An invoice arrives from ABC Company for a relatively immaterial amount of routinely purchased goods and services: copier paper, toner, office supplies, equipment maintenance contracts, telecommunications services or online listings. The accounts payable clerk looks at the invoice, it appears genuine, and gets tossed in the pile of bills to be paid in the coming days or weeks. The bill is later paid without any knowledge the bill was a complete fake.
Fraudulent invoice scams are on the rise, and the level of complexity and frequency of occurrence are increasing. Often these fraudulent invoices are even followed with phone calls demanding payment. It is often difficult for small businesses to implement the level of internal controls that can prevent all fraud, however designing some simple controls and policies can help prevent losses to these types of scams.
1) Make your staff aware of the issue
Fraudsters who send fake invoices are relying on careless accounting practices by the recipient, which will allow the fake bill to get lumped in with legitimate bills and paid without question. It is important to make your accounts payable personnel aware of possible scams and train them to follow policies on purchasing and processing of payments. These processes should be documented and available to all employees. For larger companies these processes often include procedures as well as work flow charts to document the purchasing process.
2) 3-Way Matching
Accounting professionals recommend the concept of 3-way matching. This internal control is the procedure of matching the internally generated purchase order, the shipping documents that arrive with goods, and the invoice that is received in the mail. This matching process helps ensures all products were approved and ordered by the company, all products or services were received, and the quantity and price of the products received matches the order. It’s a great safeguard against fraudulent invoices being processed by accounts payable staff.
3) Purchasing and Vendor Control
By assigning a purchasing agent inside the company, controls are established to place responsibility for the purchasing of products using requisitions and purchase orders. It also becomes the responsibility of this purchasing agent to research, monitor, and approve new vendors.
4) Leveraging Technology
Automated processes and accounting systems can also prevent invoice fraud. Automated 3-way matching allows the system to ensure that invoices are matched with purchase orders and will automatically flag for review any invoices that do not have corresponding orders. The automated system will also create audit trails that will help highlight other potential accounts payable fraud.
The risk of fraud can never be completely eliminated, but it can be reduced and the fraud can be deterred by good accounting and management practices. TGG Accounting implements strong controls and processes for our clients to minimize or mitigate fraud risk, and diligently reviews our clients’ financial activity to monitor fraud. If you need additional recommendations for reducing fraud risk please contact the professionals at TGG Accounting.Written by: Brian O’Connor