Could just one email cost your company a huge amount of precious operating dollars? It’s happened before.
Nearly 40% of small business owners and senior managers say they would agree to pay accountancy fees to a new bank account without ever checking to confirm the new instructions.
In addition to billing schemes, there are several other common AP frauds that dozens of communications companies fall victim to every year. This includes ILEC’s, CLEC’s, Cellular providers, Internet providers and even CATV operations. Could your company be next?
What You Need to Know
Despite the best efforts of independent telecom executives, general manager’s, controllers, and IT personnel, AP fraud continues to happen right under their noses. This is partially due to the large amount of money in the pipeline due to spectrum auctions, fiber plant projects and tower construction. However, normal communications company operating funds are a target as well.
AP fraud is particularly damaging to businesses due to the scope and amount of money that can be involved. Unlike other types of fraud, such as returns fraud or workers’ compensation fraud, AP fraud can be notoriously difficult to detect, particularly if businesses are not using the newest methods of AP fraud protection. In large and even mid-sized communications companies, the symptoms of AP fraud often get lost in bureaucratic red tape.
However, AP fraud is not just a problem for the big guys. Companies of any size can fall victim. In fact, fraudsters often target small companies hoping that the lack of resources rather than the bureaucratic chaos will allow their tactics to prevail. According to one study, half of all small communications businesses are at risk of AP fraud. In many cases, the employees and staff are conned into making what they think are legitimate payments right into the fraudster’s hands. In other cases, the employees themselves are behind the fraud.
A recent report from the Association of Certified Fraud Examiners found that all businesses in this country lost a total of $7 billion in 2018 due to fraud. The median loss per business across all industries was $130,000 per case, and 22% of fraud cases resulted in losses of $1 million or more. If your company is not prepared to detect and prevent AP fraud, you could be losing many thousands of dollars without even realizing it.
The Various Types of Accounts Payable Fraud
Accounts payable fraud impacts a fair number of communications companies both large and small every year. This is due to several factors, including how easy fraud is under traditional AP processes and increased sophistication on the part of fraudsters. In most cases, AP fraud is perpetrated right under the noses of an unsuspecting business and, in many cases, with their unwitting cooperation.
What types of fraud should your business be on the lookout for? Read on.
Billing Schemes
These types of schemes are often perpetrated by employees (or with their knowledge) and can vary in sophistication. For example, an employee might generate a fake invoice, then ‘pay’ the invoice for services or products that were never delivered.
Or an AP person might double pay for an invoice by writing and mailing two checks. Before the second check arrives, AP calls the vendor and says they accidentally cut two checks, and asks them to send one back to a specified address or office location to a specific person in AP. That specific person in AP then goes to the bank and creates an account in the vendors name and deposits the check and converts to cash. Since this AP person is an authorized signer, writes themselves a check or wire the money to their personal bank account.
Check Fraud
A recent study found that more than three quarters of all businesses impacted by AP fraud were victims of check-related fraud. Check fraud might include adjusting the amount a check is made out for, changing the payee, or writing checks for personal expenses from a business account.
ACH Fraud
ACH fraud occurs when someone (often employees of the business or hackers) gain access to funds as they pass through an automated clearing house used to process electronic fund transfers. The employee or fraudster may gain access to files through a keylogger or other means. Once the fraudster has access to files, they may engage in Vendor Impersonation Fraud (VIF). This occurs when a fraudster edits a current vendor profile to send legitimate payments to their personal account.
Expense Reimbursement Fraud
Expense-related frauds can be notoriously difficult to uncover and often last years. These types of frauds can occur when an employee makes purchases on a personal card and submits an expense report, overstates expenses, purposefully submits duplicate reports, or creates fictitious expenses for items never purchased. While the amounts may be small to start, they can quickly add up over time if the fraud is not uncovered.
Another type of expense fraud can occur when an employee makes a purchase on their personal card and receives payment from their employer. Then returns the item and receives a refund. Sometimes this happens out of good faith and the employee simply forgets. This is why a lot of businesses prefer to use p-card or corporate credit cards so they can receive the refund.
Kickback Schemes
Kickback schemes can be one of the most damaging types of fraud, due to the help of an insider and the circumvention of protocols. These schemes occur when an outside party offers an employee money to sway business decisions, such as vendor selection. As a result, critical business decisions are made based on who can line the pockets of one of your own, rather than what is best for your customers. It can also lead to other types of fraud, such as billing schemes, down the line.
How to Prevent & Detect AP Fraud
The major challenge of AP fraud is that it is notoriously difficult to detect without structural changes to business processes. While changing policies and implementing new safeguards may be frustrating and time-consuming, protecting the future of your company and your employees is worth the time. Here are three strategies for managing the risk to your company from AP fraud.
Understand Benford’s Law
Benford’s Law is a principle that outlines the frequency at which all numbers are used in a set of natural numbers. It states, for example, that the number 9 will appear as the first digit in a set of naturally occurring numbers less than 5% of the time.
The Advantage of Automation & Machine Learning
In most cases, fraud occurs because the overwhelming day-to-day details of running a communications business make noticing errors and patterns incredibly challenging. When an employee is processing many dozens (or even hundreds) of payments a month, for example, they often do not have time to look for trends or double-check changes.
AP automation tools can help businesses improve the AP process and prevent fraud by flagging suspicious changes. They do not miss the details, and they do not make human errors. There are numerous vendors out there that can help automate the AP process and centralize communications so that fraud is much easier to detect.
One such vendor uses a machine learning system to look for duplicate invoices, track vendor changes, and flag changes or trends that look suspicious. Using such a system allows your company to keep an eye on the details that could leave you susceptible to AP fraud. Remember, the goal is to prevent the fraud, not recover from it later.
Stay Updated on New Frauds & Fraud Prevention Processes
As technological solutions creep into every part of our lives, fraudsters have more and more tools at their disposal. Some cons include forged paperwork, hacking, and the use of keystroke loggers that whisk away passwords and account information without you even realizing what is happening. Your accounting manager and/or accounting employees should stay up to date with the newest strategies and fraud prevention processes so you can build processes to protect your company before you fall victim to the newest fraud strategies.
Final Thoughts
Most communications companies, particularly smaller businesses, assume they are safe from fraud due to their relatively low profits. However, small businesses lose almost twice as much per scheme, with a median loss of $200,000 per case.
All businesses need to pay attention to the rise in AP fraud and implementing processes to protect themselves. Businesses large and small are being hit; could your company be next? In this day of more employees working from home than ever it is all the more important to manage this risk with effective internal procedures that include various checks and balances, an appropriate suite of insurance coverages and a strong employee vetting and education process. This is called good risk management.
