Accounts Payable Fraud Detection and Prevention Strategies

Fraud in accounting is an unfortunate but ubiquitous risk that affects businesses of all sizes. While most companies have some controls in place to prevent fraudulent accounts payable activities, the fluid nature of modern financial operations, especially in AP, can make it difficult to catch schemes before they cause damage. 

The challenge lies in misaligned systems and oversight,  and adding to the complexity, many types of accounts payable fraud are designed to look like routine transactions. From invoice manipulation to vendor impersonation, these activities often blend insidiously into legitimate workflows, making early detection exceptionally difficult without the right tools and processes. Yet the cost of missing them can be severe, both financially and reputationally.

Let’s explore how accounts payable fraud detection can impact organizations, the types of scams teams need to look for, and the key strategies you need to know about how to prevent accounts payable fraud.

Key highlights:

• Accounts payable fraud is common and costly, and recognizing internal and external fraud schemes is essential to building a strong defense.
• Detection relies on proactive strategies such as Benford’s Law analysis, vendor monitoring, and automated anomaly detection to help teams spot red flags early and investigate suspicious activity before damage occurs.
• ExFlow offers embedded AP automation within Microsoft Dynamics 365, delivering built-in controls like invoice traceability, role-based access, and real-time validation, enhancing fraud prevention.
• Even a single fraudulent invoice can generate a ripple effect across budgets and forecasts, underscoring the need for compelling accounts payable fraud detection measures.

What Is AP Fraud?

Accounts Payable (AP) fraud refers to deceptive practices that exploit an organization’s payment processes to misappropriate funds. This can involve internal actors, such as employees, or external parties, like nefarious vendors or shifty cyber criminals. 

A typical internal example is when an employee creates a shell company to submit fake invoices for services never rendered, resulting in unauthorized payments. Another common occurrence is check tampering, where an employee intercepts and alters checks to redirect funds for personal gain. An external threat often presents as a known vendor, sending a convincing email request to update banking details; only for the next payment to be routed straight into the scammer’s account.

The prevalence of AP fraud is alarmingly high. According to a 2024 report by the Association for Finance Professionals, 80% of organizations were victims of payment fraud attacks or attempts in 2023, marking a 15-percentage-point increase over the previous year. 

How Fraud in Accounting Hurts Organizations 

Accounts payable fraud can have profound and multifaceted impacts on organizations. It extends beyond immediate financial losses to affect various aspects of operations and reputation. Implementing robust internal controls and fostering a culture of transparency are essential steps in mitigating these risks and safeguarding your organization’s assets and reputation.

Below is a breakdown of these impacts:​

Impacts of AP Fraud	How Your Business Is Affected
Reduced Bottom Line	Financial losses from AP fraud can quickly escalate, especially when fraudulent activity goes undetected for extended periods. These losses can include direct payments, investigation costs, recovery efforts, and the long-term financial drag caused by disrupted operations and strained vendor relationships.
Damaged Reputation	Beyond financial loss, fraud can severely damage a company's reputation, eroding trust among clients and partners. A tarnished reputation may lead to decreased customer loyalty and challenges in attracting new business. ​
Legal Issues	Due to fraudulent activities, organizations may face weighty legal consequences, including lawsuits and regulatory penalties. Legal battles can be expensive and time-consuming, diverting resources from core business operations.
Operational Disruptions	Investigating and addressing accounts payable fraud cases can disrupt daily operations, leading to setbacks and inefficiencies. Fraud investigations consume time and resources, delaying legitimate payments and straining vendor relationships.
Decreased Employee Morale	The discovery of fraud within an organization can whittle away employee morale, especially if internal controls are perceived as inadequate. Employees may feel betrayed or insecure, impacting productivity and workplace culture.​

Types of Accounts Payable Fraud Schemes

Fraud in accounts payable doesn’t always come from outside the organization. In fact, many billing schemes are orchestrated by employees or involve some level of internal access. To build a strong fraud prevention strategy, it’s essential to understand how internal and external schemes operate — and how they can often go undetected without the proper measures in place.

