AFX Corp Inc. Releases Tips on Preventing Accounts Payable Fraud

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Making fraud control part of the normal routine is good business practice and can be an inconspicuous part of the business environment; keeping a business enterprise secure to do business another day.

David Pelligrinelli is head of corporate security for AFX Corp., a document research and forensics company specializing in analyzing real estate records and fraud cases since 1995.

The accounts payable mechanism represents an opening in the barrier protecting a company’s capital. Each month, dozens or even hundreds of payments are issued by the accounts payable department. Each one of these checks represents an opportunity for assets to be diverted to unauthorized recipients.

There are several common schemes to extract money from a business through accounts payable.

  •     Ghost vendors
  •     Check washing
  •     Fraudulent invoices
  •     Bill padding
  •     Double billing

Well planned internal processes can prevent most of these. The time and expense invested to prevent and discover accounts payable fraud is a valuable investment, resulting in reduced expenses, and a more secure corporate environment.

First, separation of responsibilities is the basis of internal security. The person doing the bookkeeping should be separate from the person managing vendors. Occasionally it is a good idea to recheck the credit and financial condition of key personnel. A looming foreclosure or urgent medical expense has turned many honorable long-term employees into one-time thieves.

Second, the company owner should personally sign off on each invoice in a small company. By reviewing every invoice the principal can not only prevent internal fraud, but also notice over-billing or errors from vendors. An owner will get a good overview of the distribution of orders from this monthly exercise as well. Even if you personally sign off on invoices before payment, a corrupt bookkeeper could simply generate checks separately. For this reason, checks should be signed by the owner at the same time as the invoices are reviewed. Note the beginning and end numbers on the check run, and match them to the bank statement to ensure no others were added to the run. When possible, a separate bank account exclusively for accounts payable should be maintained. This way, if there is a breach of security, the loss is firewalled at the amount of the current accounts payable run.

Third, accounts payable checks should be marked “for deposit only” if possible. This creates an asset trail should there be a diverted check and also discourages attempts at fraud in the first place. Outgoing checks should be placed directly with the mail carrier, or delivered to the post office. Do not use mail drops in the lobby, or baskets on the reception desk. Check washing groups look for batches of payable checks, which are easy to spot in unsecured drop points. Crooks can grab an entire batch of outgoing checks, wash them in solution and rewrite the remittance to themselves.

Fourth, when the account statement does arrive be sure that the envelope gets to the business owners desk unopened. Match the check numbers with the notes from the prior month run. Then look at the check images for red flags. Stamped endorsements are normal for a business deposit. If a check has a handwritten deposit endorsement, it may be worth further investigation. Also look at the earliest deposits to flag a check which was cashed within a day or two of being written. This could indicate that it was never in the mail system, and taken directly from your company by an employee.

Fifth, when reviewing vendors, look for company names which sound like a person’s name. These are easier to deposit in a personal account. Fake vendors or ghost companies can be spotted this way. Also, if most of your vendors are distant from your company, look for local addresses which may be out of character. Try and have an approved vendor list to start with, where any proposed payee is vetted in advance. This will deter anyone inside your company from setting up a false vendor to divert money into. On a regular basis, you can randomly spot check payments. Simple investigation on Google or the Secretary of State can verify the existence of a company, and whether the principals are employees of your firm or have the same last name as employees. If you pull 10% of checks for scrutiny each month, you will effectively check all vendors each year. At the same time, check the events in the lives of those in your organization that are in a position of trust. Full background checks may not be necessary, but a business owner can spot check online property records for liens or mortgage delinquencies, and civil court records for judgments.

In a small or medium size company environment, it might seem counterproductive to be suspicious of business partners and employees. However, making fraud control a part of the normal routine, is good business practice and can be an inconspicuous part of the business environment; keeping a business enterprise secure to do business another day. In fact, it is the responsibility of a company owner to protect company assets to secure the future success of the employees.

For more information on specialized and customized internal security and fraud protection for your organization, please contact David Pelligrinelli at daveafx(at)gmail(dot)com.

David Pelligrinelli
Internal Security
AFX Corp., Inc.
877-848-5337 x100

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David Pelligrinelli
AFX Corp., Inc.
877-848-5337 ext. 100
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