3 Types of Invoice Fraud and How to Prevent it

Accounts payable is the most common source of fraud in a small business. Both internal accountants and external hackers target weak AP processes to steal money since it is the business process most vulnerable to fraud.  

Whether you perform accounts payable internally or use an AP services firm, knowing the types of AP fraud will help you detect and prevent theft.

What are some of the common fraud attempts in accounts payable?

The three most common types of AP fraud are:

  1. Fake vendors and invoices fraud
  2. Check fraud
  3. Expense reimbursement fraud

Fake vendor invoice fraud

Fake vendor fraud can be perpetrated by your internal accountant or an external con artist. Internal accountants create a fake vendor in your AP system who provides some type of product or service that is never actually received. 

Fake vendor invoice fraud varies in sophistication. In the most basic form, fake vendor payments are sent to a relative of the employee committing fraud. More advanced invoice fraud includes setting up shell companies, opening bank accounts in their name, and sending payments to those bank accounts. 

Fake vendor fraud can also be perpetrated by external con artists by submitting invoices to the AP department for products or services never delivered. Small businesses that lack simple bill approval processes or with new AP staff will often pay these invoices without questioning them. 

Check fraud

There are a variety of check frauds that can occur – check fraud often occurs under the guise of “lost checks,” “duplicated checks,” or creating duplicate or fake invoices for real vendors. In each circumstance, some unusual check activity results in an extra vendor payment being “lost” and embezzled by an AP employee.

Eliminating paper checks is the best solution to prevent check fraud. Modern AP software eliminates paper checks and replaces them with electronic payments with robust audit logs. Fraud detection is much easier once paper checks have been eliminated.

Expense reimbursement fraud

Executives, managers, and salespeople often perpetrate expense reimbursement fraud – where expense reports are exaggerated or falsified for individual profit. The result is employee invoices with overstated reimbursement amounts.

Small amounts of rounding is inevitable with expense reimbursements (that’s why many companies adopt a per deim policy.) However, blatant or recurring expense reimbursement fraud can cost a company tens of thousands of dollars.

Expenses reports should be paired with receipts and approved by managers. Electronic expense tracking systems like Divvy and Expensify make this easy, but often the weakest link is the business owner or executive who “doesn’t have time to review receipts.”

Steps to prevent AP fraud

Accounts payable fraud can be prevented and detected by following AP best practices, including:

Segregation of duties

Avoid giving any one person too much power by separating duties. Forcing scammers to contend with suspicious coworkers and immutable audit trails is very effective invoice fraud prevention. Best practice is to have three different AP roles – a data entry clerk, an approver, and a payor.

Staff education on types of fraud

The best fraud prevention is education. You and your team are more likely to detect fraud once you know they types of fraud and their symptoms.

Routine internal audits of fraud prevention processes

The weakest link in an strong AP process is failure to follow procedures. Routine audits hold everyone accountable to their role and discourage negligence. Having an outside group perform your process audits is best, whether that be a different department in your company or an outsourced AP services firm. 

Evaluate your AP Processes

If you would like to have your AP process audited, contact us for a free consultation.

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