The Definitive Guide to AP Fraud with Examples and Tips

Organizations of all sizes must protect their accounts payable (AP) processes from fraudulent activities. By implementing effective preventative measures, businesses can safeguard their finances, uphold their reputation, and maintain long-term stability. Without these protections, companies risk exposure to costly AP fraud, which can have serious consequences for both their financial health and credibility.

What Is Accounts Payable Fraud?

Accounts payable fraud is a deceptive activity designed to exploit and manipulate a company's accounts payable (AP) processes, often resulting in unauthorized or improper payments. This type of fraud can take many forms, including falsified invoices, duplicate payments, or fraudulent vendor accounts, and it can significantly impact a company's financial health if not detected and addressed promptly. It can stem from internal sources, such as employees, external entities like vendors, or collusion between the two. Increasingly, cybercriminals exploit digital systems to infiltrate accounts payable departments.

What are the financial impacts of AP fraud?

Fraud continues to be a significant challenge for organizations worldwide. The 2024 Association of Certified Fraud Examiners (ACFE) Report to the Nations reveals that businesses lose roughly 5% of their annual revenue to fraud, with median losses per case reaching $120,000. On average, fraudulent activities go unnoticed for 12 months, leading to monthly losses of approximately $10,000 until they’re caught

What Are the Risks of AP Fraud?

Preventing AP fraud is crucial for protecting a business's financial health and ensuring its operational integrity. Fraudulent activities can lead to significant monetary losses, disrupt cash flow, and require costly investigations that divert resources from productive initiatives. When fraudulent transactions go undetected, they can erode investor confidence and damage the company’s reputation, which in turn can impact relationships with vendors, customers, and regulators.

In addition to financial losses, AP fraud may result in legal repercussions,reputational damage, and even bankruptcy in extreme cases. Moreover, fraudulent activities not only affect the victimized company but also its employees, customers, investors, and suppliers. By implementing preventative measures against AP fraud, companies can avoid these damaging consequences and maintain long-term stability.

How Does Accounts Payable Fraud Work?

The Association of Certified Fraud Examiners (ACFE) identifies AP fraud as a form of "asset misappropriation” involving fraudulent disbursements like billing schemes, check tampering, and expense reimbursement manipulation. AP fraud occurs when individuals or entities exploit weaknesses in a company’s payment processes to illegally acquire funds through vulnerabilities like inadequate oversight, weak internal controls, or human error within the AP department. For instance, an employee might generate invoices for fictitious vendors or alter legitimate invoices to inflate payment amounts. In some cases, fraud arises through collusion, where employees collaborate with external suppliers to overcharge the organization, pocketing a portion of the excess payments.

This type of fraud typically relies on the creation of deceptive documents or digital records that appear authentic, making fraudulent activity difficult to detect. Tactics may include intercepting and modifying checks, altering vendor bank account details to redirect electronic payments, or employing social engineering approaches — such as phishing emails — to manipulate employees into authorizing unauthorized transactions. Without regular audits, strict vendor verification processes, or robust transaction monitoring systems, AP fraud can go undetected for extended periods, leading to significant financial losses. Accounts payable (AP) fraud can generally be classified into several key categories, each reflecting different vulnerabilities in financial processes:

Billing Fraud: Schemes involving fraudulent or manipulated invoices, including fake vendors, inflated charges, or duplicate payments.

Check Fraud: Activities like check forgery, theft, tampering, or unauthorized endorsements, resulting in misdirected payments.

Expense Reimbursement Fraud: Employees submit false, exaggerated, or personal expenses for reimbursement through AP systems.

Vendor Fraud and Collusion: Situations where employees collude with external vendors, often involving kickbacks, overbilling, or favoritism.

Cyber and Phishing Fraud: Digital attacks like business email compromise (BEC), phishing, or unauthorized system access targeting AP processes.

Internal Controls Bypass: Exploiting weaknesses such as lack of segregation of duties, insufficient oversight, or inadequate approval procedures.

Conflict of Interest Fraud: Employees influence AP decisions to benefit themselves or related parties, resulting in inappropriate or biased transactions.

Six Red Flags for AP Fraud

The ACFE highlights key red flags to watch for in AP processes. While any single red flag might seem harmless, the presence of multiple warning signs should raise concern. In fact, 85% of fraud cases involve perpetrators displaying at least one red flag beforehand. According to the ACFE, whistleblowers are the most effective source of fraud detection, followed by internal audits and management reviews. Implementing proactive monitoring and robust payment controls can drastically shorten the time fraud goes unnoticed.

