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Preventing Fraud In AP Process

Overview

Organizations today are engaged in a variety of initiatives to strengthen payments risk controls and protect the security, integrity and continuity of financial transactions. They are building defenses against fraud, tightening internal controls over the payments process and testing disaster recovery plans.

The following document is meant to spotlight best practices for migrating payment risks and help increase awareness of realities of payment processing.  By tying research information to practices and procedures, we were able to connect best practices with the payment methods least subject to fraud and measures that help prevent financial loss from fraud.

Highlights:

Key findings of this document include:

  1. Paper payments were most susceptible for fraud (94%)
  2. ACH/EFT Credits were most secure and cost effective method of payments (1%)
  3. Measure that Prevented  Financial Loss from Check Fraud, Positive Pay and Positive Pay with Payee Match accounted for 81%
  4. Proper internal procedures, controls and audits are necessary to curtail internal fraud and meet due diligence expectations.

Companies must find complete payment processing systems that control not only the development of blank safety stock to printed check creation, but include Positive Pay, electronic payments, payment control, auditing and reporting.

Payments Fraud Facts:

  • Sixty-eight percent of organizations were targets of attempted or actual payments fraud in 2005.
  • Seventy-nine percent of organizations with annual revenues greater than $1 billion report payments fraud in 2005, compared to 54 percent of organizations with annual revenues below $1 billion.
  • The prevalence of payments fraud in 2005 was largely unchanged from 2004, with fifty-five percent of organizations reporting that incidents of fraud remained about the same in 2005 as in 2004.
  • Large organizations are more likely to experience an increase in payments fraud than smaller organizations.
  • Checks and ACH debits were the most frequently used vehicles for payments fraud.
  • For organizations that were victims of payments fraud in 2004, the median dollar amount of the fraud was $26,600.

    Payment Methods Subject to Fraud in 2005
    (Percentage of Organizations that Reported Payments Fraud Activity in 2005)

     

    All Respondents

    Checks

    94%

    ACH debits

    34

    Consumer credit or debit cards

    13

    Corporate purchasing cards

    10

    ACH credits

    1

    Wire transfers

    1

    Source: Payments Risk Survey, Report of Survey Results March 2006, Association for Financial Professional

    Measure that Prevented Financial Loss from Check Fraud
    (Percentage Distribution of Organizations that Suffered Check Fraud Without Loss)

     

    All Respondents

    Positive pay/Reverse positive pay

    67%

    Payee positive pay

    14

    Daily reconciliation of balances/transactions

    5

    "Post no checks" restriction on depository accounts and/or electronic payment accounts

    2

    Timely check return

    2

    Other

    6

    Source: Payments Risk Survey, Report of Survey Results March 2006, Association for Financial Professional

    Common examples of failure to exercise ordinary care that can result in potential liability include:

    1. Lack of security control for the storage of check stock within your company's document storage area; lack of timely bank account reconciliation; lack of secure control over storage and access to signature stamps or signature machines
    2. Lack of timely reporting to your bank for potential 'check fraud' occurrences
    3. Lack of paper safety features in your check paper stock
    4. Lack of procedures within your organization that contribute to a forged signature or to an amount alteration; and
    5. Lack of supplying current documentation to your bank on authorized signers.

    Consider implementing the following internal controls within your company:

    1. Review your bank statements, cancelled checks and endorsements on a monthly basis.
    2. Segregate financial responsibilities. Ensure that at least two people are responsible for accounts payable. Make sure that the authorized signers are not the same people who reconcile the account.
    3. Review all hiring procedures and bond employees when appropriate. Run background checks for employees that are working in vendor assignment, check issuance or check reconciliation areas.
    4. Implement sound mailroom procedures.
    5. Secure all reserve supplies of check stock, cash equivalents and other bank documents. Verify that the tops and bottoms of check boxes have not been opened and then resealed.
    6. Change keys or entry codes periodically to prevent routine access to storage areas. Do not share login access codes with third party providers.
    7. Enforce mandatory vacation policies, particularly for those with financial access.
    8. Conduct random audits and reconcile statements promptly.
    9. Read and understand your bank contracts regarding liability, and your company's liability for fraud under the current UCC Regulations.

    Consider implementing the following external procedures within your company:

    1. Use bank services like 'Positive Pay,' expedited return information and signature verification systems to protect your payroll, accounts payable and accounts receivable.
    2. Use an electronic payment system for check disbursement.
    3. Purchase checks and deposit slips from approved vendors.
    4. Reconcile your check disbursements and deposits promptly.
    5. If a payable amount is fraudulently used, close the account as soon as possible.
    6. Be cautious when using refund accounts such as rebates for subscriptions. This is another target for check fraud as the checks are relatively easy to obtain and can be used for check fraud.
    7. Find ways to replace paper documents with electronic payments, devices and complete printing systems that control not only the development of blank safety stock to printed check creation, but include Positive Pay for the processing of your issued checks by the bank electronically.
    8. Shred cancelled and unused checks. Do not disclose your checking information.
    9. Question anything suspicious. Verify new business vendors and the association with your company.

    About FV

    Facta Vera Ltd. is a North American leader in accounts payable automation enabling technologies. Our solutions automate the processing and facilitate the management of payment process. Our customers achieve greater control, improved compliance, increased security and efficiencies of the operations. As a result, they are able to drastically reduce costs by 40% to 60% and make a direct impact on the bottom line.

         
         
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