An inside job: Internal fraud and how to prevent it
When thinking about the subject of fraud, it is easy to imagine the perpetrators as external individuals or groups who attack from a distance, engaging in schemes like phishing scams and identity theft. While this is certainly a threat, the unfortunate truth is that much of the danger comes from bad-faith actors within.
Here are some of the most common forms of internal fraud, and how companies can fortify themselves against them.
Footing the bill
Billing schemes are one of the most common types of AP fraud. They can take several forms. For instance, an employee may set up a shell company and create false invoices. Typically this is done using a fake service company, as it leaves no physical inventory to account for. They can make payments from the company’s account to the illusory company, then pocket the money themselves.
In a pass-through scheme, an employee orders legitimate items that the company requires. They then mark up the prices, create an invoice, approve the payment on behalf of the company, and keep the difference in cost.
Another approach would-be fraudsters may use is to create invoices for inactive suppliers and then create checks to remit payment.
An AP automation solution like Beanworks can help protect you from these types of fraud by allowing you to segment and separate duties in the approval process, ensuring that the person who approves invoices and the one who makes payments are not the same.
It is also important to regularly update your vendor master file, maintain an awareness of what companies are approved, and remove those you have stopped doing business with from the list of approved vendors.
In 2020, the Association of Finance Professionals found that 74% of businesses experienced check fraud in the past year.
Typically, this occurs when an employee forges or steals a physical check. They may also alter the code in the accounting system in an effort to cover their tracks.
It is just one more reason to phase out paper checks and move to an automated and digital payment system. Not only will doing so help better protect a business from attempted fraud, but it will also increase the efficiency of the AP process while reducing costs.
Checking the receipts
Another routine form of internal fraud takes place when employees make illegitimate claims, such as submitting false expenses or overstating their costs. They may also request funds for non-qualifying items.
Organizations worldwide lose 5% of their annual revenue to inaccurate expenses, with reimbursement schemes being one of the easiest for employees to perpetrate.
To prevent this type of activity, it is helpful to have a well-defined reimbursement policy in place. Supervisors should have a detailed knowledge of the companies’ rules relating to expenses. Like invoice and payment approval, it is also important to segregate duties, ensuring that the person who reviews expenses is not the same as the one who distributes the funds.
It is also vital to carry out regular audits of travel and entertainment accounts.
If contracts aren’t closely monitored, they can make it easier for a corrupt vendor and a dishonest employee to cooperate in a “kickback scheme”. By working together, the vendor can overinflate their costs — and once the unsupervised employee has okayed the payment, both parties can split the profit. These can be particularly difficult to detect because they are tied to an approved payment for a legitimate vendor.
Solutions like Beanworks can help prevent these types of incidents by creating multi-level approvals. By setting a dollar threshold, two separate approvers will be responsible for an invoice once it surpasses the agreed amount. For an added level of security, some systems will require both approvers to provide authorization before payment proceeds. It is also beneficial to require audits for high-value invoices.
When an employee agrees to work with a vendor because they are being offered rewards and/or personal gifts — or simply because they have a close friend or family member at the company — this is an obvious conflict of interest.
To help mitigate this, it is best practice to provide a clearly defined code of ethics that employees must contractually sign, detailing policies regarding conflict of interest. It is also helpful to require multiple bids before engaging with a supplier. Doing so provides a paper trail of evidence for why a given vendor was selected. This makes it easier to trace when audits occur, which should be performed with some regularity.
In addition to the various steps outlined above, it can be useful to provide a method for employees to report suspected fraud, such as offering a tipline. It is also important to carry out background checks on all employees, particularly those who will have access to financial processes.
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