Automation will reduce risks in Accounts Payable Fraud.

This is a topic that I have blogged about before, but I still believe that the topic is as relevant today as it ever was due to the increase in the numbers of enterprises launching into the world of Supplier Relationship Management and looking at ways to streamline process and reduction of operational costs.

By the elimination of as many Human “Touch Points” in the Accounts payable process and adherence to strict business rules is a critical success factor in the reduction of Accounts payable fraud. In short, the solution to most of today’s current AP fraud risks and processing

Inefficiencies involve the implementation and proper management of automation tools.

A key issue in regard to most forms of AP fraud is that there are so many opportunities open in the manual process for dishonest employees acting either alone or in collusion with dishonest outsiders to defraud a company. Specifically, in a conventional manual AP function, enforcement of business rules is based on after the fact audits, whereas AP automation offers the opportunity to enforce these rules duringthe process.

Taking it a step further, automation of the AP business process eliminates most if not all of the non-value-adding manual activities that consumes time, driving excessive invoice costs and undermines vendor relationships resulting in the loss of discounts.

Here is a short summary of the more common AP fraud types in two categories:

 

EXTERNAL AP FRAUD

 

The most common forms of external AP fraud are those committed by dishonest vendors, by individuals or organized fraudsters posing as vendors. Invoicing schemes are the key “weapon” in the arsenal of fraudulent vendors. Typical schemes are:

• Double billing.  The Dishonest vendor will submit a duplicate invoice a month or two after the initial legitimate one was submitted and subsequently paid. The duplicate invoice will have a different date or a consecutive number, a clear red flag of fraud. This tatic is based on the vendor’s expectation that the organization’s AP processes lack controls to screen for duplicate invoices and that the second fraudulent invoice will therefore be approved and paid without  question.

• Creating False vendors. The basic idea behind most external phony vendor schemes is simple: Create a fictitious company name. Register it with the company, give it a false address  either that of the fraudster,  a friend or relative, or a P.O. Box, using a home PC to create false invoices with all of this vendor information plus a description of the items or service being invoiced. Set up a bank account in the “company’s” name and then wait for the payments to be made. If the victim company has strong internal AP processing controls, the false invoices will be flagged and rejected as fraudulent before they are paid. If not, the fraudster gets the payment and is encouraged by this success, will probably repeat the process using the same or a different vendor name. Unfortunately, many of these frauds go undetected for long periods of time, sometimes up to several years. That’s why AP automation which incorporates optimized preventive controls is such powerful anti fraud solution.

• Delivery of substandard goods at full price. Some of the goods and services an organization orders for completion of projects for clients, for its own operations, or both are ordered from vendors with which the organization has had a longstanding relationship due to good service, quality products, and favorable pricing. Other orders may be made based on competitive bidding. Either way, it’s a risk to assume that every vendor you do business with is completely honest. There is a handfuls that take advantage of weak controls within

procurement or accounts payable processes to deliver products that are below the quality

specified in a contract or purchase order and then invoice the organization for the higher quality

and higher priced goods. The difference in price will go straight into the dishonest vendor’s pocket.

INTERNAL AP FRAUD

 

Unfortunately, statistics show that the majority of fraud against large organizations is committed by their own employees. According to PricewaterhouseCoopers,  61% of all fraud is committed by company employees. Therefore, AP managers and senior managers should be familiar with the more common and costly forms of internal AP fraud.

• Invoicing schemes. The types of invoicing schemes commonly committed by outsiders as described earlier are also a serious threat internally tothe organization. Due to the fact that procurement, AP staff or managers are more conversant with the companies AP processes and procedures and its weaknesses it is easier for them to abuse their payment approval authority to execute these schemes. If an employee is notin a position with the authority to approve phony invoices, the fraudster may try to initiate a collusive scheme with a colleague that does have the authority.

Another fraud to be aware of is employee creation of phony purchase orders (POs) for goods or services the company buys on a regular basis. The only difference is that the “vendor” is a shell company set up by the employee rather than an outside fraudster. Once the PO is successfully falsified maybe with the use of basic home computing equipment the employee simply forges an authorized manager’s signature. The Fraudster will then generate the matching phony invoices for the shell company and gets paid. One of the most common internal forms of phony vendor fraud involves creating a shell company with a name very similar to a legitimate vendor the organization regularly issues payments, but with a different address. Another common form of Invoicing scheme involves employees making unauthorized purchases and diverting the goods. These schemes are often simple to execute if the employee is a professional in a specialized area and the manager approving purchase requests is not familiar with the nature of the goods being ordered.

Potentially the most dangerous employee Invoicing fraud is the called the “straw vendor” scheme. Also known as “pass-through vendor” scheme, these crimes occur when an employee with invoice approval authority sets up a bogus company and orders goods from a legitimate vendor that the company actually requires. Once received and paid for by the dishonest employee, the goods are then sold to the company at inflated prices. The fraudulent invoices are approved by the fraudster. The fraudster may even could even generate bogus refunds or rebates to the straw vendor, which is under the fraudsters control. The latest state-of-the-art AP automation technology eliminates this risk by automatically flagging potentially erroneous or fraudulent invoice information and routing it to an appropriate remediation expert.

• Purchasing card fraud. If the organization uses procurement cards, commonly referred to as p-cards, or corporate credit cards, it is probably not breaking news that these are abused for personal benefit. The key reason that organizations initiate p-card programs is to save money on the cost of processing business related purchases. Because it costs as much to process a $250,000 order as it does a $250 order using the organization’s normal procurement process.

With an automated solution, the human “touch points” involved in invoice processing are minimized, in turn minimizing the opportunity for dishonest employees to falsify invoice data or otherwise manipulate the AP process for personal gain. At the same time, the entire procure to pay process is streamlined, reducing the time to process individual invoices, improving relationships with vendors, and, of course, reducing overall AP processing costs.

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