Daniel Saraste, the senior vice president of strategy and innovation at cloud-based source-to-pay vendor Medius, writes for PaymentExpert on the role of digital invoices when it comes to elevating payment efficiency.
The rise in digital invoicing and payment has created a whole new level of efficiency, responsiveness and cost-effectiveness for businesses around the globe. Yet, despite these advancements in payables, there has been an alarming overall increase in criminal and fraudulent activity.
According to the 2019 Association of Financial Professionals (AFP) Payments Fraud and Control Survey report, more than 80 percent of financial professionals report that their organisations were targeted by fraudsters in 2018, the largest percentage since the AFP began tracking such activity.
Furthermore, the 2019 B2B Payments Survey Report showed that 44 percent of companies have experienced a B2B payments fraud attack in the past year, with 25 percent of this group suffering a loss. The data highlighted that the source of the majority of these losses was Accounts Payable (AP). In total, 56 percent of all payment fraud attempts that resulted in a loss were related to AP, three times more than any other department.
As the business cash gatekeeper, the AP department is a likely target of fraudulent activity. The threat is two-fold, coming from potential internal and external sources; vendors, rent payments, third-party suppliers and employee travel and expenses must all be monitored closely.
While AP automation has long-been viewed as a means to improve productivity and reduce processing cycle times and costs, today it is increasingly being seen as a critical means to fight fraud. AP automation creates a ‘pane of glass’ into AP operations, allowing everyone from the AP staff to the CFO to get updates in real-time based on the latest data, greatly minimising the chances of fraud going undetected.
Below are six types of fraud and how AP automation can mitigate them:
The Fake Supplier: During the holidays, there is an increase of invoices sent from fake suppliers with names that resemble real companies. Fraudsters hope the overworked AP department simply processes the invoice for payment before anyone notices. With AP automation, no payment executed offline by means of cheque or direct entry into an online bank can take place without first having been approved through a rule-based workflow, where vendor verification processes (such as 3-way match) are enforced by the system.
The Duplicate Invoice/Multi-Entity Fraud: It’s common that multinational buyers receive identical invoices sent to multiple legal entities. With paper-based processes, these are commonly paid, resulting in duplicate payments. AP automation delivers automatic detection of duplicate invoices even across different business units and countries, regardless of how many different enterprise resource planning systems are in use by your various legal entities.
Check Fraud/Payment Fraud: The most common type of payment fraud is check fraud, in which a fraudster steals the paper check in transit and uses a fake identification to clear it. Electronic payments eliminate this type of fraud completely. As well, VCARDS exist only for one payment and one amount so they are far superior in fending off fraud than standard credit cards.
The Acquisition/CFO Fraud: This a very sophisticated and growing type of fraud. A fake email is sent to a member of the finance team that lays out a narrative such as the following: the email contains the history of a back-and-forth between the CEO and the CFO about an acquisition that is about to close and a sum of money that needs to be transferred to an off-shore account. The timeline is all very urgent. With AP automation, no payments are executed based on email. Instead, a standardised payment approval process is in place that ensures legitimacy of any requests for payments.
The Inside Man: A supplier working in collaboration with an AP clerk sends invoices that are processed by the inside AP clerk. Both disappear before the fraud is detected (which usually takes until end-of-month reconciliation). AP automation deters this deleterious activity by enforcing rule-based vendor verification and delegation of authority, a full audit trail, and automatic rules flagging transactions above normal amounts.
The Autocrat: In this scenario, a CEO abuses his authority by paying a close ally’s company or his own personal entity large sums for consulting/strategic services. Rule-based enforcement ensures that even a CEO with unlimited authorisation limit cannot approve such transactions without at least the CFO’s knowledge. A complete audit trail on each transaction shines light on dark recesses of AP operations to reduce the risk of this type of behavior.
Fraud is hidden among thousands of typical business transactions, making detecting it like looking for a needle in a haystack. That is why it is essential that management invest in secure digital systems to make accounting fraud difficult or impossible.
To support AP’s role as the company cash watchdog, AP automation allows everyone from the AP staff to the CFO to get updates in real-time based on the latest data, greatly minimising the chances of fraud going undetected. This makes it easier to know what to look for and to prevent these activities before the business’ cash is impacted.
With automation, management can set up automatic checks of any new vendors being set up within the system, creating a gateway to verify vendors from potential billing schemes. This can and should always be performed by someone other than the party responsible for setting up the vendors initially.
While AP fraud is a somewhat unavoidable part of doing business, AP automation gives companies a sense of security that they have the tools to protect their company’s hard earned cash and give their employees the ability to act as security liaisons against fraud and theft.