By identifying these patterns early, organizations can investigate and address potential insider fraud before it escalates into significant financial damage.

Financial Red Flags

These include irregularities in accounting records such as unexpected revenue spikes, unusually high or frequent write-offs, and round-number journal entries that seem too neat. Such anomalies can signal that figures are being manipulated or that fictitious transactions are being recorded to hide fraud.

• Unexplained revenue growth: Sudden, significant increases in revenue that lack a clear connection to legitimate business activities, potentially signaling financial manipulation or attempts to conceal fraudulent behavior.

• Frequent write-offs or adjustments: An unusually high volume of voided transactions or write-offs in accounts payable records, which may be used to obscure unauthorized payments or mask discrepancies.

Invoice-Related Fraud Indicators

This red flag covers issues like duplicate invoices, inflated billing, or invoices missing key information (such as tax IDs or purchase order numbers). When invoices look inconsistent or lack proper documentation, it may indicate that fraudulent charges are being submitted to siphon off funds.

• Duplicate invoices: Identical or nearly identical invoices submitted multiple times, resulting in duplicate payments for the same goods or services.

• Missing key information: Invoices that omit crucial details, such as tax identification numbers or purchase order references, making it challenging to verify the authenticity of the vendor.

• Suspicious invoice details: Invoices with unusually round totals (e.g., no odd cents) or those listing questionable addresses, such as P.O. boxes or an employee’s personal address as the vendor location. These anomalies may indicate fraudulent or altered invoices.

Transaction & Operational Warning Signs

Irregularities in the processing of transactions, such as unauthorized changes to vendor details, duplicate payments, or unusual timing of approvals, are key indicators. These operational anomalies suggest that internal controls may be bypassed, allowing fraudulent activities to slip through unnoticed.

• Unauthorized vendor changes: Unapproved alterations to vendor master data, such as updates to addresses or bank account details, which may signal potential insider tampering.

• Duplicate or irregular payments: Payments issued for the same invoice more than once or multiple rapid payments to a single vendor without clear justification, potentially pointing to oversight failures or deliberate exploitation.

• Rushed or bypassed procedures: Urgent payment requests that circumvent standard processes, such as skipping approval channels or requesting expedited payments, which heighten the risk of fraudulent transactions.

• Invoice splitting: Dividing large purchases into smaller invoices to stay below approval thresholds — a common tactic for concealing fraudulent activities.

Cyber Fraud Red Flags

These are signs of digital compromise, including unexpected login activity, attempts to change system configurations, or urgent, atypical electronic transfer requests. Such signals may indicate phishing attacks, business email compromises, or unauthorized access intended to manipulate financial data.

• Unusual login activity: Logins to AP systems at odd hours or from unfamiliar locations or IP addresses, signaling potential credential compromise or unauthorized access attempts.

• Social engineering attacks: Fraudulent emails or calls creating a sense of urgency, often impersonating a CEO or vendor, to pressure staff into changing payment details or transferring funds immediately. These are common tactics in phishing and business email compromise scams.

• Unverified account change requests: Sudden email requests from vendors to update bank account details or payment methods without proper validation — frequent in phishing schemes targeting accounts payable teams.

Vendor Fraud and Master File Discrepancies

Problems in vendor records, such as duplicate or inactive entries, mismatched addresses, or discrepancies between invoiced details and vendor master files, are red flags. These issues can reveal the presence of shell companies or fraudulent vendors being used to channel illegitimate payments.

•  Incomplete or inconsistent vendor information: Missing tax IDs, insufficient contact details, or minimal company data can signal the presence of shell companies or fraudulent vendors.

•  Duplicate or inactive vendor records: Multiple entries for the same vendor or payments made to vendors listed as inactive may indicate attempts to channel fraudulent payments through look-alike entities.

• Suspicious vendor addresses or contacts: Red flags include vendor addresses matching an employee’s address, reliance on P.O. boxes, or email addresses from free domains (e.g., Gmail) instead of official company domains — all potential indicators of illegitimacy.

• Unusual vendor transactions: Large contracts or sudden payment increases to new or unvetted vendors, without clear business justification, should prompt a thorough review of these relationships.

