENDORS AND SUPPLIERS TO UTILITIES, RENT AND LOAN PAYMENTS, EVERY DOLLAR THAT A COMPANY SPENDS GOES THROUGH ACCOUNTS PAYABLE (AP). FOR THAT REASON, AP IS PARTICULARLY VULNERABLE TO FRAUD FROM INSIDE AND OUTSIDE THE BUSINESS.

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ACFE 2016 Report to the Nations on Occupational Fraud and Abuse

CHECK TAMPERING ALONE RESULTS IN A MEDIAN LOSS OF $158,000 PER BUSINESS.

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AP fraud involves a wide range of check tampering cons, billing schemes, and travel & expense (T&E) reimbursement scams. The Association of Certified Fraud Examiners (ACFE) provides the following definitions for these forms of AP fraud.

CHECK TAMPERING SCHEME“A fraudulent disbursement scheme in which a person steals his or her employer’s funds by intercepting, forging, or altering a check or electronic payment drawn on one of the organization’s bank accounts.”

BILLING SCHEME“A fraudulent disbursement scheme in which a person causes his or her employer to issue a payment

by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases.”

EXPENSE REIMBURSEMENT SCHEME“A fraudulent disbursement scheme in which an employee makes a claim for reimbursement of fictitious or inflated business expenses.”

Every other year, the ACFE performs a global fraud study and publishes the results in its Report to the Nations on Occupational Fraud and Abuse. In the 2016 report, check tampering, billing, and fraudulent expense reimbursements accounted for nearly half of all reported fraud cases. Check tampering alone results in a median loss of $158,000 per business.

ACCORDING TO J.P. MORGAN CHASE, IN 2015, BUSINESSES SPENT AN ESTIMATED $186B IN T&E EXPENSES. OF THAT, $1B CAN BE ATTRIBUTED TO FRAUD.

However, it is important to note that this report covers only instances of fraud perpetrated from within an organization by employees. AP fraud can also be committed by external sources, such as suppliers, vendors, and customers.

WHAT IS ACCOUNTS PAYABLE FRAUD?

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THE NATURE AND PURPOSE OF A FRAUD RISK ASSESSMENT CAN BE EASILY UNDERSTOOD WITH A SIMPLE ACRONYM THAT IS ALSO SOUND ADVICE:

PROS FOCUS.

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All organizations seeking to prevent, deter, detect, and correct fraud, AP or otherwise, should first conduct a fraud risk assessment. Mary Breslin, a Senior Fellow in Internal and Operational Audit with CPE Interactive, emphasized the importance of the fraud risk assessment in her 2014 training Conducting Fraud Risk Assessments Successfully. The nature and purpose of a fraud risk assessment can be easily understood with a simple acronym that is also sound advice: PROS FOCUS.

Proactive: fraud risk assessments attempt to stop fraud before it happens.

It identifies risk schemes and respective internal controls that can both prevent and detect said schemes.

Ongoing: an initial fraud risk assessment is not enough. Periodic risk assessments should be conducted. The process never truly ends.

Systematic: the tone at the top should cultivate an anti-fraud corporate culture with a zero tolerance policy for fraud of any kind. Written policies and specific techniques should be carefully adopted and clearly communicated to everyone within an organization.

Foundational: it’s an integral component of an entity’s Enterprise Risk Management (ERM) process and their overall anti-fraud framework.

Ombudsman mentality: an ombudsman is an officially independent and neutral party within an organization tasked

with providing a safe-haven for whistleblowers. Members of organizations in managerial positions often are the common perpetrators of fraud. Given this fact, organizations should provide official channels for reporting malfeasance without fear of reprisal or reprimand.

Customizable: risk assessments can be tailored for specific industries and organizations.

Unconfined: a proper risk assessment should be aware that fraud can be committed from without (e.g. suppliers, vendors, customers) as well as from within.

Scientific art: a fraud risk assessment is part art, part science.

THE NECESSITY OF THE FRAUD RISK ASSESSMENT

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5 WAYS TO DETECT ACCOUNTS PAYABLE FRAUDMOST ACCOUNTS PAYABLE FRAUD OCCURS WHEN A PERPETRATOR HIDES ILLEGITIMATE TRANSACTIONS AMONG THOUSANDS OF LEGITIMATE ONES. THIS TYPE OF FRAUD IS DIFFICULT TO DETECT UNLESS YOU KNOW WHERE TO LOOK.

