Preventing Accounts Payable Fraud: Red Flags and Best Practices

Accounts payable (AP) fraud poses a significant financial risk to businesses. According to the Association of Certified Fraud Examiners (ACFE), organizations lose an estimated 5% of their annual revenue to occupational fraud. Without proper detection systems, fraudulent activities can go undetected for an average of 14 months.

Accounts payable fraud falls into two main categories: internal fraud (committed by employees) and external fraud (perpetrated by outside parties such as vendors or cybercriminals). Each presents unique risks requiring tailored prevention strategies.

Internal AP Fraud

1. Billing Schemes – Employees create fake vendors or inflate invoices for undelivered goods or services.

2. Pass-Through Schemes – Employees establish fake vendors, buy goods at market price, then resell them to their employer at inflated prices.

3. Check Tampering – Fraudsters alter payee details or amounts to commit fraud.

4. Expense Reimbursement Fraud – Employees submit false claims, such as duplicate receipts or inflated travel expenses.

5. Duplicate Payments – Paying invoices twice allows fraudsters to divert extra funds.

6. Conflict of Interest – Employees approve payments to vendors with undisclosed personal ties.

7. Kickback Schemes – Employees receive personal benefits (cash, gifts) from vendors in exchange for contracts or inflated invoices.

External AP Fraud

1. Invoice Fraud – Fraudsters submit fake invoices, often impersonating legitimate vendors.

2. Overbilling – Vendors inflate invoice amounts or charge for undelivered services.

3. Ghost Vendors – Fictitious suppliers receive payments for nonexistent goods or services.

4. Business Email Compromise (BEC) – Cybercriminals impersonate executives or vendors via email to request fraudulent payments.

5. ACH Fraud – Hackers alter ACH payment instructions, diverting funds to unauthorized accounts.

6. Phishing and Malware Attacks – Cybercriminals infiltrate financial systems using phishing emails and malicious software.

Best Practices for Preventing AP Fraud

Organizations must implement robust controls to prevent fraud. Here are key strategies:

·         Implement Multi-Layer Approval Processes – Require multiple approvers for high-value payments.

·         Automate Invoice and Payment Matching – Use AI-driven tools to verify vendor details.

·         Conduct Regular Audits – Surprise audits help identify anomalies.

·         Monitor Vendor Relationships – Verify new vendors and watch for conflicts of interest.

·         Enhance Employee Training – Educate employees on fraud detection and prevention.

·         Use Positive Pay for Checks – This bank service verifies checks before clearing payments.

·         Strengthen Cybersecurity Measures – Implement two-factor authentication (2FA) and restrict system access.

The Future of Accounts Payable Fraud Prevention

According to a PYMNTS Intelligence Report, 91% of mid-sized firms plan to expand AP automation to combat fraud. As cybercriminal tactics evolve, leveraging AI and automation will be critical for businesses to stay ahead. Investing in AI-powered fraud detection, strengthening internal controls, and fostering a culture of accountability will significantly reduce the risk of AP fraud and safeguard financial assets.

By integrating AI and human oversight, businesses can proactively detect and prevent AP fraud, ensuring financial stability and long-term success.