Employee Behavior Warning Signs

Warning signs include employees exhibiting behavior that doesn’t match their compensation—such as lavish spending or resistance to delegation—and those who insist on handling all aspects of a process without oversight. Such conduct may suggest an individual is masking fraudulent activities or colluding with external parties.

• Avoidance of leave or delegation: Employees who refuse to take vacations or rotate responsibilities may be trying to avoid scrutiny of their workflows, potentially fearing exposure of improper practices.

• Living beyond their means: Staff whose lifestyles or spending habits significantly exceed their income — such as driving luxury cars or making extravagant purchases — may exhibit a classic warning sign of fraud motivation.

• Unusually close vendor relationships: Suspiciously close connections between an employee and a vendor, marked by favoritism or bypassing standard checks and balances, could signal kickbacks or collusion.

• Excessive control or secrecy: Individuals who insist on managing every step of a process, resist oversight, or refuse to share duties may create an environment where fraudulent activities can remain hidden.

15 Types of Accounts Payable Fraud Schemes with Examples

AP fraud encompasses a variety of deceptive practices that exploit an organization's payment processes, leading to financial losses. These schemes can be perpetrated internally by employees or externally by vendors and cybercriminals. Understanding these schemes helps organizations protect themselves from AP fraud. Enforcing strong controls, verifying invoices thoroughly , and training employees to spot fraud are key steps to safeguarding resources and maintaining stability.

1. Billing schemes:

• Shell companies: Employees create fictitious vendors and submit invoices for goods or services never provided.​ Example: A school principal and his brother-in-law established a fake cleaning company to invoice the NSW Department of Education for $1.4 million in nonexistent maintenance services. ​

• Inflated invoices: Employees collude with legitimate vendors to overcharge for actual goods or services, sharing the excess funds.​ Example: A con artist defrauded payroll lending companies of $5 million by submitting inflated invoices for services never rendered, using the funds for personal luxuries.

2. Check tampering:

• Forged maker: An employee forges signatures on company checks to divert funds.​ Example: An office manager embezzled over $150,000 by writing fraudulent checks to herself, disguising them as payroll and loans.

• Altered payee: Legitimate checks are altered to change the payee's name after authorization.​ Example: A fraudster stole checks from a company's accounts, altered the payee information, and deposited them into his own accounts, resulting in a loss of over $56,000.

3. Expense reimbursement fraud:

• Fictitious expense reimbursement: Employees submit reimbursement claims for expenses that were never incurred.​ Example: A non-profit manager used organization funds for personal expenses, including adult entertainment, leading to legal action. ​

• Inflated expense reimbursement: Actual expenses are exaggerated to receive higher reimbursements.​ Example: An employee submits a receipt for a $50 meal as a $100 expense, pocketing the difference.​

4. Pass-through schemes: An employee establishes a shell company to purchase goods at market prices, then resells them to their employer at inflated rates, pocketing the difference.​

Example: An employee creates a fake consulting firm, bills their employer for services, and outsources the work at a lower cost, keeping the markup.​

5. Conflict of interest: Employees approve payments to vendors in which they have an undisclosed personal interest, potentially leading to biased decision-making and financial loss.​

Example: A procurement manager awards contracts to a company secretly owned by a relative, resulting in overbilling.​

6. Kickback schemes: Employees receive personal benefits from vendors, such as cash or gifts, in exchange for facilitating business with the vendor, often resulting in inflated prices or subpar goods/services.​

Example: A purchasing agent accepts vacations from a supplier in return for continued business, leading to overpayment for supplies.​

7. Duplicate payments: Processing the same invoice multiple times, either intentionally or due to oversight, leading to overpayments.​

Example: A vendor submits identical invoices months apart; without proper checks, both are paid.​

8. Disguised purchases:

Employees make purchases under the company's name but divert the goods or services for personal use.​

Example: An employee orders electronics through the company account and takes them home.​

9. Invoice fraud: Fraudsters submit fake invoices or alter legitimate ones, such as inflating amounts or changing bank account details, to divert payments.​

Example: Scammers send invoices resembling those of regular suppliers, leading to unauthorized payments. ​

10. Overbilling: Vendors charge for goods or services not delivered or inflate prices, exploiting weaknesses in the company's verification processes.​

Example: A vendor bills for 100 units delivered when only 80 were received.​

11. Business email compromise (BEC): Cybercriminals impersonate executives or vendors via email to request urgent payments or sensitive information, often using spoofed addresses and social engineering tactics.​

Example: Fraudsters pose as a company's CEO, emailing the finance department to wire funds to a fraudulent account. ​

12. Check fraud: Forgery, alteration, or theft of physical checks, leading to unauthorized withdrawals from company accounts.​

Example: A postal worker stole over $1.6 million in tax return checks, funding personal luxuries.

