The Role of AI in Enhancing Accounts Payable Fraud Protection

The threat of fraud in accounts payable (AP) has been a persistent and growing issue for businesses, and it doesn’t appear to be improving. According to the Association for Financial Professionals (AFP), fraud has been on the rise, with 80% of organizations reporting they were victims of payment fraud attacks or attempts in 2023—an increase of 15 percentage points over the previous year.

But why is this problem increasing? 

It’s because fraudsters are becoming more adept at exploiting vulnerabilities, and accounts payable departments are particularly vulnerable. From fake invoices to sophisticated social engineering tactics, the threats are real, ever-evolving, and elusive. 

Fortunately, artificial intelligence (AI) is emerging as a powerful ally in the fight against AP fraud. In this post, we will explore how AI enhances fraud protection in accounts payable, the technology behind it, and what the future of AI looks like in this critical area of business operations.

Fraud Protection in Accounts Payable Using AI

The threat of fraud in AP isn't limited to the most obvious scams like fake invoices. Fraud takes on many forms, and too many times, it slips through the cracks of manual processes and internal controls. Fortunately, AI offers a variety of tools to address these challenges by improving the accuracy, security, and efficiency of AP processes.

One of the main ways AI helps protect against fraud is by reducing human errors—a problem that occurs more readily with manual invoice processing. With its robust technology available through an AP automation soulution like APSmart®, AI can automate invoice data entry, match invoices with purchase orders, and process payments, significantly reducing the chances of these errors occurring. In addition, AI systems can flag discrepancies and anomalies that might otherwise go unnoticed.

AI also plays a critical role in improving compliance within the AP process. Whether it’s ensuring that invoices align with company policies, verifying that payments are made to legitimate suppliers, or maintaining adherence to regulatory requirements, AI is able to automatically check each transaction against predefined rules and raise alerts when potential issues arise. 

Another key advantage of AI in fraud prevention is its ability to optimize approval workflows. AI automates approval routing, so each transaction gets moved electronically to the appropriate personnel for review. Payments are then authorized only after all necessary checks are completed, minimizing the chances of fraud due to a lack of oversight or inefficient workflows.

How AI Works to Enhance Fraud Protection

AI’s effectiveness in fraud detection and prevention comes down to its ability to analyze large amounts of data quickly, recognize patterns, and predict potential threats. Let’s take a closer look behind the scenes at how AI works to protect against fraud in accounts payable.

First of all, data analysis is a fundamental strength of AI. Besides being able to rapidly analyze data, it can identify trends and flag irregularities that might indicate fraudulent activity. For example, if an invoice amount is higher than usual for a particular vendor or if a payment doesn’t align with historical patterns, AI can alert the AP team before the transaction is processed.

Another way AI helps prevent fraud is through detailed pattern recognition. By training machine learning models on historical data, AI systems identify behaviors that are indicative of fraud, such as unusual transaction patterns, inconsistent purchasing behaviors, or deviations from typical user activity. 

To explain pattern recognition more thoroughly, imagine a vendor consistently submitting invoices that fall just under approval thresholds; this activity could be flagged as suspicious. Then, as AI continues to learn from new data, it becomes better at recognizing emerging patterns of fraud, so it becomes an increasingly powerful tool for detecting new tactics as fraudsters deviate in their methods.

AI’s predictive capabilities also play a critical role in fraud prevention. Predictive modeling allows AI systems to use historical data to anticipate future outcomes. In an accounts payable context, AI can predict the likelihood of an invoice being fraudulent based on factors like past payment history, vendor behavior, and other risk indicators. These predictions can be used to flag potentially fraudulent invoices or payments before they are processed, giving businesses a chance to intervene and prevent fraud from occurring. 

Finally, anomaly detection is one of the most advanced techniques AI uses to identify fraud. By establishing a baseline of normal transaction activity, AI can quickly spot anomalies or outliers that could indicate fraud. With anomaly detection, AI can spot when a payment is made to a vendor that hasn’t been paid in a long time, or if a payment amount significantly deviates from past invoices. These anomalies can then be flagged for further review to prevent fraudulent payments from slipping through.

