Every organization relies on a well-established payment process for acquiring products, paying their vendors, and running their business activities smoothly. The same payment process, however, becomes vulnerable if manipulated by any individual either from within the company or outside. It is quite common for fraudsters to commit disbursement fraud, causing monetary loss and disruption for companies.
In this blog, we will try to understand what disbursement fraud is, the working of billings schemes, how to identify red flags, and ways in which organizations can protect themselves against such frauds.
Understanding Billing Schemes and Why They Continue to Threaten Businesses in the USA
Even though the advancements in technology have helped improve the process of accounting, fraudulent billing systems still impact organizations, regardless of their size. This occurs as a result of exploiting vulnerabilities in the process of purchases, accounts payable, or vendor management systems, rather than technical flaws. Trust-based companies which do not implement any financial controls tend to be more susceptible to such problems. Knowing how such schemes work is one of the most important steps in developing fraud prevention strategy.
What Are Fraudulent Disbursements?
The use of corporate money through improper or deceptive payments is referred to as fraudulent disbursement. As opposed to cash theft that does not involve the recording of the cash used, the fraudulent disbursement entails normal business transactions carried out through the accounting system and therefore appears legitimate in accounting records. Since the transactions are officially recognized, it is relatively easier to track the transaction history, although fraudulent intentions might be hard to determine.
Fraudulent disbursements are one of the types of asset misappropriations and include different forms of payments including payroll, reimbursement of expenses, check tampering, and billing fraud. According to the Association of Certified Fraud Examiners (ACFE), the fraudulent disbursements are the most prevalent form of asset misappropriation.
Why Billing Schemes Are So Common
Billing schemes aim to take advantage of an organization’s procurement process through making the organization pay for goods and services that are either imaginary, superfluous, overvalued, or meant for personal gain. As most companies receive hundreds if not thousands of invoices on a monthly basis, it becomes easy to slip fraudulent payments through the system if the reviewing process is inadequate.
One more factor contributing to the existence of billing schemes is the fact that they usually include individuals trusted within an organization and familiar with the approval process. Such fraudsters can use vulnerabilities in vendor verification, invoice approval, or payments authorization processes.
The Main Types of Billing Schemes
Another popular approach includes the use of shell corporations. In such cases, the fraudster sets up a fictitious company and prepares bills for the delivery of goods/services which were never received. Since shell corporations come off as legitimate vendors, the billing scheme may go undetected until months pass by.
Some other types of billing scams include pay and return scam, in which the invoice is deliberately overstated so that any refund paid out goes into the hands of the fraudster, and personal procurement scams, whereby employees bill their personal purchases or non-business-related items to the company.
Recognizing the Warning Signs Before Financial Losses Escalate
Fraudulent billing usually does not start from a big deal. In most cases, small discrepancies build up to larger financial discrepancies as the perpetrators realize that their actions are undetected. Watching for operational or behavioral warning signs can help the organization notice suspicious behavior. An efficient fraud detection system is a combination of financial assessment, awareness and supervision. Going beyond the transaction usually shows more than meets the eye.
Unusual Vendor Activity
One of the first signs of any billing scam is that of changes made to the vendor’s database. When changes frequently occur to vendor names, addresses, bank account information or payment details, such behavior suggests fraudulent activities. Similarly, the introduction of vendors that cannot be verified by sufficient evidence of business legitimacy is another sign that needs to be investigated.
Additionally, one should look out for several vendors who happen to have the same address or bank account details. Such cases often suggest that shell companies have been set up to accept payment fraudulently.
Changes in Billing Patterns
Unexpected changes in invoice behavior should be closely monitored. Sudden increases in frequency of invoices submitted, unusually high bills being paid, or immediate payments demanded without any justification by vendors might need extra scrutiny. Though it is a known fact that some businesses undergo changes, it is essential to keep track of these.
Financial analysis plays a critical role in recognizing such instances. Comparison of frequencies of invoices submitted, payment timings, size of purchases, and trends in purchases can enable accounting departments to recognize such oddities.
Behavioral Red Flags Among Employees
Even though financial information can help identify any anomalies, behavior on the part of an employee can also give some clues. Those who are engaged in fraudulent activities tend to demonstrate certain changes in their lifestyle that are not consistent with their reported salary. Purchasing luxurious things, going on expensive holidays, buying expensive cars, or having increased expenditures may become signs of continuing financial dishonesty.
Behavior as a clue cannot be considered proof of fraud. Still, if unusual changes in one’s lifestyle happen along with accounting anomalies, companies will have more reasons to carry out an internal investigation or audit.
Building Strong Internal Controls to Reduce Billing Fraud Risks
In addition to detecting suspicious transaction behavior after the money has actually been paid, preventing fraudulent billing involves putting in place controls that make such fraudulent activities difficult from the beginning. Good control procedures not only prevent fraud but also lead to increased efficiency, accountability, and good financial reporting. Controls need to be updated regularly according to the organization's growth, technological advancements, and potential fraud risk.
Strengthen Purchasing and Accounts Payable Controls
Responsibilities segregation continues to be one of the most effective ways to counteract billing fraud. Individuals who are tasked with purchases should not be in charge of verifying invoices, processing payments, receiving goods, or keeping accounting records. Responsibilities segregation makes it difficult for any one person to commit billing fraud.
Purchase orders should be documented before any invoices are approved. Documentation through pre-numbered purchase orders with comprehensive details such as quantities, prices, vendors, and delivery date is effective.
Improve Invoice Verification and Vendor Oversight
A good invoice verification process will help guarantee that payment is being made for a legitimate business transaction. Before an invoice is approved, organizations should reconcile it against purchase order and receive reports to verify that the goods or services were indeed ordered and received. Reconciliation of credit memos for return of goods needs to happen prior to any adjustments of vendor balances.
The maintenance of an accurate master vendor file provides additional control. Regularly scheduled reviews may discover duplicating vendors, inactive vendors, questionable changes in addresses, or other peculiarities related to the vendor and payment transactions. Organizations should have automated controls in place to detect duplicating invoice numbers and purchase orders.
Use Ongoing Monitoring and Audit Trails
Continual monitoring is yet another level of defense that will help prevent any fraudulent payments. By performing periodic examinations of the payable accounts, purchase processes, and even company credit cards statements, one will be able to spot any unusual transactions that do not fit the normal course of operations.
Finally, companies should always keep track of what is going on with their accounts. In order to do that, they need to restrict the access to the accounting documents and ask for the management’s permission to perform certain activities, for example, write-off the supplier’s debt.
Billing scams have continued to be the most prevalent type of occupational fraud because they use the process of procurement and payment that is commonplace in almost all businesses every day. Though the payments through disbursements may look valid in the accounting books, close scrutiny, proper internal control, checking of vendors, and segregation of duties will help to lower the chances of losing money. Companies that are willing to prevent fraud are able to safeguard themselves.
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