Accounts Payable (Disbursements)

Accounts payable and disbursement fraud are forms of asset misappropriation involving fraudulent disbursements.

Accounts payable fraud is perpetrated when an employee causes his or her employer to either pay for goods services that have not been received or pay an inflated amount for goods/services that have been. Sometimes this involves the creation of a shell company—an entity with no valid legal or economic purpose that exists only as a means to illicitly collect funds.

At other times, this type of fraud involves deceiving an employer into paying for an individual’s personal purchases.

Accounts payable fraud can also result from an employee, working with a legitimate vendor, inflating the amounts paid to the vendor, with the employee ultimately receiving a share of the overpayment.

Disbursement fraud may not involve employee participation. A common example of this is check tampering, in which a check is intercepted and its payee or amount of payment is altered.

Misappropriation
Risks Risks Risks
Duplicate Payments

Disbursements for the same amounts or to the same vendor for the same amount (other than such regularly recurring payments such as insurance or rent) can indicate duplicate payments.

Another Red Flag for duplicate payments is spending in excess of budgeted or normal amounts.

Interestingly, a vendor's failure to claim a discount due might also indicate that he has been paid twice and doesn't want to engender additional review of his account.

Credit balances in the accounts payable subsidiary ledger might indicate a duplicate payment.

Convert payments to ACH or other electronic methods - ACH or electronic payment methods take more time to initially establish compared to simply printing a check to a vendor thus are less likely to include fraudulent transactions.

General Guidance Fraud involving cash expenditures can involve a great deal of money, and come in a number of forms, many of which are discussed in detail below. After considering the risks, red flags and tools/best practices discussed in this table, you might want to investigate some of the online tools listed to the right.

National Association of State Controllers (NASC) Control Questionnaire for Payables

National Association of State Controllers (NASC) Control Questionnaire for Accounting Systems

Detecting and Preventing Accounts Payable Fraud

Understand the built-in security in your accounting system’s accounts payable module.

Review and rewrite each accounts payable employee’s job description to ensure proper segregation of duties are in effect.

Use a third-party data mining tool to help you analyze your accounts payable transactions on a regular basis.

Have an annual review of your accounts payable function done by an internal control expert.

Kickback Scheme

Consistent preferential (early) payments to one vendor.

Look for invoices that do not have the folds that come from having been mailed. No folds, may point to potential fraud.

Sequential invoice numbers from the same vendor or invoice numbers with an alpha suffix.

Payments made based on copies of invoices, not originals.

Vendor invoices are received by department other than accounts payable (purchasing).

Separate check writing and checking account reconciliation. Never have the person who writes the checks also be the person who reconciles the checking account, this is asking for trouble.

Tax ID numbers on the vendor invoice reinforce the invoice's legitimacy.

Segregate duties between processing of accounts payable invoices and updates to vendor master files.

Misdirected Payments

Payments are misdirected to someone posing as a legitimate vendor. No proper documentation or approval of additions, changes, or deletions to vendor master file.

Vendor addresses do not agree with vendor approval application.

Verify that all changes to vendor records (name, address change, bank account) are submitted by an authorized vendor signatory, and approved by an agency signatory. This is to prevent theft or misappropriation of funds.

Segregate duties between processing of accounts payable invoices and updates to vendor master files.

Misdirected Payments

Payments are misdirected to someone posing as a legitimate vendor. No proper documentation or approval of additions, changes, or deletions to vendor master file.

Vendor addresses do not agree with vendor approval application.

Verify that all changes to vendor records (name, address change, bank account) are submitted by an authorized vendor signatory, and approved by an agency signatory. This is to prevent theft or misappropriation of funds.

Segregate duties between processing of accounts payable invoices and updates to vendor master files.

Non-compliance with State/Local-Wide Central Service Cost Allocation Plans and Indirect Cost Rate Proposals Unwarranted profitability of internal service funds.

U.S. Department of Health and Human Services Best Practices Manual for SWCAP

National Association of State Controllers (NASC) Advisory Controls Questionnaire for A-87 Compliance

Overpayment

Excessive purchases of unneeded items.

Frequent shipments to P.O. boxes.

Weekend or holiday delivery dates on invoices.

Same person signs both the purchase order and the receipt.

<p>Data analytics for:</p>

<ul>
    <li>Vendor Summary Totals &ndash; Period Comparison</li>
    <li>Descriptive Statistics / Benford&rsquo;s Law Analysis</li>
    <li>Above Average Payments To A Vendor</li>
    <li>Duplicate Payment Testing</li>
    <li>Employee to Vendor Address Match</li>
    <li>Payments Made After Period End for Valid Liabilities at Period End</li>
    <li>Identify Exceeded Purchase Orders</li>
</ul>

<p>Reconcile checking accounts promptly. Allowing time to lapse simply allows more time for fraudulent activity to occur if present.</p>

<p>Keep blank check stock and signature stamps under lock and key. Limit access to check stock to specific individuals.</p>

<p>Centralize your check writing function to minimize the need for review.</p>

<p>Immediately notify your bank of changes in check signature authorizations.</p>