Tips for detecting fraud in your accounts payable
by Kylene Casanova
Fraud in accounts payable (AP) can continue for an average of two years before being detected, according to a report by the ACFE (Association of Certified Fraud Examiners). The typical company loses 5 per cent of revenues in a given year as a result of fraud, with the average fraud costing $2.7 million – although only 23.2 per cent of cases causing losses of $1 million or more and the median loss in the ACFE's study was $150,000.
In a blog published by Accounting Web Jeramy Kaiman, of the staffing agency Accounting Principals, picks out several ways to detect accounts payable (AP) fraud. They are:
The human element
Kaiman cites KPMG's 2016 Global Profiles of the Fraudster report, which looks at the typical profiles of fraudsters, from the insider to the lone wolf or fraudsters who work in packs. The report notes that fraud is a growing problem and weak internal controls are a factor in more than half of all fraud cases. And contrary to the stereotype of the lone, white-collar, typically-male worker initiating fraudulent transactions from his desktop, the report underlines that fraud is almost twice as likely to be perpetrated in groups as in solitude. It says: “Larger groups (say, five or more people) tend to do more harm financially than single fraudsters or small groups.”
Vendor due diligence
KPMG's report points out that conducting third-party verifications and reviews is an important way of combatting AP fraud. It says: “Groups of fraudsters very often comprise people both inside and outside the company. Sixty-one percent of colluders are either not employees of the company, or are employees who work with people who aren’t.” This includes former employees and highlights the need for third-party due diligence, including for vendors and customers.
Kaiman suggests the following steps to checking and verifying vendors:
- conduct regular vendor reviews;
- approve every new vendor before they are included in your accounting system;
- manually verify vendors you don't recognise by calling them and checking online to verify the number is connected to the business in question;
- check vendor addresses that match employee home addresses;
- look out for cheques sent to local PO boxes or residential addresses; verify vendors with the same contact information and new vendors with names that resemble current vendors.
Transaction analysis tools
Kaiman advises using data mining tools to analyse the volumes, sizes, frequency, destination and timings, such as transactions out of business hours. He also suggests looking out for cheques issued for rounded amounts (without cents or pence).
CTMFile take: The ACFE's report also found that companies that have reporting hotlines are much more likely to detect fraud through tip-offs compared to companies without hotlines (47.3 per cent compared to 28.2 per cent, respectively).
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