Small Business Accounts Payable Fraud
Fraud is not an easy task to commit. Money cannot leave the company without strict controls. Shopping is the most crucial area to look for fraud. Procurement fraud in its many forms leads as a source of losses, as paying vendors is one of the main ways that money leaves a business. Kickbacks, bogus invoices, bogus vendors, and conflicts of interest involving company and vendor employees or officials are some of the most common purchasing scams.
Although many of the experts say that “internal control helps prevent fraud”, if this is the ultimate truth, large companies that have strict internal controls would never have been victims of occupational fraud.
Fraud is an entirely different game and to combat this creature, along with strengthening internal controls, it is also necessary to assess the risk of fraud in perpetuity. Proactive management of risk areas is no easy task. External auditors can do this, but small and medium-sized companies cannot afford the costs of a comprehensive audit.
According to the PriceWaterHouseCoopers Economic Crime Survey, smaller organizations detected a much higher proportion of economic crime through auditing processes than through other means. Given the respective size of the organizations, this will most likely be done through external auditors, a troubling finding that suggests that smaller companies may be paying too little attention to developing effective controls and alternative checks and balances. Over-reliance on a single annual review to root out problems may be playing into the hands of the fraudster.
Perpetual evaluation is the key to avoiding fraud everywhere. In addition to Microsoft Access, Excel, ACL, and Idea, $ afeGuard can be a useful tool for spotting common red flags for accounts payable fraud.
One of the most common accounts payable fraud schemes is the shell company scheme. Employed scammers often create fictitious vendors to commit billing scheme fraud. The fictitious supplier could be a shell company that does not offer products or services. Or it could be a transfer company, where the fraudster becomes an unnecessary middleman between the legitimate company and the victim company to make an unauthorized profit from the payments to the legitimate provider.
By installing fictitious vendors in accounting information systems, scammers often leave clues that allow auditors to detect their crimes.
Common red flags include the following:
o The home address of an employee matches the address of a supplier.
o The initials of an employee match the name of a supplier.
o A provider’s address contains a P.O. Box.
o Provider data is missing
Perpetual evaluations carried out with the help of software will easily detect the above fraudulent schemes. However, there are a few more things that virtually every business owner should know to reduce fraud losses.
Standards for supplier selection: Not all organizations can choose the right supplier for the right material. Especially small and medium-sized organizations do not formalize their procedures and lose substantial revenue due to incorrect selection of providers. A business must be uniform in the way it purchases its goods and services. This includes setting and enforcing competitive bidding rules, seeking quotes from genuine suppliers, and rules specifying what employees can accept from suppliers in the form of gifts and gratuities. What is considered bribery is a point of legal importance in the event of a process.
Maintain good internal controls – Maintain files on all suppliers, including information from trusted sources on suppliers’ business activities and reputations. Keep rating vendors based on various predefined criteria. Keep a record of the supplier’s address. How many times did the communication address change, if the PO box number is mentioned in the provider’s address?
Concurrent Analysis of Vendor Payments – Payments must be analyzed as they are made. The smaller the gap between the payment date and the scan date, the more likely it is that exceptions will be detected. If the exceptions are caught in real time, it will be easier to recover the fraud proceeds, if any. Perpetual analysis with tools like $ afeguard helps business owners check vendors and suspicious vendor activity. Benford analysis is one of the methods to analyze payments digitally using statistical theorems. The frequency of the particular number that occurs rather than its probability determines the payment patterns that can result in fraud.
Require disclosure by employees and vendors. Employees responsible for purchasing and all senior executives should be required annually to complete conflict of interest statements and disclose interests in related parties. Suppliers should be asked to disclose their ownership and financial status. This helps deter employees who attempt to collude with suppliers to mislead employers. There is still a moral tension when the employee makes the disclosures.
Verify disclosures and reputations. Confirm that the company exists as a legal entity. Check out potential sister corporations, companies that are affiliated with the provider through common ownership, or officers. Also search for multiple businesses at one address or phone number, which can easily be done with a “criss-cross” city directory or similar resource. If two providers share an address, there is the possibility of bid rigging.
Small businesses often don’t have enough control over suppliers, they don’t treat control as an organic process, so they aren’t always looking at the flow of transactions and who the suppliers are and the procedures they follow when using suppliers. We still see a lack of due diligence on suppliers and also a lack of a risk-based approach in which the company is constantly observing situations, testing weaknesses, analyzing suppliers and identifying suspicious suppliers.
Some of the testing techniques include looking for multiple providers in one location or phone number, or providers using box numbers or post offices. Consecutive or duplicate payments to a provider also deserve special scrutiny, as those payments may be attempts to bypass authorization limits.
If someone asks you what is in the name? Then there is a chance that you will get caught on the left foot. The names of the providers tell you everything. The simple analysis of the names of the providers can generate red flags. One should always be suspicious of companies with names that do not tell you what they do, such as ABC Management Co. or company names that are slightly different from well-known companies such as IBM Chemicals or Cesco Inc. Generally these names are created with the intention of facilitating the payments. Names that appear to be sales or marketing brokers or companies should also be considered, because they are soft services.
One final caveat about vendor payments is benchmarking. The company’s purchases should continue to be compared with other companies on a regular basis. This is a test that no software can do for the business. You need to keep asking if similar business organizations require these services. If other companies pay the same rate for the same services?
Analyzing the accounting databases along these lines is not the guarantee that your business is fraud-free, but it will definitely help provide a peaceful night’s sleep.
