Using AP Automation for Fraud Prevention

Fraud continues to cost American businesses millions of dollars every year. The Association of Certified Fraud Examiners, or ACFE, prepared a detailed report in 2012 as well as a corresponding infographic in 2016 to detail the devastating effects of fraud on global businesses. According to the ACFE infographic, the average organization loses 5 percent of its total revenue to fraud.

Even worse, the ACFE analyzed 2,410 occupational fraud cases whose combined losses totaled more than $6.3 billion. The organization identified the three most common types of fraud:

1. Asset misappropriation
2. Corruption
3. Financial statement fraud

Of these, financial statement fraud can lead to the most significant losses.

Accounts payable, or AP, automation could help prevent fraud, no matter its source. In fact, the ACFE report showed that victim organizations without anti-fraud controls suffered twice the losses of those with anti-fraud measures in place.

While AP fraud represents a genuine threat to businesses, AP automation might offer a reasonable solution. Writing for AccountingWeb, Circulus Vice President of Marketing Wes Wilkins suggests that AP automation can aid fraud prevention in several ways, including audit trail creation. According to Wilkins, the right data collection and analysis tools can help businesses identify potential anomalies and trace them back to their source.

Wilkins notes that AP automation can issue red flags that encourage accountants to dig deeper into the data. He suggests looking for specific anomalies that could indicate fraud, such as:

• Incomplete invoices
• Invoices that are rounded to the nearest dollar
• Suspicious logins that occur after hours or during lunch periods
• Invoices that fall just beneath approval limits for the creator
• Changes in pricing among specific vendors

While Wilkins concedes that businesses could look for these red flags in paper ledgers, automated AP systems can alert you to problems before anyone notices them.

In his AccountingWeb article, Wes Wilkins states that AP anomalies do not always trace back to fraud. An honest mistake might look similar to an instance of fraud until a trained accountant digs deeper into the problem. A Deloitte white paper lists several best practices related to AP automation that could help detect fraud as well as human error.

Specifically, Deloitte mentions that many companies rely too much on processes that demand repetitive, menial tasks of human workers, such as data entry. When the human mind focuses for too long on such tasks, it can make mistakes out of sheer fatigue or a casual slip of the finger.

A few practices that could benefit from automation might include:

• Automatically filling in information related to invoice amounts and payable parties
• Generating spreadsheets and databases for internal review and auditing
• Building databases with financial information that can help forecast future accounts payable
• Generating electronic checks or automating electronic payments to vendors

Deloitte recommends an AP automation system that creates a centralized, paperless environment that establishes rules for accounts payable and establishes clear management workflows. According to Deloitte, conducting regular reviews and maintaining strict AP standards can prevent not only fraud but also manual errors.

The American Academy of Family Physicians (AAFP) publishes a fraud prevention checklist that can help AP departments across all industries improve their internal controls. The AAFP recommends creating unique passwords and usernames for every staff member who has access to the AP system, then tracking those workers’ activities.

In his AccountingWeb article, Wes Wilkins echoes this advice, stating that access control helps fight fraud. He uses the example of locking doors and windows in a physical building. Access control ensures that only personnel with authorization can make changes to invoices and other documents in the system.

According to Wilkins, AP automation allows accounting professionals to create separate roles within the system. For instance, one person might assume responsibility for data accuracy and completeness, while another takes over duties related to invoice approvals, and a third actually sends out payments when they are due.

A segmented strategy might prevent internal fraud by allowing accounting professionals to watch over one another. While cooperative fraud does happen, according to the ACFE’s research, it usually involves much higher dollar amounts, and might, therefore, prove more visible to management. If accounting leaders, such as those with a master’s degree in accounting, pay careful attention, employee groups might struggle to find ways to commit AP fraud.

Wilkins also recommends setting limits for individual transactions. In other words, an accounting professional might need to obtain management approval for invoices over a certain threshold, such as $3,000. Managers can then look for invoices that fall just under the approval limit, which Wilkins identifies as a red flag for internal fraud.

Additionally, revoking privileges can help deter fraud. A terminated employee, for instance, might retain access to the system if management does not disable his or her credentials. Automating this process reduces the potential for user error.

Some businesses may be cautious about upgrading to AP automation because they fear the potential costs. However, in an article for Forbes, Entryless CEO Mike Galarza asserts that automation software has become increasingly accessible even to small businesses. If accounting professionals can obtain C-level buy in, they might gain the support necessary to switch from paper and manual systems to automated AP solutions.

According to Galarza, nearly 50 percent of accounting professionals consider manual tasks, such as data entry, to be among their largest hurdles. Galarza advises managers and business owners to consult with their accounting departments when choosing automation solutions and deciding how to proceed with AP automation. Professionals who already work with invoices and accounts might offer valuable insight into the struggles they face.

If you are thinking about advancing in your accounting department and gaining more responsibilities over AP automation and other tasks, you might want to earn a master’s in accounting. Visit Maryville University’s Online Master of Science in Accounting degree program to discover the curriculum, potential benefits, and other key information about your academic future.

Sources

ACFE.com – The Staggering Cost of Fraud

Accounting Web – 3 Ways AP Automation Can Prevent Fraud

Deloitte – Strategies for Optimizing Your Accounts Payable

AAFP.org – Internal Control and Fraud Prevention Checklist

Forbes – How To Save Time And Money Through Automation