CloudX Blog

Can AP Automation Technology Really Decrease Fraud Risk?

Posted by Chris Cosgrove

Apr 15, 2013 3:22:00 PM

How to get the bad guys perpetrating AP Automation fraud!

Ever seen this kind of an affair in an AP organization?

 

One of the primary challenges that every Accounts Payable process leader has to come to terms with is the reality of payment related fraud.  Unfortunately, in most situations, it involves some level of complicity between internal employees and external cronies.  Worse yet, in many situations the  fraud scheme occurs over a period of time during which it is not quickly detected and in that period of time the damages can be extensive.  To add insult to inury, it’s a rarity that the funds lost actually get recovered, as most absconded dollars get spent funding lavish lifestyles and other wasteful ways.

 

So the question is how can Accounts Payable automation technology do anything to hedge the exposure to fraud risks?

 

3 Ways AP Automation can help address the issue:

1.  Flag Exceptions  - We discuss this in greater detail in this blog post here, but suffice it so say that some AP fraud schemes are simpler than others while others are decidedly more complex.  With that said, any strange changes to vendor master file information, repetitive payments, excessive dollar amounts around a period of time can all be indicators of a fraud program in motion.  With that said, you can leverage a variety of triggers to kick off escalations and workflows to get actionable data into Supervisory hands.  Now…if you’re problem is from a Supervisory level…that definitely complicates things.

       

    2.  Display Dynamic Reporting – Not to be discounted, but the ability to pull data and supporting documents faster is also a boon for curbing fraud in your organization.  When you consider that the act of pulling together supplier payment data is an time and space consuming task when done in a manual setting, the transformation to an electronic process is about as different from communicating on stone tablets to today’s electronic tablets.  Because of this, and the underlying foundation of using indexed metadata to drive business intelligence, you can quickly assemble reporting to investigate potential frauds much more efficiently than digging out boxes and folders and files (OH MY!).

    3.  Enable Better Analysis – This ties in directly to the above points, but by flagging exceptions as they occur and then providing a faster and easier way to pull supporting information, ie. through Accounts Payable software (document management technology etc.) you can foster better analysis.  If we’re honest, no system can prevent fraud 100% of the time. Precisely because people involved in the system are most likely the ones that are perpetrating fraud, it’s entirely possible that they’ll enact workarounds to continue the deception.  So, it may not be a bad idea to use the time recouped from AP process automation improvements to implement more standardized, regimented internal audit cycles as a means to safeguard the organization.  Alternatively, it’s also not a bad idea to engage specialized firms in recovery audits for this process.  While audits are never exactly priority on the fun scale, they definitely make sense to identify gaps, loopholes, and issues in the Accounts Payable process, and can serve as valuable tools in fighting fraud in your organization.

     

    So in summary, AP automation tools, can empower Finance leaders to get better visibility and process controls in place, and in turn expedite processing while escalating exceptions for review, but there will always be a need to synthesize analysis and investigation to serve as a sort of checks and balances to an area that could otherwise be exploited.

     

    What are some ways that you have seen fraud addressed in your AP environment?  We’d love to hear, so please post a comment below!

     

    If you’re interested in learning more about vendor portal technology and how it defies the time space continuum or how by leveraging Accounts Payable best practices you actually can increase your vertical jump by 6” guaranteed, or if you want to identify what risks in your AP process are more dangerous than an angry sasquatch click below!

    Or for the smarty pants that don’t understand the references above…it’s this little thing called humor…maybe you’ve heard of it…?

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    Topics: Accounts Payable Process, AP Process, Accounts Payable Automation, Improve Accounts Payable, accounts payable system, accounts payable software, Invoice Processing, ap automation, accounts payable fraud

    10 Ways An Automated AP System Can Help You Prevent Fraud – Part 2

    Posted by Chris Cosgrove

    Oct 17, 2012 12:34:00 PM

    So in our previous post, we saw that major AP fraud incidents still occur on a fairly frequent basis.

    More local to our CT home here at CloudX, a local woman was recently implicated in a fraud scheme in the city/town of Shelton, CT.  Sharon Scanlon is currently under criminal investigation at City Hall for allegedly siphoning off over $300,000 from city coffers over a three year period.  Scanlon had access to vendor payment, payroll, and grant systems and the investigation is on-going.