Types of Fraud and Theft Vulnerabilities in Accounts Payable

Accounts payable is often subjected to various types of fraud, some of which can be difficult to detect without the right systems in place. Below are some of the most common fraud risks that businesses face in the AP process.

1). Invoice fraud

One of the most widespread forms of AP fraud, this scheme involves fraudsters submitting fake or altered invoices for goods or services that were never provided. These invoices come from new or existing vendors, and often the fraud is not noticed until after a payment is already made. AI detects this type of fraud by comparing invoices against historical data, vendor information, and payment patterns. 

According to a 2022 Association of Certified Fraud Examiners (ACFE), invoice fraud accounts for 22% of all AP fraud cases, making it a significant risk for businesses.

2). Duplicate payments 

Another common issue in AP operations is duplicate payments, and these occur when an invoice is accidentally paid twice or when a fraudster submits the same invoice multiple times in hopes that one of the payments will slip through unnoticed. AI helps prevent this by cross-checking invoices before payments are authorized. If a match is found between a new invoice and a previously paid one, AI can flag the transaction as a potential duplicate, giving AP teams time to review and resolve the issue before payment is made.

The Institute of Finance and Management (IOFM) reported that 1.5% of an organization’s total outgoing cash flow is from duplicate payments. Of those, an estimated 10-20% of duplicate payments are fraudulant.

3). Phishing, social engineering, and other types of fraud

Cybersecurity attacks that rely on manipulating AP personnel are also significant threats to AP operations. In these incidents, fraudsters often impersonate legitimate vendors or internal employees, attempting to trick AP staff into making fraudulent payments. They may send emails requesting changes to vendor banking details or attempt to gain access to sensitive account information. 

To detect these schemes, AI analyzes communication patterns, identifies suspicious requests, and flags them for review. AI can also be programmed to recognize when vendor banking details change unexpectedly, giving staff time to investigate before any payments are processed. 

Proofpoint’s 2024 State of the Phish Report found that in 2023, In 2023, 71% of organizations experienced at least one successful phishing attack.

4). Expense manipulation

This type of fraud occurs when employees or vendors inflate expenses or submit fictitious charges for reimbursement. Thankfully, AI systems can track spending patterns and compare individual transactions against company-wide trends, so if an expense claim deviates from the norm, AI can flag it for further review. Additionally, AI can be used to enforce company policies by ensuring that only authorized expenses are reimbursed.

An Association of Certified Fraud Examiners’ (ACFE) report revealed that expense fraud accounts for about 5% of occupational fraud cases worldwide, making it the fourth most common type of occupational fraud in the US and Canada.

The Future of AI in Accounts Payable Fraud Protection

Looking ahead, the role of AI in accounts payable is poised to continue growing and integrating new technologies. Beyond the fraud detection and prevention capabilities already discussed, AI will continue to evolve and offer even more advanced solutions for businesses.

One of the most exciting possibilities to think about is the move toward autonomous payments. In the future, AI may be capable of processing and approving vendor payments on its own—eliminating the need for human intervention. Besides reducing fraud potential caused by human error or oversight, it will help streamline the entire AP process.

The integration of AI with blockchain technology could also enhance the security of accounts payable systems since blockchain’s decentralized ledger system offers an immutable record of all transactions that fraudsters cannot alter or manipulate. AI could also be used to analyze this data for suspicious activity, combining the strengths of both technologies to create a virtually fraud-proof accounts payable system.

Fraud Protection with Reliable AI-Based AP Automation

Fraud in accounts payable is a serious concern for businesses, but the AI available in accounting automation solutions is rapidly becoming a crucial tool in preventing and detecting fraud. 

By reducing human errors, improving compliance, and leveraging powerful data analysis and pattern recognition capabilities, AI helps safeguard businesses against a wide range of fraud schemes. And as AI technology continues to evolve—it promises even greater benefits—from autonomous payments to enhanced security through blockchain integration.

If you want to protect your business from AP fraud and improve the efficiency of your accounts payable processes, contact CloudX today to learn more about how our AI-powered AP atuomation solutions help secure your financial operations and prevent fraud before it happens.