13. ACH fraud: Unauthorized electronic transfers made through the Automated Clearing House network, often resulting from phishing attacks or compromised credentials.​

Example: Hackers obtain login details and initiate unauthorized ACH transfers from the company's account.

14. Vendor collusion: Vendors collaborate with internal employees to defraud the company, such as submitting inflated invoices or billing for undelivered goods/services.​

Example: A vendor and employee agree to overstate service hours, splitting the excess payment.​

15. Non-delivery fraud: Vendors charge for goods or services that were never delivered, exploiting weaknesses in the company's verification process.​

Example: A supplier invoices for materials that are never shipped, relying on lax oversight to go unnoticed.

What Is Benford’s Law?

Fraud investigators often turn to Benford’s Law, sometimes referred to as the "first-digit law," as a key tool for detecting anomalies in financial datasets that predicts the frequency of leading digits in naturally occurring numbers, revealing a pattern that might otherwise go unnoticed.

According to Benford’s Law:

• The digit 1 appears as the leading number about 30% of the time.

• The digit 2 shows up 18% of the time.

• The frequency of each digit decreases until the digit 9, which appears as the first digit less than 5% of the time.

This phenomenon holds true across a wide variety of datasets, including financial figures, and it applies regardless of the units of measurement. In forensic accounting and fraud detection, investigators might compare the distribution of first digits in an expense report to the expected pattern outlined by Benford’s Law. If the actual distribution deviates significantly, it could indicate data manipulation or falsification.

This principal's unique ability to uncover irregularities has made it an invaluable tool for fraud examiners, offering both mathematical elegance and practical utility when identifying potential red flags in seemingly ordinary data.

10 Ways to Prevent AP Fraud

Detecting fraud in accounts payable is essential to preserving financial integrity. A robust approach combining preventive and detective controls can help uncover and mitigate fraudulent activities. By proactively applying these strategies, businesses can fortify their AP departments, ensuring financial operations remain secure and transparent:

1. Implement Accounts Payable Automation Software

Adopting AP automation software significantly reduces manual intervention[5] , ensuring consistent application of controls and providing real-time monitoring. Automated systems enforce compliance with policies, improve audit trails, and minimize the risk of errors and fraudulent activities.

2. Enforce Segregation of Duties

Reduce the risk of fraud by assigning separate employees to manage different stages of the AP cycle, such as invoice approval, payment authorization, and account reconciliation.

3. Shift vendor payments to credit cards

Corporate card programs often come with controls outlining who is authorized to use corporate cards, what types of expenses are allowed, and spending limits. Automated transaction monitoring tools can flag unusual spending patterns or transactions that fall outside normal parameters, enabling early detection and rapid response to potential fraud. In addition, regular reconciliation, audit processes, and virtual card programs[6]  are essential to ensure that every expense is legitimate and properly documented.

4. Conduct Regular Audits

Schedule both internal and external audits to thoroughly review AP transactions and uncover irregularities. Routine audits not only deter potential fraud but also identify unauthorized activities.

5. Leverage Data Analytics

Use advanced data analysis techniques to detect anomalies in financial transactions. Tools like Benford's Law can identify irregular numerical patterns, serving as early red flags for fraud.

6. Strengthen Vendor Management

Verify vendor legitimacy during onboarding and maintain a regularly updated, approved vendor list. Periodically review vendor information to spot unauthorized changes or fictitious entities.

7. Prevent Duplicate Payments

Implement systems designed to flag and prevent duplicate invoices. Regularly reconcile accounts to quickly identify and resolve any overpayments.

8. Foster Whistleblower Reporting

Establish confidential, retaliation-free channels for employees to report suspicious activities. Encouraging whistleblowers helps uncover potential fraud early.

9. Adopt Continuous Auditing

Implement real-time auditing processes to monitor financial transactions as they occur. Continuous auditing allows for the rapid detection and mitigation of anomalies, minimizing opportunities for fraud.

