Protecting Your Business From Accounts Payable Theft

Accounts payable (AP) theft is one of the most common and costly forms of internal fraud in businesses today. Because AP processes often involve multiple departments, high volumes of transactions, and a level of trust in employees and vendors, they can be easy targets for those seeking to exploit the system.

Understanding how these schemes work is the first step to preventing them. Below, we explore the most common types of AP fraud and offer practical strategies to protect your business.

Common Forms of Accounts Payable Theft

Vendor-related fraud is a frequent source of financial loss. These schemes often involve over-purchasing, inflated pricing, or fabricated invoices. In many cases, an employee will create false vendor invoices to disguise theft. For example, an accounts payable clerk might set up a fictitious vendor account, generate and approve fake invoices for goods and services never received, and send payment to an address they control – often a P.O. box or even their home. Some go a step further by copying legitimate invoices from real vendors and changing the address to divert funds.

Another red flag is inflated pricing through middleman companies. An employee might establish a shell business that appears to provide services but does nothing other than mark up prices and pass the expense back to the employer. In return, the employee pockets the difference. 

There are also subtler schemes, such as excessive purchasing. For instance, a manager might buy food or supplies far beyond what’s needed. The excess can be stolen outright, or the employee might earn bonuses for lowering cost per unit by buying in bulk – even if the bulk isn’t necessary. In some cases, employees accept kickbacks from vendors in exchange for large orders.

False expense reports are another common tactic. Employees who travel for work may submit inflated or fictitious charges – personal purchases disguised as business expenses, duplicate receipts, or completely made-up line items. Without careful review, these can go unnoticed for months or even years.

Lastly, conflicts of interest can undermine purchasing integrity. A manager who has a financial stake in a supplier might route most businesses to that vendor, regardless of pricing or quality, for personal gain.

How to Protect Your Business

Preventing accounts payable theft starts with internal awareness and strong financial control. One of the most effective steps a company can take is to regularly review its approved vendor list. Watch for vendor names that are almost identical to legitimate ones, multiple addresses listed for a single vendor, or vendors that were recently added and are receiving large payments. Pulling vendor data into a spreadsheet and comparing current-year and prior-year activity can help spot new or unusual relationships and abnormal invoices.

It’s also crucial to separate duties within your AP process. No single employee should be able to create a vendor, approve an invoice, and issue a payment. Segregating these responsibilities creates natural checkpoints and makes fraud much harder to execute.

Expense reports deserve close scrutiny, too. Require original receipts and detailed documentation for all employee reimbursements. Implement pre-approval processes for travel and entertainment expenses and consider conducting random audits to keep everyone honest.

Lastly, take potential conflicts of interest seriously.  Require employees to disclose relationships with vendors and make it a point to periodically review those vendors for appropriateness.

Final Thoughts

Accounts payable fraud often starts small and can escalate into serious financial damage if left unchecked. With regular oversight and policy implementation and enforcement, businesses can dramatically reduce their exposure to fraud. Protecting your AP process doesn’t just safeguard your bottom line – it also strengthens internal trust and ensures your business is operating with integrity.