Involving different people during the vendor setup, invoice approval and payment process is not only good business practice, but helps you to protect your business from fraud. According to this article of the Association of Government Accountants, 22% of all corporate fraud cases are happening in the Accounting Department, with an average loss of $180,000.
These are the most common Internal Fraud activities:
Someone who has access to enter and approve invoices adds either additional (read: fake) invoices to a vendors account or enters a higher amount than the original invoice had, approves the invoice and makes sure to get them paid and finally splits the additional funds with the receiver.
Or the receiver of the payment had been set up already with a fraudulent intention – was never meant to be a vendor of your company (“Shell Company”). This vendor then receives payments for goods never delivered/services never rendered or a markup is added to invoices from a “real” vendor.
Both schemes can be prevented if there are at least three different people are involved in the P2P process: one can only set up vendors, one can only approve invoices and one can enter invoices and pay them only once the invoices are approved. Or every step of the process – in case there are not three different people available – should be checked by at least one other person.
Entering a invoices only against a Purchase Order helps here. In addition, the approval process, if the invoice is for Goods, should be automated against the Receipt of Goods. If it is a Service invoice, the person who received the Services should be the approver (and not the one who enters and pays the invoice). So called “Desk Top Receiving” can help to improve this process, automatically matching the invoice against the “virtual receipt”.
Manual checks are another common way of fraud. Especially when have to sign a check in a hurry, without proper documentation to support the payment. Manual checks should be avoided as much as possible, and if needed, the underlying documentation needs to support the payment fully and has to be detailed in regards to the check receiver. In addition, it is not uncommon that a manual check is tampered with, and the amount is, for instance, moved up from “eighty” to “eighty thousand”.
Regular account reconciliations, again undertaken by a person not being part of the invoicing/approving/payment cycle, can help to uncover – and hopefully prevent – this kind of fraud.
In this 2016 report, page 5, of the Association of Fraud Examiners, they find that “The most prominent organizational weakness that contributed to the frauds in our study was a lack of internal controls, which was cited in 29.3% of cases […]”. Segregation of Duties, together with regular ac
count reconciliations and proper controls are the foundation of protecting your company from Internal Fraud.
Please see as well our blog post on External Fraud
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