Let’s review the main type of fraud in AP:

Internal Fraud Schemes

Internal AP fraud typically involves employees who exploit gaps in approval workflows, payment processes, or oversight. These schemes can be challenging to detect because the perpetrators often know how to bypass existing accounts payable fraud prevention controls​. Below are some of the most common forms:

• False Billing: An employee creates and submits invoices for goods or services that were never provided, often using a shell company or fake vendor profile to process payments.
• Check Manipulation: Payment intended for legitimate vendors is altered by changing the payee or amount before being deposited into a personal or fraudulent account.
• Expense Misrepresentation: Employees exaggerate or falsify reimbursement claims, submit phony receipts, or duplicate expenses across multiple reports to extract additional funds.
• Vendor Collusion: In this scheme, an employee conspires with an external vendor to overbill the company or approve payments for subpar or incomplete goods and services, sharing the illicit proceeds.
• Intermediary Purchasing: An employee purchases goods through a third party, inflates the cost, and bills the company through an intermediary, pocketing the markup.

External AP Fraud

External fraud comes from outside the organization — often from cyber criminals, fake vendors, or shady, opportunistic suppliers. These schemes tend to exploit digital channels or loopholes in vendor onboarding and invoice validation processes.

• Fictitious Invoicing: Fraudsters send invoices that appear legitimate but are tied to nonexistent services or products. These often rely on forged branding or lookalike vendor names to deceive AP teams.
• Overcharging: A vendor intentionally inflates pricing on invoices, hoping these discrepancies will go unnoticed, especially when order volumes are high or oversight is minimal.
• False Vendor Registration: Bad actors register as vendors using stolen or fabricated information to gain access to payment systems and issue fraudulent invoices.
• Non-existent Suppliers: Similar to fictitious invoicing, this scheme involves creating an entirely fake supplier in the system and directing payments to personal or fraudulent bank accounts.
• Email Impersonation: Also known as business email compromise (BEC), this involves a scammer posing as a known vendor or executive, often requesting urgent payment to a new account.
• Payment Diversion: A legitimate vendor’s payment instructions are intercepted and altered (either through phishing or compromised portals) to redirect funds to an unauthorized account.

How to Detect Accounts Payable Fraud Risks

Detecting AP fraud is a proactive effort that blends data analysis, process oversight, and intelligent invoice automation. The more fraud awareness your organization builds, the better equipped you’ll be to spot and stop suspicious activity before it puts your business at risk. Below are some insightful fraud prevention techniques your finance team can use to flag suspicious activity early and subsequently tighten up vulnerabilities.

Apply Benford’s Law Analysis

Benford’s Law is a statistical principle that predicts how often certain digits appear as the leading number in naturally occurring data sets. In legitimate accounting records, lower digits like 1 and 2 tend to appear more frequently at the beginning of numbers than higher digits like 8 or 9. When fraudulent transactions are manually created or manipulated, they often fail to follow this natural pattern.

Applying Benford’s Law to payment amounts, invoice totals, or transaction logs can help uncover irregularities that warrant further investigation. It’s especially effective when reviewing large volumes of data where manual review isn’t practical. While it doesn’t prove fraud on its own, it’s a valuable screening tool to help prioritize deeper audits.

• Run Benford’s analysis monthly or quarterly
• Flag data sets where leading digits appear disproportionately
• Focus reviews on outliers for further investigation
  

Implement Automated Anomaly Detection

Machine learning and AP automation tools can flag unusual behaviors, such as duplicate payments, off-hours transactions, inconsistent approval routing, or amounts that fall outside your expected ranges. These systems use historical data to establish normal patterns, and then alert users when activity deviates from those baselines. 

Automated anomaly detection is especially valuable in high-volume environments where manual oversight is limited, helping finance teams identify potential fraud faster, reduce human error, and focus their efforts on transactions that truly require investigation.

• Set thresholds for invoice values and approval patterns
• Use tools with real-time alerts for flagged entries
• Combine with cloud-based invoice approval to ensure timely and secure oversight across remote teams
• Continuously refine models based on new fraud trends
  

Monitor Vendor Master Files

Many AP fraud schemes begin with subtle changes to vendor records, such as updated bank details or altered contact information that allow funds to be redirected without detection. Regularly monitoring your vendor master file helps identify unauthorized edits, duplicate entries, or newly created vendors that haven’t gone through proper verification. 

