According to the Association of Certified Fraud Examiners 2018 Report to the Nations, fraudulent disbursement schemes remain the costliest form of asset misappropriation fraud to threaten small businesses. Although this risk can seem overwhelming, it may be avoidable through taking proactive steps against fraud within your company.
Here are eight tips to help you expose this popular employee fraud scheme:
Rotate Accounts Payable Employees
A fresh set of eyes is a great way to expose unusual patterns in vendor invoices. If your company has more than one accounts payable clerk, each one is likely responsible for the processing of a set group of vendors. Consider rotating these employees across vendor groups to keep their perspective fresh.
Require Mandatory Vacation for Employees
Concealment is the modus operandi of fraud. Requiring employees to take vacation helps remove the opportunity for concealment and exposes unexpected patterns and irregularities. Remember: an employee who is hesitant or unwilling to leave the office may have something to hide. Don’t ignore this important red flag.
You can expose fictitious vendors and conflicts of interest by analyzing employee information alongside the information of approved vendors:
- Compare employee addresses to vendor addresses to identify payments directed to an employee’s home.
- Compare vendor tax identification numbers to employee social security numbers.
- Fuzzy matching can identify vendors and employees that have the same street and city.
Vendor invoices or payments just below a pre-set approval limit is a common method to circumvent approval controls. The analysis of payments or vendor invoices just below the limit can expose transactions that require additional examination. If, for example, your company requires management approval for purchases over $2500, vendor invoices of $2499 should sound an alarm.
When searching for fraud, duplicates are anything but twice as nice. Duplicate invoice numbers and invoice amounts from a single vendor can be an indicator of a disbursement scheme. This can also occur by utilizing duplicate invoice amounts submitted on the same date but under different invoice numbers. Using a data mining software, run a twist on a duplicate test by searching for “Same, Same, Different.” For example: same vendor number, same invoice amount, same invoice date, different invoice number. And don’t forget to search for duplicate vendors and duplicate payments to vendors!
Beware of gaps in pre-numbered business records that should be sequential. Checks written for the payment of vendor invoices are a perfect example. If you identify missing checks, review your accounting system’s audit log and bank statements to ensure the missing checks haven’t cleared the bank.
Irregular or Unusual Transaction Dates
Most business offices operate during a traditional Monday through Friday 9-to-5 schedule. A search that reveals transactions processed on nights, weekends, and holidays deserves an extra look, as an employee could be conducting nefarious activities during non-business hours. Be sure to run a similar search on invoice dates and check dates.
Unexpected changes to the dollar amount and frequency of transactions with a vendor or within a department of your business can be a warning signal for fraudulent activity. Search for and analyze rapid or unusual changes on a monthly and annual basis. This continual evaluation will not only uncover possible fraud, but also alert potential fraudsters that you are vigilant about detecting unusual activity. Additionally, analyzing activity by budget cycle may expose additional patterns.
When combined with the review of supporting documentation, these eight tips can go a long way in uncovering fraud in accounts payable. Remember: fraud detection is best conducted through early and proactive efforts. By putting these tips into action now, you may protect your company from devastating financial and reputational damage in the future.