    With that said, we’d like to delve back into ways by which an intelligent, automated AP system can identify and help prevent these types of issues for you.

     

    1. Shipments & Payments to PO Boxes

    po box

    When recurring shipments and payments are made to PO Box addresses, it may be an indicator that there’s something nefarious under the covers.  Some businesses do have legitimately used PO Box addresses, however any time this becomes a new or modified address in the system it should be monitored for accuracy and exposure to fraud.  An automated AP system can assist in identifying these data fields and alert supervisory staff to changes within the address field of a vendor system.

    2.  Expedited/Preferential Payment to a Certain Vendor

    rush

    Let’s face it…we all like some people just a little more than others.  That’s fine in everyday life, but the way that plays out in AP can manifest through preferential or expedited payment to certain accounts.  In the case of pursuing invoices with discount terms, we’re completely in favor of expediting payments to capture profit opportunities.  However, unless there is a compelling business reason, like discounts involved, there could be a reason that the invoices are getting paid preferentially.  In some cases, certain payments are expedited through the system to facilitate unlawful transactions and continue a fraudulent scheme.  With automated AP however, you can inspect and detect payment cycles to your vendors and understand in greater detail what their end to end processing looks like from a cycle time perspective to be alerted to fluctuations.

    3.  Vendor Cross Coverage

    cross cover

    This is more of a physical best practice, whereby you randomly assign invoices to different processors in the organization so no one vendor gets specific AP processor coverage.  Think of it as a block and tackle technique where you swap certain players out on different plays.  Some may disagree with this process and we’ve seen organizations that have structured their AP staff in a regimented format, whereby they assign vendors to certain individual processors, but  by having alternating or random processors within an AP department, you may be able to uncover errant payment and invoice processing patterns.  This can be facilitated by an automated AP system in the sense that invoices can be assigned to various processors, especially on the Non-PO side of the house.  Most PO-invoices, if the data is captured correctly, will flow in a straight-through processing manner.

    4.  Payments within a % of Approval Threshold

    spedometer limit

    If there is collusion between AP processor and supervisory or management staff, there will be opportunities to exploit the approval thresholds set as part of each businesses unique financial approval rules.  In many instances employees will run up false invoices to a dollar amount that nears the threshold of the supervisor manager involved.  Detection of these types of fraud activities can be made possible through an automated AP system with solid reporting capabilities by auditing the number of payments within a defined percentage deviation from the approval threshold.  You can then stack rank the results of that list automatically to see which invoices/payments are popping up just under the radar, so to speak.  It could be nothing…but it could be something too.

    5.  Above Average Payments Per Vendor

    above average

    Similar to our previous point about the frequency at which a vendor is receiving payment, fluctuations in the actual amount of payment can be an obvious indicator of seedy activity.  If for instance, you have a vendor that is typically paid a recurring or stable dollar amount, say $2500, every month, and then a sudden adjustment to $7500 a month or a one time adjustment to $45,000 per month, could be indicative of manipulation and fraud and would be worthwhile to investigate.  Again, an automated AP system that captures invoice amounts can present the historical trend and actual dollar amounts back to supervisory, management, and executive staff to provide real time insight to fraud scenarios.

     

    We hope that you found these points relevant to building a good foundation for fraud prevention in your AP organization. 

    We welcome your questions and feedback about what’s been effective in preventing and thwarting fraud in your environments.

    To learn more about how to build a killer AP system with automated invoice processing, electronic workflow, and robust dashboarding capabilities, click here:

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    For more information on CloudX, visit our growing Resource Library here:

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    Topics: Accounts Payable Process, AP Process, AP Process, Improve Accounts Payable, ap system, accounts payable system, ap services, accounts payable fraud, ap fraud

    10 Ways An Automated AP System Can Help You Prevent Fraud – Part 1

    Posted by Chris Cosgrove

    Oct 15, 2012 11:39:00 AM

    Go To Jail - Accounts Payable Fraud

     

     

     

     

     

     

     

     

     

     

     

    Dealing with Accounts Payable fraud is no new feat for AP managers and financial executives.  In recent years there have been several notable scandals within enterprise level organizations prompting Federal leadership to enact regulations promoting tighter fiscal compliance standards within public companies, namely, the Sarbanes-Oxley act of 2002.  However, many AP fraud incidents often go without much media attention as the embezzled funds tend to be lesser amounts in smaller businesses.   This is largely an economies of scale issue with any amount stolen being morally reprehensible in addition to being a financial burden to any business and an unwanted headache.  The larger the wake of the fraud, the more notoriety it receives and vice versa.

