When your business is in the startup phase it is almost certain that the founder(s) will know where every single penny is being spent—it’s the nature of financial scarcity. But as your company grows, this becomes unrealistic and could become counterproductive if you neglect sales.  You have to establish procedures that ensure timely and accurate payment to vendors. But despite doing everything you should, fraud and mistakes do happen.

The $8 million e-mail

Advance Publications is the 46^th largest private company in the United States with over $7.6 billion sales and 29 thousand employees. The company has been in existence since 1922 and the owners are billionaires.

Last year, the accounts payable department received an e-mail from one of their vendors indicating that future payments should be directed to a new bank account. Fair enough. These changes do happen from time to time. But $7,917,667.93 later the company realized they were the victims of a pretty simple scheme by conman Andy Surface.

The execution of the fraud was not elaborate or highly sophisticated.  It was actually pretty simple:

1. Mr. Surface established a company, naming “Quad Graph” to be intentionally confused with the real vendor “Quad/Graphics.”
2. He opened a bank account for his company.
3. He sent an e-mail to the A/P department at Advance Publications.
4. He waited for the money to roll in.

Clearly there was a breakdown in procedure in several places for this to occur. But if it can happen at a large corporation with significant resources, it can certainly happen to you.

So how can you prevent this type and other types of accounts receivable fraud?

Speak to your vendors

In the case of Advance Publications, many months went by between the time the fraudulent payments began and the time the two companies started talking to each other. Call your top five vendors regularly to ensure that everything is running smoothly. One phone call could prevent a multimillion dollar embarrassment.

Separate responsibilities

The employee responsible for making payments to vendors should never be the same person that reconciles your company’s bank accounts.

Monitor duplicate payments

They may or may not be fraudulent, but if duplicate payments slip through the cracks a less than scrupulous employee may see this as an opportunity. Estimates of duplicate payments made by the average company today are in the two percent range. That represents $200 thousand on $10 million in expenditures. If you make $500 thousand in pre-tax income, shaving your duplicate payments in half would increase profits by up to 20 percent.

Use Benford’s Law

This mathematical law states that in a list of numbers within a data set the leading digit is distributed in a specific, non-uniform way. What this means is that in a data set of numbers from one through nine the odds of the number one appearing are different than the odds of the number nine appearing. The odds of the number one appearing is around 30 percent, decreasing as the digits increase until reaching nine which appears less than five percent of the time. Running a frequency check on the digits in your Accounts Payable and comparing them to Benford’s frequency will alert you to potential fraud if certain digits are appearing too often (which is a sign of manual manipulation through fraud).

Invoices that don’t have cents

Many attempts at fraud are done using invoices with rounded values ($9,500.00 vs. $9,483.32). If a particular vendor requests payment for a larger number of rounded invoices this is worthy of further investigation.

While these checks are not exhaustive, they provide the basis for minimizing the risk that your company will accidentally make payments of $8 million!