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How to Safeguard AP Operations Against Invoice Fraud
The rapidly growing invoice fraud risk poses a significant threat to businesses. Having the potential to cost hundreds of thousands of dollars in losses, it can decimate business-to-business relationships and cause irreparable damage to an organization’s good reputation.
It’s imperative to protect your organization against invoice fraud, also known as AP fraud, as a result. If you don’t safeguard it, you run the risk of shelling out thousands of fraudsters. What’s more, as regulators clamp down on non-compliance with anti-money laundering regulations, you also risk large fines that could cost you more than the fraud itself.
Understanding Invoice Fraud
What is Accounts Payable Fraud?
Accounts payable (AP) fraud is any kind of fraudulent activity that specifically targets a company’s accounts payable department. This, of course, being the department that’s responsible for paying suppliers means that AP fraud can result in significant financial losses.
AP fraud is commonly committed by external threat actors and vendors but it can also take place internally by rogue employees—or by both internal and external persons working in tandem.
Encompassing various deceptive practices including fake invoices, overbilling, and phantom vendors, AP fraud tactics are designed to funnel money out of a company under the radar. It’s therefore critical to know what AP fraud looks like so you can safeguard against and take action should you suspect it.
- Phantom Vendors: Dishonest employees can create fake vendors and then submit false invoices which are subsequently approved for payment.
- Fake Invoices: Fraudsters can make false invoices using a legitimate vendor’s information and then submit it for payment.
- Overbilling: Dishonest vendors can intentionally overcharge companies for goods or services by inflating quantities, prices, or both.
- Duplicate Invoices: Dishonest vendors can submit multiple invoices for the same goods or services, resulting in duplicate payments being made.
- Payment Diversion: Fraudsters intercept legitimate payments intended for vendors and redirect them to their own accounts through various means.
Why Are AP Processes Vulnerable to Invoice Fraud?
Your AP function is busy. It involves a lot of people dealing with lots of invoices that are usually constrained by time. Things can and do slip through the cracks, and fraudsters seek to take advantage of this.
Some of the most common AP vulnerabilities include:
- Lack of Automation: Legacy, paper-based processes create opportunities for fraudsters to take advantage of. Manual data entry and paper invoices are easier to manipulate or forge, enabling fraudsters to introduce fraudulent documents into the system.
- Weak Internal Controls: Frail or non-existent internal controls, such as little segregation of duties or insufficient workflows, open the door to fraudsters who look for these things when deciding which businesses to target.
- Poor Vendor Management: Inefficient vendor onboarding and management processes can make it difficult to verify the legitimacy of vendors. This can allow fraudulent vendors to be added to the company’s records.
- Transaction Volume: AP processes often involve a high volume of transactions, making it challenging to thoroughly review every invoice and payment request. This can create opportunities for fraudulent invoices to go unnoticed.
- Internal Leaks: Threat actors might be able to access sensitive AP data which can then be used to commit fraud. This is more common where there’s a lack of duty segregation, for example, where the same person is responsible for both approving invoices and remitting payments.
Ways to Prevent Invoice Fraud in Accounts Payable
Provide Employee Training
Educating and training your workforce on AP fraud, for instance, by familiarizing employees with common fraud schemes, puts them in a position to spot the warning signs and help you fight back. Furthermore, fostering an anti-fraud culture helps to promote vigilance and ethical behavior, creating an environment where employees feel compelled to act.
Encourage Better Vendor Management
AP departments should look to implement vendor management best practices, such as ensuring that thorough due diligence on vendors takes place during the onboarding stage to verify their legitimacy.
Organizations should regularly audit their vendors by periodically reviewing accounts and invoices, actively seeking out irregularities and discrepancies. It’s also a good idea to encourage the use of vendor portals for invoice submission and communication, thereby ensuring a secure and traceable channel for all transactions.
Implement Internal Controls
Having internal controls is an effective way to fight back against AP fraud, the most important of which is to segregate duties so that individuals have distinct responsibilities within AP operations.
Nobody’s role should be, “a bit of everything.” Ensure that tasks of invoice approval, payment processing, and reconciliation are distributed across multiple individuals or teams. Additionally, establish clear approval workflows for invoices, ensuring that proper authorization procedures are followed.
Use AP Automation Software
One of the most effective ways to prevent AP fraud is to introduce robust automation to your AP flows.
Tools like Cevinio help enterprises streamline their invoicing processes and handle the complexities of multiple ERPs by safeguarding against fraud through various features, including:
- Electronic Records and Audit Trails: With Cevinio, you can maintain a digital trail of all invoice-related activities. This serves as a valuable resource during internal and external audits, making it easier to trace fraud.
- Secure Document Storage: Storing invoices and related documents in a secure digital repository helps safeguard against physical document theft or tampering.
- Workflow Management: With Cevinio, you can streamline the approval process for invoices. We ensure that invoices go through the appropriate channels for approval, reducing the chances of unauthorized payments.
- Automatic Accounting and Compliance Checks: Our proprietary algorithms can automatically detect discrepancies in invoice figures, duplicate invoices, or unexpected changes in vendor payment information, alerting your team to potential fraud.
- Data Analytics: We offer a full suite of data analytics functionality, enabling you to monitor invoice transactions and vendor activities, giving you full control over potential fraud indicators.
- Integration with Other Systems: integrate Cevinio AP automation seamlessly with your existing accounting and ERP systems. This ensures data consistency and minimizes the risk of data manipulation when transferring information between systems.
- Streamlined and Accurate Data Entry: automatically extract and enter data from invoices into our systems. This reduces the risk of errors and eliminates the need for manual data entry.
AP automation software not only protects against fraud but also brings several benefits to organizations. These include reduced costs, decreased processing time, minimized manual tasks, improved vendor relationships, and the ability to better leverage data analytics.
At Cevinio, we help companies seeking streamlined global operations, monitoring and control tools, and best-in-class AI and ML solutions. If you’re ready to lead your organization’s adoption of AP automation, get in touch today!