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 is a source of loss, as paying suppliers is one of the main ways money leaves a business. Bribery, false invoices, fake vendors, and conflicts of interest involving employees or officials of companies and vendors are some of the most common procurement frauds.
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 workplace fraud.
Fraud is a whole different ballgame and to combat this creature, along with strengthening internal controls, it is also necessary to assess fraud risk on a perpetual basis. Proactively managing risk areas is no easy task. External auditors can do it, but small and medium-sized businesses cannot afford the costs of an extensive audit.
According to the PriceWaterHouseCoopers Economic Crime Survey, smaller organizations detected a much higher proportion of economic crime through audit processes than through other means. Given the respective size of the organizations, this is more likely to be done through external auditors, a worrying 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 checkup to root out problems may be playing into the hands of the scammer.
Perpetual appraisal is the key to avoiding fraud everywhere. In addition to Microsoft Access, Excel, ACLs, and Idea, $afeGuard can be a useful tool for detecting common red flags of accounts payable fraud schemes.
One of the most common accounts payable fraud schemes is the shell company scheme. Employee scammers often set up fictitious vendors to commit billing scheme fraud. The fictitious supplier can be a fictitious company that does not offer products or services. Or it could be a stop-and-go business, where the scammer becomes an unnecessary middleman between the legitimate business and the victim business to make an unauthorized profit on payments to the legitimate vendor.
By establishing fictitious providers in accounting information systems, fraudsters often leave clues that allow auditors to detect their crimes.
Common warning signs include the following:
o An employee’s home address matches a provider’s address.
o An employee’s initials match a provider’s name.
o A provider’s address contains a PO Box.
o Missing supplier data
Perpetual assessments done 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.
Supplier Selection Standards: Not every organization 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 consistent in the way it purchases its goods and services. This includes establishing and enforcing competitive bidding rules, seeking quotes from genuine suppliers, and rules that specify 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 case of processes.
Maintain good internal controls: Keep files on all vendors, including information from trusted sources about vendor business activities and reputations. Continue to rate vendors based on various pre-defined criteria. Keep track of the address of the providers. How many times did the communication address change, if the PO box number is mentioned in the seller’s address?
Concurrent analysis of supplier payments: Payments must be analyzed as they are made. The smaller the gap between the payment date and the analysis date, the greater the chances of exceptions being caught. If exceptions are caught in real time, it will be easier to recover the proceeds of fraud, if any. Perpetual scanning with tools like $safeguard helps business owners verify vendors and suspicious vendor activity. Benford analysis is one of the methods to analyze payments digitally using statistical theorems. The frequency of occurrence of a particular number greater than its probability determines payment patterns that may result in fraud.
Require disclosure by employees and vendors. Purchasing employees and all senior executives must be required annually to complete conflict of interest declarations and disclose related party interests. Vendors must be required to disclose their ownership and financial condition. This helps uncover employees who are trying to collide with vendors to deceive employers. A moral tension remains when the employee gives the disclosures.
Check disclosures and reputations. Confirm that the business exists as a legal entity. Check out potential sister corporations, companies that are affiliated with the provider through common ownership or officers. Also look up multiple businesses at one address or phone number, which can easily be done with a “crisscross” city directory or similar resource. If two suppliers share an address, there is the possibility of bid rigging.
Small businesses often don’t exercise enough control over suppliers, they don’t treat control as an organic process, so they don’t always look at the flow of transactions and who the suppliers are and the procedures they follow when using them. We still see a lack of due diligence on vendors and also a lack of a risk based approach where the company is constantly analyzing situations, testing for weaknesses, analyzing vendors and identifying suspect vendors.
Some of the testing techniques include searching for multiple providers at 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’s in the name? Then there is a chance that you will be caught on the wrong foot. The names of the sellers tell you everything. Just looking at provider names can raise red flags. One should always be suspicious of companies with names that don’t 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. These names are often created with the intent to facilitate payments. Names that appear to be brokerage or sales or marketing firms should also be considered, because those are soft services.
One last word of caution about provider payments is benchmarking. One should keep comparing the company’s purchases with other companies on a regular basis. This is a test that no software can do for the business. One must keep asking if similar business organizations require these services. What if other companies are paying the same fee for the same services?
Analyzing accounting databases along these lines is not a guarantee that your business is fraud-free, but it will definitely help provide a good night’s sleep.
