Accounts payable (AP) fraud is one of those threats that most people inside the four walls of your organization aren’t aware of. However, that doesn’t dampen its severity.
It’s a huge threat that requires a strategic and disciplined management approach. That starts with understanding the different forms of AP fraud:
- Invoice fraud. This is where fraudsters will create fictitious invoices and/or alter legitimate ones to divert certain payments to their accounts. Their goal is to exploit gaps in a company’s invoice verification process. Once they find a company with poor invoice verifications, they’ll continue to target it indefinitely.
- Ghost vendors and shell companies. There’s a form of fraud where perpetrators will set up fake vendors and shell companies to submit fraudulent invoices and collect payments. These are often referred to as “ghost vendors.”
- Unauthorized charges. In some cases, the perpetrator simply manipulates payment details, like bank account numbers, in order to redirect funds into their own accounts. This may happen with perfectly valid invoices, which makes it difficult to spot.
- Employee collusion. You may love your team members and employees, but don’t underestimate or ignore the risk of insider threats. This includes employees or contractors colluding together or conspiring with external fraudsters to manipulate your AP processes.
These are the main types of AP fraud. However, it’s important to understand that there are always innovative methods being created by perpetrators. The key is to remain vigilant and proactive.
Three Ways to Prevent AP Fraud Risk
Once you understand some of the different risks and threats facing your business on this front, it’s important to explore proactive ways to prevent AP fraud from happening in the first place. Here are several suggestions:
1. Better Verification Protocols
Preventing AP fraud starts with establishing robust verification protocols within your organization. These protocols are the frontline defense against fraudulent invoices and payment diversion schemes.
While it might seem overboard, adopting a more streamlined and thorough vendor onboarding process is going to be key to reducing your risk. This process should include background checks, credit checks, and legal documentation to ensure the vendor is, indeed, legitimate. You’ll also want to put processes in place to periodically review your existing vendor relationships.
On a “per-invoice” basis, you should make a habit of always matching invoices to purchase orders to ensure there’s perfect alignment. This is an added step, but it helps confirm that everything is as it should be.
2. Regular Audits
Regular audits are another important component of an AP fraud prevention strategy. These audits serve as a systematic and comprehensive examination of your financial processes, helping you identify anomalies, potential risks, and fraudulent activities.
It’s a good idea to perform both internal and external audits on occasion. An internal audit consists of people within your organization who perform routine checks on your AP processes. Because these audits are done in-house, they’re usually inexpensive and fairly easy to carry out. They also remind your team that they’re being held accountable. External audits also play a role. By bringing an independent third-party into the picture, you get a fresh perspective and unique vantage point. It also cuts down on the risk of employee collusion and other insider threats, as they’re harder to cover up when an external party is performing the audit.
3. Leverage Technology
Don’t underestimate the role that technology plays in preventing AP fraud. Various technologies exist to help you automate processes, enhance accuracy, and proactively identify and neutralize activities that may indicate fraud.
One example is Microsoft Dynamics 365, which is a powerful ERP system that a lot of businesses use. And when paired with a robust security solution, like Medius, it can really set you up for success.
“Dynamics 365’s real-time monitoring system automatically scans every transaction for anomalies,” Medius explains. “Whether it’s an unusually large payment, a duplicate invoice, or a payment made outside regular business hours, the system flags it. Instant notifications mean that businesses can act immediately, stopping potential fraud in its tracks.”
These technologies exist to help keep you ahead of the latest fraud trends. The key is to know they exist and to leverage them fully.
Set Your Business Up for Success
There’s no method that’s 100 percent foolproof. You have to remain vigilant and proactive in order to identify and thwart attempts at undermining your business. But with the right approach, you can put your company in a position to be as successful as possible moving forward.