CONSIDER THE HUMAN ELEMENT. Employees who are disgruntled over pay or other issues are more likely to feel “justified” in stealing from their employer. Employees who seem to be living beyond their means or having financial problems may also be motivated to commit fraud. Looking for red flags? Reckless behavior on the part of the CFO or controller, such as extensive personal debt, a lavish lifestyle or frequent trips to destinations such as Las Vegas could signal a problem.

1 VERIFY YOUR VENDORS. Regular vendor reviews are essential to detecting AP fraud. Software can make it easier to detect and harder to mask, but verifying vendors is as simple as picking up the phone. Call to make sure they answer the phone, check to see whether their number is listed and search online to verify the number is connected to the business in question.

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TEST TRANSACTIONS. Periodically review AP transactions for anything unusual. Require additional review or a second signature on checks over a certain threshold amount. Be suspicious of checks written just below this threshold or checks issued for round amounts without cents. Look for indicators of fraudulent transactions, such as payments going to cities that have nothing to do with the business; unusual transactions occurring during the night or off-hours; or dramatic increases in the average size or frequency of payments to a certain vendor.

3 MONITOR FINANCIAL RATIOS. Keep an eye on the business’ financial ratios. O’Laughlin says an unusual drop in the current ratio (current assets divided by current liabilities), may signal check fraud or another internal AP scam.

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REVIEW WRITE-OFFS. Write-offs are a common mark of AP fraud. Carefully review all accounts that are written off or reduced on a monthly basis and require the approval of at least two people for all write-offs.

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IN KPMG’S 2016 REPORT, GLOBAL PROFILES OF THE FRAUDSTER, THE TYPICAL FRAUD PERPETRATOR IS:

Between the ages of 36 and 55

Predominantly male

Holds an executive or director level

position

Employed by the company for at least six years

Described as autocratic and

friendly

Esteemed in the organization

Likely to have colluded with

others

Motivated by personal gain

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By far, the best way to handle AP fraud is prevention. Most AP fraud is not a one-time event. According to the ACFE’s report, check tampering, billing, and expense reimbursement schemes last an average of two years before being detected.

Lawrence Chester, owner of CFO Simplified in Chicago, Illinois, offers several tips for preventing AP fraud before it occurs:

• Divide responsibilities. Make sure that the person doing AP isn’t the same person writing the checks and doing the bank reconciliation.

• Review the list of checks being issued before they are issued. Match that with the list of checks that were issued. Keep that list to make sure that next week the numbers are continuous.

• Approve every new vendor before they are entered into your accounting system. Verify any vendors you don’t recognize. Who are they and what are you buying from them?

• Use high-security checks with anti-fraud technology.

• Use high-security tamper-proof toner in your printer.

• Implement positive pay at your bank. In a positive pay system, the business sends a list of checks it has written to the bank. When checks are presented for payment, a teller compares information on the check to the list. If there is a discrepancy, the bank will hold the check and notify the company.

• Don’t allow the use of debit cards in your company.

Unfortunately, accounts payable fraud is a risk that comes with doing business, but knowing the signs and putting internal controls in place can help businesses detect and limit their financial loss. The sooner indicators of fraud are available, the greater the chance that losses can be recovered and control weaknesses can be addressed. If you suspect fraud or worry that your internal controls are not strong enough to detect and prevent AP fraud, get a third party involved in the resolution right away. Timely detection can reduce losses for an organization and serve as a deterrent when employees know continuous monitoring is taking place.

Looking for Accounting & Finance talent? Interested in employment opportunities? Contact your local Accounting Principals office today.

PREVENTING ACCOUNTS PAYABLE FRAUD

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ALEXANDER REICHMANN, CEOiTestCash alexreichmann@gmail.com https://twitter.com/iTestCash

DALE GOLDBERG, CPADale Tax Service daletaxservice@aol.com https://twitter.com/dalesgoldberg

EILEEN O’LAUGHLINSoftware Advice https://twitter.com/EOLoughlin5

KENNETH ASHE, CPAPrudential Financial Ken.ashe@prudential.com https://www.linkedin.com/in/kenashe

LAWRENCE CHESTERCFO Simplified https://www.linkedin.com/in/lchester

KPMG

Global profiles of the fraudster: Technology enables and weak controls fuel the fraud, May 2016 https://assets.kpmg.com/content/dam/kpmg/pdf/2016/05/profiles-of-the-fraudster.pdf

Report to the Nations on Occupational Fraud and Abuse, 2016. Accessed February 2, 2017 from Association of Certified Fraud Examiners. https://s3-us-west-2.amazonaws.com/acfepublic/2016-report-to-the-nations.pdf

SOURCES

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