Accounts payable fraud costs businesses billions of dollars each year. This type of fraud targets the payment processes that companies use to pay vendors and suppliers. According to the Association of Certified Fraud Examiners (ACFE), businesses lose about 5% of their annual revenue to fraud each year.

Since many companies shifted to remote work after the pandemic, weaknesses in payment processes have increased, making accounts payable fraud an even bigger problem in the US. Organizations that implement proper detection and prevention methods can reduce these losses significantly, helping protect their bottom line. Learning the warning signs and building strong defenses protects businesses from financial damage and operational disruption.

What is Accounts Payable Fraud?

Accounts payable fraud occurs when criminals manipulate payment systems to steal money from businesses. Fraudsters target the Accounts Payable department because it processes large amounts of money and handles vendor relationships. Common forms include creating fake vendors to receive payments, submitting duplicate invoices for the same service, altering checks after approval, and using phishing emails to redirect payments to fraudulent accounts.

These schemes often involve criminals pretending to be real vendors or company executives to trick the business into sending payments to fraudulent accounts. Check fraud related to accounts payable increased by 385% between 2021 and 2023, according to the Financial Crimes Enforcement Network.

Key Indicators: How to Detect Accounts Payable Fraud

Early detection prevents larger losses and limits damage to business operations. Specific warning signs often appear before major fraud incidents, based on patterns found in real fraud cases, such as:

  • Duplicate invoice numbers or amounts: Multiple invoices with identical numbers, dates, or amounts usually show someone is trying to get paid twice for the same service.

  • ACH payment anomalies: ACH transactions to unknown or unexpected accounts are strong signs of fraudulent activity and are often flagged by US banks.

  • Suspicious routing numbers: Routing numbers that don’t match the known financial institutions or are linked to high-risk regions generally signal payment fraud.

  • Vendor address matches employee address: A vendor mailing address that matches an employee’s home address almost always indicates a fake vendor set up for fraud.

  • Sudden changes to vendor payment details: Requests to change bank account information, especially via email, are a common method to hijack payments.

  • Invoices without purchase orders: Receiving invoices without matching purchase orders, especially from new or unknown vendors, is a clear red flag for fraudulent billing.

  • Round-dollar invoice amounts: Invoices with perfectly round amounts like $5,000 or $10,000 are frequently linked to fraudulent transactions.

  • Vendor names similar to legitimate suppliers: Fake vendors using names closely resembling real suppliers are deliberately created to trick accounts payable teams.

  • Employee lifestyle changes not consistent with their income: Employees showing expensive purchases or lifestyle upgrades that cannot be explained by their salary often indicate internal fraud involvement.

  • Rush payment requests: Vendors demanding immediate payment or threatening to stop services to force quick payments are using tactics commonly associated with fraud.

How to Build a Strong Accounts Payable Fraud Defense?

Effective prevention depends on implementing several control measures that work together to block fraud attempts. The most effective defenses combine technology solutions with strong internal procedures. These methods have proven successful in reducing fraud incidents across various business sizes.

  • Implement Three-Way Matching: Compare purchase orders, receiving reports, and invoices before approving any payment to ensure all transactions are legitimate and authorized.

  • Use Technology Tools: Employ fraud detection modules within platforms like SAP and Oracle NetSuite to monitor transactions and flag suspicious activities.

  • Follow US Compliance Frameworks: Align controls with regulations such as the Sarbanes-Oxley Act Section 404 and the Bank Secrecy Act, which mandate internal controls and financial transaction monitoring.

  • Segregate Duties: Assign vendor setup, invoice approval, and payment authorization to different employees to prevent any single person from controlling the entire payment process.

  • Establish Vendor Verification Procedures: Require written documentation and management approval for all new vendors, and verify vendor information through independent sources before processing payments.

  • Set Payment Authorization Limits: Create dollar thresholds that require additional approval levels, with higher amounts needing senior management sign-off to prevent large unauthorized payments.

  • Use Positive Pay Services: Work with banks to implement positive pay, which matches issued checks against a list of authorized payments before processing them.

  • Monitor Vendor Master File Changes: Track all modifications to vendor information and require supervisor approval for changes to payment details, addresses, or bank account information.

  • Conduct Regular Accounts Payable Audits: Perform monthly reviews of payment patterns, vendor relationships, and approval processes to identify unusual transactions or control weaknesses.

  • Train Employees on Fraud Recognition: Educate staff about common fraud schemes and establish clear reporting procedures for suspicious activities or requests.

Accounts payable fraud is a significant threat to businesses, but proper detection and prevention measures can effectively reduce this risk. Organizations that implement comprehensive fraud controls, train their employees, and maintain regular monitoring processes protect themselves against financial losses. Using strong defense strategies and working with trusted partners like Drip Capital provides better protection against fraud and supports steady business growth.

Frequently Asked Questions

1. What are the most common types of Accounts Payable Fraud?

The most frequent types include fake vendor schemes where criminals create fictitious suppliers, duplicate payment fraud involving multiple submissions of the same invoice, check tampering where fraudsters alter payment amounts or recipients, and business email compromise where criminals impersonate vendors to redirect payments to fraudulent accounts.

2. What is a "three-way match," and how does it help prevent fraud?

A three-way match compares the purchase order, delivery receipt, and vendor invoice before authorizing payment. This process ensures that businesses only pay for goods or services that were ordered, received, and properly billed. It prevents payments for fictitious transactions or inflated amounts.

3. How often should we audit our accounts payable processes?

Most fraud prevention experts recommend monthly reviews of accounts payable activities, with comprehensive audits conducted quarterly. High-risk areas like new vendor additions and large payments should be reviewed weekly. The frequency may increase based on company size and transaction volume.

4. Why is it important to have a fraud policy?

A written fraud policy establishes clear procedures for preventing, detecting, and responding to fraudulent activities. It defines employee responsibilities, reporting requirements, and investigation processes. Companies with formal fraud policies experience 50% lower fraud losses than those without such policies, according to fraud research studies.

5. What is vendor fraud, and what are its warning signs?

Vendor fraud occurs when suppliers or fake vendors steal money through false billing, inflated invoices, or kickback schemes. Warning signs include vendors requesting payment method changes via email, invoices without proper documentation, significant price increases without explanation, and vendors with addresses matching employee locations or post office boxes. c