Uncovering accounts payable fraud using "fuzzy matching logic": Part 1.(selected topic)

With the increasing growth of accounts payable transactions every year, there's an increasing risk of potential fraud and abuse. Here you'll learn nine different ways that you can detect potential accounts payable fraud.

While conducting a duplicate payment audit for a medium-sized healthcare product manufacturer, we noticed multiple $40,000 payments to one person on the same day. Curious, we ran another algorithm to identify above-average payments per vendor and the same payments floated to the top of the report. The person turned out to be an employee who typically received a bi-monthly paycheck of between $500 and $1,000--yes, $40,000 seemed unusual! Especially three payments on or near the same day! What was also highly unusual was that there were no invoice numbers on these high-dollar payments. Most accounts payable systems will not accept an invoice entry without an invoice number; in fact, many A/P clerks are coached to enter the date if no invoice number is provided. Well, we got lucky in this situation because the client had given us their check register (instead of an A/P extract), which listed ALL checks issued, including checks with missing invoice numbers. Using some cutting-edge data mining technology, we were able to import the electronic version of the check register and create a database from it. Then using this database, we were able to implement some time-tested fraud detection algorithms and uncover the fraud. (While we used SAS to complete the task, there are other text-mining software packages such as Monarch that can be utilized.)

After speaking with the new controller of the company, we found that the employee had already left. The new controller mentioned a legal mishap, but she did not know about the $40,000 checks. (We are not privy to the legal aspects of how this story ended.) Do you want to stop this type of fraud before your employees run away with the cash? If so, this article introduces some approaches to identifying potential accounts payable duplicate payments and fraud.

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The volume of financial transactions occurring in the average accounts payable department is always increasing. With that growth comes an inherent risk of improper payments, which include inadvertent errors such as duplicate payments and miscalculations, payments for unsupported or inadequately supported claims, payments for services not rendered, missed discounts, missed credits and payments resulting from outright fraud and abuse. According to the ACFE's 2006 Report to the Nation on Occupational Fraud and Abuse, the median loss attributed to billing schemes was $130,000, making them the second most expensive form of fraudulent disbursement behind wire transfers, which had a median loss of $500,000. In Fiscal Year 2000, the U.S. General Accounting Office concluded that the U.S. government made about $19 billion in improper payments, or about 16% of the total expenditures for the year. (1)

The Sarbanes-Oxley Act is forcing many companies to take an in-depth look at internal accounts payable controls. Implementing and monitoring internal controls may be an expensive proposition in terms of time and money, but if fraud or leakages are found, it will be time well spent.

Here we describe the first of eight different ways to detect potential accounts payable fraud. Look forward to the April issue for Part 2 of this article that discusses numbers 2-8.