Companies, irrespective of their size, confront substantial financial risks stemming from payment scams and the emergence of inventive fraud techniques in their accounts payable operations. In 2020, 74% of businesses were affected by fraud, resulting in a loss of over $3.6 billion (Gartner, 2021). The detection and prevention of vendor fraud and payment scams within the Accounts Payable department are challenging, especially for large companies with numerous suppliers.
Accounts payable automation can help in detecting and preventing fraudulent activities in AP departments while ensuring compliance with regulations. By leveraging AP automation, organizations can strengthen spend management, enhance fraud detection capabilities, and establish robust control measures to safeguard their financial resources and reputation.
What are the common types of accounts payable fraud?
Accounts payable fraud involves illicit or fraudulent B2B payments, leading to financial losses for the company or victims involved. Fraudulent practices within organizations include invoice manipulation, expense reimbursement fraud, and quid pro quo (bribery) fraud, among others.
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Invoice manipulation fraud involves the creation of false invoices for a shell company that pretends to be a legitimate supplier.
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Expense reimbursement fraud involves the use of false expense claims to receive expense reimbursements that an employee should not receive.
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Quid pro quo or bribery occurs when a supplier works with an employee to deprive the company of money by inflating supplier invoices and sharing the profit.
External fraud can take various forms, such as money transfer fraud, phishing attacks, identity theft, and credential abuse.
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Money transfer frauds involve scammers pretending to be a trusted source, like a vendor or contact, to ask for direct wire transfers to their account.
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Phishing attacks are typically done through email or other means and aim to trick the recipient into thinking the message is from a reputable source.
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Identity theft involves cybercriminals stealing personal information and using it under false pretence.
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Credential abuse is when an external party has access to an account through theft or misuse of credentials.
The digital transformation of business operations has led to a parallel digitalization of fraudulent activities. The reasons for the increase in digital fraud are varied and complex, but some of the main contributing factors include:
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Fraudsters have easy access to sensitive data due to the large scale and industrialization of the process for obtaining personal information and login credentials.
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The widespread availability of resources enables automated attacks. From YouTube tutorials to online marketplaces, these resources allow fraudsters to easily carry out sophisticated attacks with minimal effort.
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Mule networks play a significant role in facilitating various criminal activities, including accounts payable fraud and illegal trades. These networks involve criminals recruiting unsuspecting individuals to transfer money or goods obtained through fraud. During the pandemic, mule activity surged, with organized crime rings using mule accounts to steal billions of dollars from government relief programs.
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The rise of faster payments has also contributed to the systematization of fraud. With more than 40 countries enabling faster payment rails (nth Exception, 2020), it has become easier for fraudsters to move money quickly and cover their tracks.
Accounts payable automation for fraud detection and prevention
The implementation of anti-fraud controls has been linked to reduced losses due to fraudulent activities (Association of Certified Fraud Examiners, 2022). AP automation is an effective anti-fraud control tool that can identify and prevent such activities.
Advanced AP automation tools often use Intelligent Document Processing (IDP) solutions to detect and prevent fraud in multiple ways. These tools include image classification models to identify fake documents by detecting unique patterns and features in genuine documents. Additionally, models can be trained to validate the data entered into forms by cross-referencing it with other sources of information to detect inconsistencies and potential fraud. Signature verification is another way to authenticate documents, by comparing signatures on documents such as loan applications and ID cards to known genuine signatures. These tools can also segment documents into individual fields and extract specific information such as account numbers, names, and addresses, which can be compared with the original document to detect tampering or fraud.
AP automation can help identify and prevent fraud in accounts payable operations in the following ways:
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Minimizing errors from manual handling: AP discrepancies do not always indicate fraudulent activities, as honest mistakes can often resemble fraudulent transactions until thoroughly investigated by a skilled accountant. Many organizations rely heavily on processes that require repetitive and mundane tasks of their employees, such as manual data entry, which can lead to inadvertent errors due to fatigue or typographical errors. According to Forbes Technology Council (Mike Galarza, 2016), 47% of accounting professionals consider manual tasks, such as data entry, to be a significant challenge. By automating invoice data entry, generating spreadsheets and databases for internal auditing, and automating electronic payments, companies can reduce human error and mitigate the risk of fraudulent activities and manual errors. Additionally, creating databases with financial information can facilitate future accounts payable forecasting.
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Maintaining an audit trail: AP automation tools typically maintain an audit trail that aids in identifying potential anomalies and their source. Through the collection and analysis of pertinent data, the AP automation system can flag suspicious activity and prompt further investigation by accounting professionals. This process can effectively detect specific anomalies that may indicate fraudulent activities, including incomplete invoices, rounded invoice amounts, suspicious login activity, invoices that fall just beneath creator approval limits, and fluctuations in pricing from specific vendors.
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Controlled access to AP data: Authorized access to data is vital in preventing fraud, much like using a safe to store precious items. With AP automation, accounting professionals can establish distinct roles within the system, guaranteeing that only authorized personnel can modify invoices and other important financial documents. Automatically imposing transaction limits for individual users can also act as a deterrent against fraud. Revoking privileges can decrease the potential for user error and minimize the risk of fraudulent activities.
Specific applications of AP automation in fraud prevention
Many advanced AP automation tools use AI techniques such as machine learning and two, three, and four-way matching, that can help in accurately capturing and validating invoice data, ensuring that payments are made only to legitimate vendors for actual goods and services. Additionally, automatic approval routing and customizable reporting tools can help detect and prevent instances of expense report fraud and vendor collusion fraud, saving businesses time and money while protecting against financial losses.
Some specific areas in which AP automation can help mitigate fraud include:
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Invoice Fraud: ML-powered OCR data capture ensures accurate recording of essential details such as vendor information, item quantities, and costs. Such tools validate data accuracy by cross-checking vendor information and comparing invoice details with purchase orders and goods receipts. Automated approval routing strengthens billing processes by moving invoices through pre-determined approval workflows based on invoice amounts.
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Payment Fraud: By integrating vendor payments into the procure-to-pay process, AP solutions provide a seamless and secure payment experience that minimizes the risk of payment fraud. Additionally, advanced security features such as SSL/TLS data encryption, identity and access management controls, and adherence standards are incorporated into AP automation software to ensure data safety and compliance with industry standards.
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Reimbursement fraud: AP solutions ensure standardized approval workflows, making it hard for fraudulent reimbursement requests to go unnoticed. Process visibility and performance analytics in AP software also provide insights to help businesses detect unusual activity, such as a high volume of expense reports coming from a particular department or employee.
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Quid Pro Quo Fraud: AP systems include vendor activity monitoring to prevent collusion. Exception reporting tools can flag unauthorized kickbacks by identifying suspicious activities in AP workflows. Customizable reporting tools and dashboard features allow stakeholders to quickly identify unusual activities and perform internal audits to prevent collusion. By leveraging these features, businesses can stay vigilant and identify potentially fraudulent activities before they escalate.
Takeaway
Fraud prevention is a critical challenge for businesses, and accounts payable automation tools offer a valuable solution for detecting and preventing fraudulent activities. Given the increasingly sophisticated tactics employed by organized crime rings and mule networks, it is important to adopt a layered approach that includes a range of defensive measures such as invoice matching, supplier records verification and payment monitoring. Financial services firms must also continuously monitor transactional activity post-login and facilitate collaboration between fraud and information security teams for optimal protection against fraud. By leveraging a comprehensive and proactive strategy, businesses can stay ahead of the curve and minimize their risk of falling victim to fraud.