Implementing alerts for changes and requiring dual approval for updates can significantly reduce the risk of manipulation and ensure that vendor data remains accurate and secure.

• Require dual approval for all vendor additions/changes
• Audit bank account updates and mailing address changes
• Lock inactive vendor profiles after a set period

Analyze Invoice Sequences

Reviewing invoice numbering can uncover inconsistencies that may point to fraud or process breakdowns. Gaps, duplications, or out-of-sequence entries could indicate missing invoices, altered records, or attempts to conceal unauthorized payments. 

While it may seem like a basic control, analyzing invoice sequences regularly, especially by vendor, can reveal patterns of manipulation that might otherwise go unnoticed and help ensure a complete and auditable payment trail.

• Sort and compare invoice numbers per vendor
• Investigate duplicated or missing sequence numbers
• Validate time stamps and submission dates for consistency

Track Returned or Canceled Checks

Returned or voided checks shouldn’t be dismissed as routine errors, especially when they occur frequently or without clear documentation. These transactions may be used to reroute funds, obscure unauthorized payments, or cover up earlier fraud attempts. 

Monitoring all canceled or reissued payments, and cross-checking them against original approvals and supporting documentation, can help uncover irregularities and ensure that corrections aren’t being used as a smokescreen for fraudulent activities.

• Maintain a log of all canceled or reissued checks
• Investigate frequent voids by vendor or department
• Cross-check canceled payments against approved transactions
  

How to Prevent Accounts Payable Fraud

Fraud prevention starts with building a resilient AP process that emphasizes transparency, oversight, and accountability. Below are ten actionable strategies organizations can use to reduce accounts payable fraud risks and reinforce trust in their financial systems.

Implement Strong Internal Controls

Having well-defined internal controls is your first and most important line of defense against AP fraud. These controls ensure accountability at each step of the invoice and payment lifecycle, making it harder for bad actors to exploit process gaps. Organizations should regularly review and strengthen these measures, especially as teams grow or systems evolve.

Key controls to implement:

• Segregation of duties (e.g., invoice entry vs. payment approval)
• Mandatory dual approvals for vendor changes or high-value payments
• Access restrictions on sensitive financial systems and files
  

Foster an Ethical Culture

A strong ethical culture is one of the most potent deterrents to internal fraud. When leadership consistently models integrity and transparency, it sets the tone for the entire organization. Employees are more likely to report questionable behavior and follow established policies when ethical expectations are clear and supported.

Tips to foster ethical behavior:

• Set the tone from the top with clear values across the board
• Reward integrity in decision-making
• Create safe, anonymous channels for whistleblowers to report suspicious behavior
  

Train Employees on Fraud Awareness

Fraud training shouldn’t just be for finance or compliance teams. Everyone who touches invoices, vendor statements, or payment systems should understand what fraud looks like and what to do if they suspect it. Training should be relevant, engaging, and repeated regularly—not just a one-time checkbox.

Effective training programs should:

• Include real-world examples and red flags
• Provide clear protocols for escalation
• Be updated regularly to reflect current threats
  

Verify Vendor Information

Vendor fraud often starts with inaccurate or fabricated details, which is why every new vendor should be thoroughly verified. Rushing through setup without checks can expose your business to fraudulent schemes. Verifying identity, legitimacy, and banking information is non-negotiable in a secure AP process.

Vendor verification should include:

• Cross-checking tax IDs and business licenses
• Verifying banking details via direct contact—not email alone
• Reviewing vendor websites and physical addresses for legitimacy
  

Standardize Vendor Setup Process

A consistent and well-documented vendor onboarding process helps close loopholes and reduce human error. It also allows for easier audits and better visibility into who was approved and why. Standardization removes the guesswork and ensures every vendor goes through the same due diligence.

Standardization helps by:

• Ensuring required documentation is always collected
• Reducing the risk of duplicate or false vendors
• Making it easier to audit and trace changes over time
  

Use AI Technology

AI-powered AP automation systems are increasingly capable of detecting patterns and anomalies that humans might miss. These tools improve both detection and prevention by flagging suspicious behavior before payments are processed.

