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Alleviating fraud in your finance function

Finance enterprise resource planning (ERP) and procure to pay (P2P) systems – often described as the heart and lungs of a company – are known to have vulnerabilities and can be open to fraud. David Thorley, director of customer development at Fiscal Technologies, writes

According to fraud experts, each company has around a one in three chance of experiencing internal fraud this year, with enterprise organisations averaging losses of $0.5m.

Additionally, acquisitions, mergers or the centralisation or decentralisation of the P2P function and systems also create a higher vulnerability to duplicates, errors and fraud.

When systems are being configured and resources are stretched, errors and omissions occur. Processes take time to adapt, and this allows sophisticated fraudsters to target these types of transformation projects.

The crisis created by the Covid-19 pandemic has worsened these issues and opened up further vulnerabilities through remote working. It therefore requires accounts payable (AP) and P2P to be proactive in order to reduce costs, with the focus on retaining and protecting cash taking precedence.

Transformation risk

As migration projects typically copy only open transactions to the new system – historical transactions seen as being of little value – transaction history can be lost. Spotting irregularities relies on comparing transactions with historical data so that the validation of duplicate payments is hindered.

During ERP migrations, the master supplier file (MSF) is frequently left untouched and copied in its entirety from the old to the new system. This creates heightened risks as supplier reference changes in the new ERP’s MSF make historical look-ups impossible, and the opportunity to remove unused, out-of-date and duplicate suppliers – a hotbed for fraud – is removed.

Particularly at a time like right now, it is crucial that organisations are able to take action in recovering missed payment errors.

Targeted fraud

Over the past few years, there has been no shortage of stories about internal company fraud or senior finance professionals being tried in court for financial fraud. While only a small proportion of these instances become public knowledge, as organisations fight to keep reputational damage at bay, it is essential that companies place financial fraud high up on the corporate radar in order to protect against these threats.

According to the KPMG Fraud Barometer, there was a sixfold increase in the number of alleged procurement frauds appearing in court in 2019, usually involving fake invoices. Six cases worth over £16m ($21.2m) appeared in court in 2019, compared to £2.9m in 2018.

The individuals and groups who are deceiving businesses to gain payments usually gain some inside knowledge of the processes or systems to enable them to set up fraudulent suppliers and divert funds to their accounts. They are sophisticated and plan their attacks.

They tend to target the complex relationships between procurement and AP, especially in enterprise organisations where the adoption of artificial intelligence, complex system integration and automation delivers a touchless-AP process, but may lack in the controls of traditional processes

The biggest risk factor when it comes to ERP fraud is allowing users to access parts of the system that they should not be able to see, thereby enabling them to commit fraud in a variety of ways.

The most common type is the dummy company fraud, where a user sets up a false supplier, processes fictitious orders and invoices, and pays for goods or services that are never received. This fraud is surprisingly easy to perform for a user with a little too much access.

But there are many other forms of deception, including supplier bank account changes, inventory manipulation and unauthorised changes to payroll data. Proper control measures can mitigate these vulnerabilities to a large extent.

More so than ever, cashflow is the number one priority. With this in mind, it is imperative that organisations ensure they have the right processes in place to protect and retain cash.

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