The accounts payable department keeps your company running smoothly. They maintain your relationships with vendors to ensure you have all the goods and services your organization needs to stay in business. But what happens when an AP employee turns to fraud?

On average, check and billing fraud schemes go undetected for two years, according to the Association of Certified Fraud Examiners. In 24 months, your company could lose tens or even hundreds of thousands of dollars, on top of the stress and morale damage fraud can cause. Knowing how to identify it, detect it and prevent it can save your organization's finances, reputation and workplace environment.

What Are Common Accounts Payable Fraud Schemes?

When an accounts payable employee commits fraud, it typically falls into one of five types of schemes.

Shell Company

The employee invents a fraudulent company, creates invoices from that company, submits the invoices for payment and directs the payments to a PO box or address that they control. They might have to forge a coworker's signature for approval of the invoices to ensure they're submitted unnoticed.

RELATED: 4 Ways to Prevent Vendor Fraud

Billing Fraud

The employee makes fake or inflated invoices or submits invoices for personal purchases. A shell company is also a type of billing fraud.

Check Fraud

The employee forges a signature on a check from your organization to themselves or creates a counterfeit check. They might also alter the payee, address or amount of a check to match their or their shell company's information.

Vendor File Fraud

The employee adds a vendor to your full list. It could be their shell company or a vendor colluding with them. They might also edit vendor files to match their banking or contact information, rerouting payments to them.

Invoicing Fraud (Kickbacks)

The employee works with a vendor to inflate invoices and receives a kickback from the vendor. The vendor might provide low-quality goods, fewer goods than were ordered or simply benefit from not competing for a contract with your organization.

RELATED: An Essential Guide to Accounts Payable Fraud

Tips for Detecting and Preventing Fraud in Your Accounts Payable Department

Detection Controls

Uncovering fraud before it gets too big reduces your losses and the amount of time you'll need to get your company back in working order. Implement these internal controls to boost your fraud detection:

• Conduct regular internal audits (every few months) as well as surprise audits
• Implement a hotline where employees can report concerns or incidents of internal fraud
• Set up surveillance measures, such as security cameras
• Have an employee who doesn't work in AP manually review your financial records
• Use automation to detect anomalies in your records
• Identify the owner of all PO boxes on vendor files
• Compare employee names, initials, addresses and other contact information against vendor files
• Manually validate vendors' legitimacy via email, phone or in-person contact with a representative
• Review transactions for fraud red flags such as round numbers and unusual invoice frequencies or amounts for the vendor
• Require all AP employees to take their allotted vacation time and designate another employee to take over their duties while they are away

RELATED: 41 Types of Employee Fraud and How to Detect and Prevent Them

Prevention Controls

While strong detection methods are helpful, set your focus on prevention. It's the surest way to protect your company's assets and reputation. Peter Goldmann, Certified Fraud Examiner and President of FraudAware, suggests building these preventive steps into your organization's procedures:

• Require approval of all purchases/requests over a certain dollar amount
• Require competitive bidding for all purchases over a certain dollar amount
• Separate duties: for example, don't give an employee who has purchase approval power editing access to the vendor list
• Write a gift policy forbidding employees from accepting vendors' gifts over a certain value
• Require all employees to send their shipping documents and receipts to AP within one business day
• Audit your vendor list every six months
• Use high-security check stock and other measures from your company's bank to protect against check fraud
• Rotate job duties every few months for employees with AP and accounting duties
• Task an employee who doesn't issue checks with reviewing invoices before they're paid
• Foster a culture of honesty and open communication

For more expert tips, check out our free webinar, "Accounts Payable Fraud: Keys to Detection and Prevention" from Peter Goldmann.

According to the ACFE, implementing internal fraud controls reduced fraud losses and duration by about 50 per cent. Add mindful auditing and review procedures like the ones above to your company's operations to ensure you don't become a victim of accounts payable fraud.