Fraud Detection & Prevention for Accounts Payable! Presented by Larry Holmes!
Accounts Payable With Fraud! Paying for goods and services that were not received! Paying inflated prices for goods and services! Paying for short shipments of products!
Who Commits AP Fraud?!» Accounts payable personnel!» Procurement or purchasing personnel!» Management!» Vendors and suppliers!
Association of Certified Fraud Examiners! Median loss! $140,000!
5x! Managers! Employees!
Todayʼs Agenda! Common red flags! How to make sure an invoice isnʼt fake! Preventing check, vendor, and employee fraud! Internal controls every organization should have in place to prevent fraud! What you should do when you suspect fraudulent activity!
The Fraud Triangle! Opportunity! A personʼs ability to commit fraud! Rationalization! A personʼs inclination to justify fraud! Motivation! Why someone commits fraud!
What was the opportunity?!
Who was supposed to hold the CEO accountable?! Regulators! + National Futures Association! + Commodity Futures Trading Commission! Auditors!
What was the rationalization?!
What was the motivation?!
Look for the:! Opportunity! Rationalization! Motivation!
Red Flag! 1. Anyone who seems to be a heavy gambler.!
Association of Certified Fraud Examiners! 34% Fraud! Committed by people with financial problems.!
Red Flag! 2. Extravagant lifestyle that just doesnʼt make sense!
Red Flag! 3. Neglecting their responsibilities at work!
Red Flag! 4. People who refuse to take a vacation!
Red Flag! 5. People who are secretive about their work or refuse to let anyone help them!
Red Flag! Why is it missing?! 6. Missing documents! Is it a document that could be used for fraudulent purposes?!
Photocopies of Documents!» Unusual fonts!» Misaligned text!» Math or spelling errors!» Dates, quantities, and prices are incorrect.!
Red Flag! 7. Irregularities! The explanations donʼt make sense.!
Check Fraud!» 27 billion checks written each year!» 80% of business-to-business transactions made by check!» $5 billion a year in check fraud!» 2% imprisonment for check fraud!
Check Fraud!
Uniform Commercial Code! Comparative culpability! When you issue checks, you must use reasonable care in handling your checks.!
American Bankers Association! Check fraud:! The intentional negotiation of a check without the account holderʼs full authorization and approval!
Reasonable Care! 1. Make sure you take reasonable care in managing your check stock.! 2. Take precautions like doing employee background checks, securing your check stock, and reconciling your monthly bank statements.! 3. Report any check fraud to the bank as soon as itʼs discovered.! 4. Have written policies and procedures for organization controls.!
What Kind of Controls?!» Never use rubber stamps to sign checks.!» Preprinted checks use:! Watermarks! Foil strips! Laid lines! Microprint lines!
Donʼt Print on Checks! Not valid for amounts over such-and-such amount! 2 signatures are required for checks over a certain amount.
Positive Pay! Send to your bank your check-issued file every time thereʼs a check run.!
Reverse Positive Pay! The bank faxes or emails to you a list of check numbers and the dollar amounts for the checks presented for payment that day.!
Collusion! The cooperation of 2 or more people who are colluding with each other to commit fraud! The best way to protect yourself against internal fraud! Segregation of duties! Checks and balances!
Assign Duties! Security of the check stock! Check writing and signing! Bank statement reconciliation! Payment processing!
Employee Fraud! Longtime Trusted Employees!
How Fraud Happens! 1. Pay for goods or services that are received by the employee or people outside the organization who are in collusion with the employee and the vendor.! 2. Vendor invoices are altered or photocopied to hide the alteration.! 3. Check signatures are forged.!
How Fraud Happens! 4. Improper check requests are submitted.! 5. A check is issued for the benefit of an employee or third party and the name of the payee is changed in the disbursement journal.! 6. Bank reconciliations are changed.! 7. Void notations on signed checks are removed.!
Solution!! Checks! &! Balances!!!
3-Way Match! 1. Invoice! 2. Purchase order! 3. Receiving report!
Checks! Prenumbered order and recorded! Bank reconciliation process! Segregation of duties! Check signer should review the account!
Expense Report Issues!» Personal purchases!» Procurement cards! Purchasing cards (P-Cards)! + Consolidates invoices into 1! + Lowers the cost of invoice handling!» Fictitious expenses!» Multiple reimbursements!
Wire Transfers! System! 2 people! Independent of each other!
Vendor Fraud!» Requires the collusion of an employee within the organization!» Involves small amounts of money!» Shipping low-quality but highpriced products!
Advertising Scams! Duplicate copy of the ad in a publication you never heard of! Invoice for payment with copy of the ad attached!
Pay-for-Life Scam! By cashing this check, youʼre agreeing to pay $29.95 a month.!
How to Protect Yourself From Vendor Scams! Itʼs illegal for a vendor to send bills for unordered merchandise.! Make the vendor prove that it was ordered.! Return the product.!
How to Protect Your Vendorsʼ Files From Fraud! 1. Limit access to the file.! 2. Print reports periodically of all changes.! 3. Compare vendors in the database against the approved vendor list.! 4. Cross-check every vendorʼs address, phone number, and ZIP code against employee information.!
How to Protect Your Vendorsʼ Files From Fraud! 5. Check the invoice sequence for every vendor.! 6. Identify any payments that were made without purchase orders, receiving reports, or other supporting documents.! 7. Check vendors against business directories to confirm theyʼre legitimate.! 8. Review and purge your vendor file on a regular basis.!
11,000 Vendors! Fewer than 100 employees! 2,300 vendors on file! 25% never purge! 17% purge every! 3 years! Purge your list at least once a year.!
Invoices! All invoices should be sent to Accounts Payable first.! Use strict coding standards.! Assign individual account responsibility.! Use P-Cards for small transactions.! Use an electronic invoicing system.!
Fake or Fraudulent Invoices! 1. Make sure the goods and services were ordered by an authorized representative of your organization.! 2. Make sure the goods or services were actually received.! 3. Make sure there is a 3-way match.!
Fake or Fraudulent Invoices! 4. Make sure you received exactly what was ordered in the quantity and quality called for according to your agreement with the vendor.! 5. Make sure the goods or services were delivered in a timely manner and on schedule according to your agreement.! 6. Verify that the invoice amount is the price authorized by your purchase order or agreement.!
Top 3 Controls! 1. Segregation of duties! 2. Supervisor review! 3. Information technology security!
Best Way to STOP Fraud! Perception of detection! The belief that management is diligent about preventing fraud on every level and that any fraud will be detected and prosecuted to the full extent of the law!
What You Should Do When You Suspect Fraud! Donʼt! Act on emotions.! Immediately confront the suspected guilty party without a plan.! Call the police right away.!
What You Should Do When You Suspect Fraud! Contact a fraud investigation professional.! Investigate.! Hire a forensic accountant.! Suspend the fraudster.! Fire the guilty party.!
Document! Document! Document!
Reminders! How important it is that you have controls in place! Only when there is trust can there be fraud.! Perception of detection! Communicate in advance and on an ongoing basis that fraud in your organization will be detected.!
Welcome to Fraud Detection & Prevention for Accounts Payable Q&A! With Larry Holmes!
Thank you for joining us today!!