How accounts payable fraud can affect small companies
There are often many opportunities for accounts payable fraud to occur in the small business environment. This article explains how accounts payable fraud can occur, how it may affect your small business and what you can do to eliminate this potential problem.
How fraud can affect a small company
Accounts payable fraud is one of the easiest an employee can commit, but it is often one of the hardest to detect, therefore it is a real threat to any company. A common way accounts payable fraud is perpetrated involves setting up a ‘bogus’ supplier in the accounting system, which is used to supply fake invoices for payment and then transferring funds from the company’s bank account to another bank account, which is usually that of an employee within the company.
Some readers may think that this attempt at defrauding the company would never work, but in the technological world we live in and the fact many people have access to computers, sophisticated design programs and printers, it is not too difficult to produce reasonably genuine looking invoice that can easily be slipped in a bundle of genuine invoices for some unsuspecting and lazy manager to authorise for payment.
Another fraud is where accounts payable staff use genuine suppliers to buy goods and products from for their own personal use and pay for them with company funds.
Accounts payable fraud is nothing less than theft and the main consequence of this is the extraction of cash out of the company. The decrease in cash may have knock on effects such as:
i) Causing the company to become overdrawn and incurring bank charges and interest. In Extreme cases the company may seek short term funding, such as an overdraft extension or bank loan which will incur further costs.
ii) Payments to genuine suppliers may have been delayed in order to pay the bogus supplier and any early settlement discounts available may be lost. In addition, paying the genuine suppliers late may result in interest and charges payable to the supplier.
iii) In extreme cases late payment to genuine suppliers may adversely affect the trading relationship, resulting in a lost supplier. If the goods bought from the suppliers are readily available from other sources this may not create too many issues, however if the supplier provides a unique product that is key to the company this could be more problematic.
So how do you ensure your company doesn’t suffer from accounts payable fraud? In order to combat fraud and identify any potential fraud before it happens, the company needs to implement a purchases control system, which is a pre-defined step by step way the company buys stock. From the purchase requisition to the ordering of the goods to the receipt of the goods to the final payment to the recording of the transaction in the financial records each step must be done in a specific way and checked or authorised by management at each and every step. Some may see a purchases control system as an overkill and unnecessary but it not only detects fraud but it also serves as a deterrent.
A strong purchases control system consists of segregation of duties within the company. This means that no single person is responsible for the whole of the purchasing function. If possible, split the purchasing function into distinct separate parts and allocate each part to a different person. Using this method the risk of fraud is greatly reduced, although there is still the possibility the employees may collude together but this is quite rare. If there are any concerns over collusion you need to replace your staff with more trust worthy individuals.
In smaller companies there is not usually the man power available for segregation of duties and it is not uncommon for the same individual to carry out all the functions of the purchases system. In these cases the control is achieved by close director involvement. In these instances the director must ensure it is vigilant in checking the requisitions, delivery notes and purchase invoices very carefully and does not become complacent. In these situations it is advisable the director retains control over the payment of the purchase ledger since this is the last action to be completed before the funds leave the company’s bank account.