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How to Manage and Prevent Accounts Receivable Fraud

Topics: Finance, Management, Accounts Receivable

Payment fraud continues to be widespread – in 2022, more than 70% of companies surveyed report being targeted for payment fraud, according to the Association for Financial Professionals. Accounts receivable fraud, both internal and external, can ruin a company's financial health without the appropriate controls in place. 

Accounts Receivable Fraud Stat Image

In this article, you’ll find some of the most common ways that accounts receivable fraud is committed and ways to help prevent fraud in your company.

Most Common Types of Fraud in Accounts Receivable

Sadly, accounts receivable fraud happens more often than you might think. Although there are many ways to commit fraud, here are several of the most common types:

Lapping

In a lapping scheme, the employee pockets payments made by customer businesses toward their open invoices. To cover this up, the employee credits payments made by other customers toward these open invoices so that they are paid.

Kiting

An employee may try to cover up a misappropriated payment by kiting. Check kiting involves writing a fraudulent check from one bank account and depositing it into another. If it takes a few days for the check to clear, your bank accounts look like they have more money than they do during that time. Kiting is often done at year-end to make it less evident that funds may be missing.

Skimming

Skimming occurs when an employee misappropriates a customer's payment. This is done when an employee opens a bank account with a name that looks close enough to the company they work for. The employee intercepts customer payments and deposits them into their fraudulent bank account.

Fictitious Sales

Creating a fictitious sale is a way to boost company production. This fraud may be committed by management or salespeople who are compensated based on hitting sales goals. Or, management may create fictitious sales to make the company look more profitable.

Fictitious sales can be particularly damaging, as your company may rely on money that never comes in.

Fraudulent Write-Offs

To cover up payment theft, an employee may post a discount, credit, or a return to a customer company’s account to hide missing money. Sometimes, the employee may void or delete the open invoice altogether. These write-offs are often used to cover up other types of crimes.

Credit Card and Check Fraud

If customers pay you via credit card, their numbers could potentially be stolen by employees or third parties to make purchases. A fraudster could gain access to your business’s accounting or credit card processing systems and steal credit card numbers in bulk.

Check fraud may occur in a few ways. A customer may use a fraudulent check to pay for goods and services bought from your company, or a customer’s check may be stolen from a mailbox and altered.

While these accounts receivable schemes may be the most common methods of fraud, additional types of both internal and external accounts receivable fraud could also impact your company. 

Red Flags for A/R Fraud and What to Watch Out For

To prevent fraud, CFOs or Accounts Receivable Managers can monitor tell-tale signs of accounts receivable fraud. Common red flags to look out for include:

  • Customer complaints about payments not posted to their account or incorrect balances reflected on their statements

  • Employees who resist sharing job tasks or taking vacations 

  • Large spikes in revenue without corresponding increases in inventory or purchases

  • Discrepancies between the total payments posted to your books compared with bank deposits

  • Excessive discounts, write-offs, credits, or returns posted against customer invoices

  • Unauthorized sales or suspicious transactions with new business customers

  • Unusual activity, such as extensive sales made at month or year-end

  • Unexplained changes in collections patterns

Best Practices for Preventing Accounts Receivables Fraud

Taking preventative steps can help you avoid accounts receivable fraud. Key steps to take to prevent fraud in accounts receivable include:

Segregate Duties

When one person manually controls all of your company’s billing and collections, it can spell disaster. Splitting essential business functions is a key step toward preventing fraud.

For example, it may be beneficial for the employee who handles billing and customer communications to be a different person than the employee who posts payments. Consider having a member of management approve invoice changes, such as discounts, credits, or write-offs. Prevent employees from intercepting checks by setting up a lockbox for customers to mail their payments to. 

Check Transactions

Make it a point to periodically review transactions. Check invoices where discounts, credits, or write-offs were posted. Select a few cash receipts during the month to make sure they were recorded in the appropriate customer’s account.

Periodically review your accounts receivable aging report and reach out to customers with large or old outstanding balances. 

Regular Audits by a Third Party

When you have a third-party audit of your books and records, checking your accounts receivable balance may reveal fraudulent activity. An audit may compare customer payments deposited into your bank account against those posted in your accounting records to determine if they agree. The auditor may also reach out to a few customers to confirm balances they owe. 

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A/R Automation

A/R automation improves the operational efficiency of your company. By automating your billing and collections process, you can cut back on the time spent by employees preparing manual bills, sending emails, and following up on outstanding balances. Automation often saves time due to fewer invoicing errors, and automatic reminders help speed up your payments.

While a third-party audit could reveal fraud in accounts receivable, it can also point out inefficiencies in your billing and collection process. Manual accounts receivable systems are often plagued with posting errors, billing delays, and slow payments. A/R automation minimizes these issues.

Not only can automating your billing and collection process improve overall productivity, but it also cuts back on opportunities for accounts receivable fraud. A/R automation eliminates the manual billing and collection processes that expose your company to fraudulent activity. Employees have fewer opportunities to alter invoices or misappropriate customer payments. With A/R automation, customers typically have online access to their accounts, providing oversight over billing and collections and a clear audit trail.

With Apruve, you can automate A/R, credit, and payment processes to improve operational efficiency, reduce errors, and diminish accounts receivable fraud risk.

Prevent Accounts Receivable Fraud

Accounts receivable fraud can be perpetrated by a trusted employee or an unknown third party. Regardless of where it originates, fraud within your billing and collections can damage your company’s financial health, customer relationships, and reputation.

Despite numerous ways that fraudulent activity in accounts receivable can happen, you can take steps to protect your company from fraudulent activity. Being on the lookout for red flags and incorporating smart practices with the support of A/R automation can help prevent fraud. 

A/R automation upgrades your billing and collection process. Automating invoice processing creates, reconciles, and approves invoices electronically, resulting in cheaper and faster payment collection. Fraud is also easier to spot and prevent in automated processes.

Contact Apruve today to transform your operational efficiency by eliminating late payments, increasing revenue predictability, and reducing accounts receivable fraud risk.

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ABOUT APRUVE

Apruve enables large enterprises to automate long-tail credit and A/R so you can stop spending 80% of your time and resources on 20% of your revenue. We partner with each of our customers to solve their unique credit, payment, and accounts receivable challenges and build the right credit solutions for your markets, customers, and goals. 

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