10. Use Payment Sanction Screening and SWIFT

Sanction screening is a powerful tool for detecting and preventing fraudulent payments by comparing transactions against sanction lists. With SWIFT’s transaction screening service, businesses can efficiently identify suspicious activity and promptly alert finance teams to potential risks, ensuring a more secure payment process.

How to Find AP Fraud

Detecting AP fraud without technology relies on robust internal controls, meticulous oversight, and time-tested auditing practices. Regularly validating vendor legitimacy and reviewing vendor master lists can quickly expose fake entities. Physical audits, such as matching invoices with delivery receipts or inventory records, often uncover issues like overbilling, duplicate payments, or non-deliveries. Additionally, comparing vendor pricing and invoices against historical data or market rates can reveal inflated charges or suspicious price spikes.

Fostering a culture of vigilance and encouraging whistleblower reporting are equally vital. Employees are often the first to notice red flags, such as unusually close vendor relationships, unexplained wealth, or reluctance to delegate financial tasks. Providing anonymous reporting channels empowers staff to raise concerns safely, enabling swift action. Other preventive measures include surprise audits, unannounced vendor checks, and enforcing segregation of duties — separating invoice approval, payment authorization, and record-keeping — further fortifying fraud defenses. Related to this, enforcing policies like mandatory vacations and periodic job rotation can uncover schemes that rely on one person’s continued, uninterrupted control​ — it’s common for fraudsters to avoid taking leave to prevent others from discovering their misconduct.

What to do if you find AP fraud

If you suspect or identify accounts payable fraud, your first priority should be to document and secure all evidence. Collect and preserve transaction records, invoices, email correspondence, and any relevant data that support your concerns. Maintaining an unaltered and clear audit trail is essential before proceeding further.

Next, promptly report your findings to the appropriate internal authorities, such as your manager, internal audit team, or compliance department, in alignment with your organization's fraud reporting protocols. They can initiate a formal investigation and, if necessary, involve legal counsel or external law enforcement.

In parallel, evaluate and fortify your internal controls to prevent future occurrences. Ensure corrective actions are swiftly implemented to minimize financial losses and protect your organization’s reputation. If fraud is detected:

1. Initiate an internal investigation immediately to assess the scope of loss.

2. Suspend payments to the suspected individuals or entities.

3. Report findings to law enforcement if necessary — ACFE data indicates 59% of fraud cases lead to legal action.

4. Revise compliance protocols and enforce stricter internal controls.

Protect Your Business from AP Fraud with Corpay AP Automation

AP fraud detection requires a combination of preventive controls, monitoring techniques, and advanced technology to identify irregularities. By implementing segregation of duties, regular audits (both internal and external) and strong vendor management practices, companies can ensure that fraudulent activities are caught early before significant financial losses occur. In addition to manual oversight, advanced AP automation software plays a critical role in preventing and detecting fraud by minimizing human intervention and ensuring compliance with internal controls — to say nothing of reducing the need for fraud-prone paper checks.

Corpay AP Automation ensures strict adherence to approval hierarchies and spending policies, flagging any invoices or payments that deviate from business rules. Detailed digital audit trails provide comprehensive visibility into each transaction, simplifying the task of identifying anomalies, like unauthorized vendors, altered payment amounts, and irregular purchasing patterns. Additionally, built-in checks for duplicate invoices and real-time reporting tools help identify suspicious activities promptly, allowing for swift intervention before substantial losses occur. By combining these strategies — preventive controls, advanced technology, automation, and a culture of accountability — organizations can proactively protect their financial assets and mitigate the risk of fraudulent schemes within their accounts payable operations.

AP Fraud FAQs

What are the common types of AP fraud?

Common categories include billing fraud (e.g., duplicate or inflated invoices), check fraud (e.g., forged or altered checks), expense reimbursement fraud, and vendor collusion (e.g., kickbacks or overbilling).

What internal controls help reduce AP fraud risk?

Key controls include segregation of duties, proper invoice verification processes, strong vendor management, routine audits, and establishing clear policies for expense and invoice processing.

What role do external audits play in detecting AP fraud?

External audits provide an independent review of financial records, helping identify discrepancies, irregular transactions, and vulnerabilities in your AP processes that might indicate fraudulent activity.

How does technology assist in AP fraud prevention? Tools such as AP automation software, data analytics, and continuous monitoring systems help identify anomalies, reduce human error, and ensure that only authorized transactions are processed.