    It should come as no surprise then that when Anita Collins was convicted for Grand Larceny in New York City recently for having stolen over $1,000,000 from the Archdiocese of New York, that the case and sentencing garnered much attention from major media outlets including the Wall Street Journal and the New York Times.

    Another situation in New York City at Columbia University involved four conspirators who have been convicted for stealing over $5,000,000 of payments.  In this situation, another corrupt AP clerk made payments intended for a hospital vendor to false accounts with assistance from his scheming cronies.

    In both of these instances, all of the parties involved are now facing serious jail terms as they should based upon their actions and convictions.

    With that said, here are five ways that fraud can be detected and prevented by deploying a state of the art AP automation solution with invoice imaging, intelligent capture, and automated workflow.

    1. Duplicate Payments

    duplicate

     

     

     

     

     

     

     

     

     

     

     

    One of the key ways that AP fraud is committed is by way of duplicate payments.  Payments of actual duplicate amounts are paid to vendors or suppliers and in some instances to false suppliers.  Another way this can occur is through a multiple of X times the invoice amount, in the case of a $225.25 invoice, a payment of $450.50, is an effective double payment, and can be audited against in comparison to purchase orders and receiving documents.

    In either example, with automated intelligent capture of invoice documents, and especially PO/receiving documents, you can perform math checks on these items to validate consistency in payment and billing amounts.  In the event of mismatch between these supply chain documents, escalation to an AP supervisor or manager can be made for inquiry and approval.

    2.  Abnormal Invoice Volume

    abnormal

    Many vendors have a predictable invoice flow from a monthly quantity of invoice perspective.  For instance of a vendor is on a bi-weekly supply and billing program, and suddenly payments start to flow out in greater volume, it could be identified as a trigger that there is aberration.  An automated system that is linked to payment data can identify this and segment based upon this view and reference against historical trends to identify aberrations to invoice volumes by vendor.

    3.  PO & Receipt Signing

    Purchase Order & Receipt Signing - Headed for a crash

    Unbelievably, several mid-market organizations that we have consulted with have had poor controls in place, whereby employees who were responsible for processing invoices for payment also had shared receiving responsibilities or receiving coverage when the primary receiving employee was out.  This is an obvious area for a red-flag with potential for fraud to occur.  By employing invoice (and potentially receiving document) intelligent capture, you can again facilitate improvement to the matching process, thereby mitigating risk.  However, if you have a person physically performing these functions, be forewarned that you’re setting yourself up for a crash.

    4.  Cancelled/Returned Checks

    point of no return

    Another common way that AP fraud is committed is by way of Cancelled & Returned checks.  These types of checks are a natural occurrence in any AP environment, though they can also be exploited by corrupt AP staff to create opportunities for theft.  In some instances, employees who receive the checks back into the organization will resend the checks to suspect addresses where either they or a conspirator can obtain the check and cash or deposit it.  Or they can add themselves as an alternate person on the ‘Pay To’ line thereby setting themselves up to be benefit illicitly from the scheme.

    With an automated AP system in place, and especially an automated payment component, you can curb these types of activities.  Many organizations are now pursuing P-card and ACH payment systems to reduce their dependence on physical check printing, with the added benefit of fraud deterrence.

     

    5.  Vendor - Employee Cross-Check

    cross check

    Cross checking between the addresses and phone numbers that exist in your Vendor Master file and in your personnel records is a simple and wise way to detect potential fraud scenarios.  If you find that there is alignment between these fields in both databases, then there may be a likelihood that there is unlawful activity occurring within your AP organization and should be monitored and investigated more rigorously.

    This functionality can be inbuilt as a reporting tool within an automated AP system as a means to performing internal audits at either scheduled or random times.

    We’ll continue this discussion later this week with Part 2 covering the remaining 5 points to Preventing Fraud with an automated AP system.

    For more information on CloudX click here: f68a5c32-8edb-41e2-9e1c-fac7483dd2d0

     

    To learn how to rapidly transform your AP system click here:

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    Topics: Accounts Payable Process, AP Process, Accounts Payable Automation, ap system, accounts payable system, Accounts Payable Solutions, ap services, accounts payable fraud, ap fraud

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