AI can help with:

• Predictive fraud risk scoring
• Real-time alerts for out-of-pattern invoices
• Automated invoice data capture to reduce manual entry errors and manipulation

Conduct Regular Audits

Audits provide a crucial layer of protection by uncovering red flags, policy violations, or control weaknesses. Regular audits keep teams accountable and send a clear message that fraud will not go unnoticed. For maximum effectiveness, both internal and external audits should be scheduled and occasionally unannounced.

Audit best practices:

• Schedule both planned and surprise audits
• Rotate audit responsibilities to avoid conflicts of interest
• Review both financial transactions and user access logs
  

Monitor Key Performance Indicators

Tracking AP-related KPIs can help spot early signs of fraud. Sudden changes in processing time, payment error rates, or vendor turnover could indicate underlying issues worth investigating.

Key KPIs to monitor include:

• Duplicate payment rates
• Number of vendor changes per month
• Average invoice approval time
  

Perform Fraud Risk Assessments

A fraud risk assessment allows your organization to identify vulnerabilities proactively. This process should be collaborative and cover the full AP workflow, not just the payment stage. By evaluating where controls are weakest, you can better prioritize investments in security and process improvements.

Steps to perform a risk assessment:

• Map out the AP workflow from invoice receipt to payment
• Identify gaps where controls are weak or missing
• Prioritize areas with a history of errors or unusual activity
  

Stay Updated on Fraud Prevention Techniques

Fraud tactics evolve quickly. Staying informed about new schemes and prevention strategies is essential for maintaining strong defenses, and this applies to both technology and human behavior.

Ways to stay updated:

• Subscribe to fraud prevention newsletters (e.g., AFP, ACFE)
• Attend webinars or workshops on financial risk and compliance
• Encourage knowledge-sharing within your finance team

Enhance Accounts Payable Fraud Prevention with ExFlow 

Even with strong internal processes, preventing AP fraud at scale requires intelligent automation and built-in control mechanisms. ExFlow for Finance & Operations and Business Central, a fully embedded AP automation solution for Microsoft D365, helps organizations reduce risk and close gaps in the payment process—without adding unnecessary complexity.

Here’s how ExFlow supports smarter, more secure accounts payable operations:

• End-to-End Invoice Traceability: Every invoice is tracked from receipt to payment with full audit trails. This visibility makes it easy to detect anomalies, unauthorized approvals, or invoice manipulation attempts.
• Role-Based Access Control: ExFlow limits access to sensitive functions based on user roles, helping enforce segregation of duties and reduce opportunities for internal fraud.
• Automated Matching and Validation: Three-way matching between invoices, purchase orders, and goods receipts ensures that only valid and approved invoices are paid—automatically flagging mismatches for review.
• Real-Time Workflow Monitoring: Finance teams can monitor invoice status and workflow steps in real time, making it easier to detect bottlenecks, overrides, or unusual approval patterns.
• Audit-Ready Reporting: ExFlow provides built-in reports and exportable logs that make internal audits faster and more transparent, helping businesses stay compliant and fraud-resilient.
  

Book a demo today and explore how ExFlow can help your organization enhance accounts payable fraud detection.

Frequently Asked Questions

What Red Flags Should AP Teams Look for to Prevent Fraud?

AP teams should be cognizant of unusual invoice amounts, duplicate vendor names, missing documentation, or last-minute payment requests—especially if they’re marked as urgent. Other red flags include frequent vendor changes, payments to unfamiliar bank accounts, and approvals from unauthorized personnel. Spotting these early can help prevent more serious financial losses.

What Are Common Examples of Fraud in Accounts Payable?

Common AP fraud schemes include fictitious invoicing, where fake vendors submit invoices for nonexistent goods; duplicate payments; and internal collusion, where employees and vendors work together to overcharge or approve false payments. Check tampering, email impersonation, and misrepresented employee expenses are also frequent examples seen across industries.

What Role Does Automation Play in Reducing AP Fraud?

Automation helps reduce AP fraud by enforcing rules-based workflows, flagging anomalies in real-time, and limiting manual data entry, which is one of the biggest sources of vulnerability. Automated systems like ExFlow also provide traceable audit trails, role-based access control, e-invoicing solutions, and automated invoice matching, all of which reduce the likelihood of fraudulent activity slipping through.