To a criminal exploring ways to steal from a business, the accounts payable department often looks like the equivalent of a poorly guarded cashbox. Any time money exits a business, it flows through accounts payable. At most companies, that makes this function the most vulnerable and attractive opportunity for thieves both inside and outside the business.
The frauds involving accounts payable are numerous, but perhaps the most common occurs when accounts payable employees write checks to fictitious suppliers, then have them mailed to a post office box to be picked up and cashed later. If detected, this crime is simple to prosecute, because it leaves a paper trail that points unerringly to the perpetrator.
It’s not always easy to see the signs, however, unless you know where to look. Fortunately, accountants have developed effective ways to not only spot accounts payable fraud, but to also reduce the chances of it occurring. Here are the main ways to detect accounts payable fraud in any business.
Reconcile your accounts payable entries and your company checkbook monthly. This single step will make it difficult for employees to write checks to themselves.
Look for invoice oddities. If invoices aren’t sequentially numbered, if there are gaps or skips, or two or more invoices have the same number, it may indicate that a false invoice has been created. If an examination of paper invoices reveals use of correction fluid, photocopied invoices, or invoices that appear to have been scanned and printed on a computer, investigate further.
Check out check amounts. If you see checks for amounts that are just below the threshold requiring additional review, a second signature, or another security measure, be suspicious. In other words, if your company’s threshold for review is $2,500, a check for $2,499.99 should set alarm bells ringing. Also look for rounded amounts that don’t include any cents.
Vet your vendors. Cross-check addresses of vendors against employee home addresses. A match is a bad sign. Also look for checks sent to local post office boxes, addresses that seem to have more than one vendor, and vendor names that resemble well-known vendors.
Smile and dial. Look at the phone numbers on vendor accounts. No phone, an unlisted phone, a home phone, multiple vendors with the same phone, and phone numbers that are always picked up by answering machines should make your spider sense tingle.
Trace transactions. Be alert for unusual transactions, such as those taking place in faraway cities, occurring in the middle of the night, or involving amounts that are unusually large or unusually small.
Be aware of the human factor. Unhappy employees in accounts payable are almost a prerequisite for accounts payable fraud. Keep an eye on morale there, and ensure that pay, benefits, and other issues are addressed so that these employees don’t have reason to complain. Avoid excessive turnover here, and try not to hire temporary employees for these jobs.
Technology is an invaluable aide for sifting through your accounts payable entries. If your company processes a large volume of transactions through accounts payable, it’s almost a necessity. Even if you don’t have all that many records to check, you can use accounting, database, and spreadsheet software to go through your accounts payable quickly and accurately, looking for signs of trouble. For instance, you can merge the files for your employees and your vendors to scan for matching addresses, phone numbers, bank account numbers, and other identifiers.