The Complete Guide to Accounts Payable Fraud: Risks, Detection, and Prevention Strategies

Why Accounts Payable Fraud Demands Boardroom Attention

Digital transformation has reshaped business operations, particularly
financial transactions, by enabling cloud-based platforms and remote systems.
While this evolution enhances flexibility, it also introduces heightened
exposure to fraud, especially in the absence of strong preventive controls.
However, the convenient, open-access automation, especially when lacking
preventive filters, leaves your systems and financial data exposed to
cybercriminals. Accounts payable fraud, or AP fraud, is one of the most
prevalent, costly, and, unfortunately, one of the easiest to execute. In fact,
an
AFP Payments Fraud Report
showed that about 71% of businesses encountered AP fraud in 2021. Another
ACFE Global
Fraud Study
found that check tampering can result in a median loss of $100,000 per
business.

With technological advancements, fraudsters are figuring out how to
manipulate weak AP controls, fragmented systems, and high invoice volumes in
new ways. Therefore, a company should remain highly vigilant with its
financial transactions and implement measures to curtail fraud. Failure to do
so can put a company and its financial health at significant risk and severely
damage its reputation.
This blog explores how organizations can identify, prevent, and proactively
respond to accounts payable fraud, using advanced technologies such as
artificial intelligence.

Understanding Accounts Payable Fraud

Accounts payable fraud involves deceptive practices, either internal or
external, that exploit an organization’s payment process to misappropriate
funds. Such schemes may be carried out by individuals, employee groups,
external vendors, or through collusion between both parties. In any
enterprise, payments are always routed through accounts payable, which makes
this a lucrative site for thieves to conduct fraud.

The Rising Threat: What’s Fueling Enterprise-Level Fraud

Below are several factors that contribute to the rise of accounts payable
fraud or invoice fraud:

Digital Payments Boom – The rapid adoption of digital payments has no
doubt streamlined transactions, but it has also exposed them to new
vulnerabilities. Hackers can simply breach unsecured email systems, intercept
payment credentials, or impersonate vendors. Many firms are thinking of
switching to digital or instant payments, yet many lack the necessary security
measures to prevent fraud in these channels.

Vendor Complexity – Enterprises often manage hundreds of vendors
across disparate systems and departments, each with distinct billing cycles,
payment terms, and invoice formats. This lack of standardization creates
visibility gaps, making it difficult to detect impersonation, duplicate
submissions, or altered payment details. 

Legacy Systems – Many companies still rely on outdated AP solutions or
fraud detection software that lacks integration capabilities and real-time
monitoring. These legacy systems struggle to handle the sophisticated
frameworks employed by modern fraudsters. Scammers exploit the blind spots and
loopholes in these systems without setting off any alarms. There are also no
audit trails. So, if someone does commit any fraudulent activity, you won’t be
able to detect it before the next audit season. 

Financial and Operational Impacts of AP Fraud:

1. Direct Financial Losses: Includes unauthorized payments, negative cash
   flow, and disruption of assets, liquidity, budget planning, and annual
   forecasts.
2. Vendor Relationship Strain: Disputes over erroneous or duplicate payments
   can trigger legal tensions and may damage long-standing vendor
   relationships or partnerships. It derails the business’s credibility for
   securing future credit.
3. Compliance Violations: Breaches of financial regulations, such as SOX,
   FCPA, GDPR, and anti-money laundering (AML) laws, raise audit red flags.
   It exposes the organization to legal fines and penalties.
4. Degraded AP Performance Metrics: Fraud can distort accounts payable KPIs
   such as payment cycle time, cost per invoice, and exception handling
   rates, undermining operational visibility and efficiency.
   
5. Reputational Damage: Public disclosure, regulatory actions, and media
   leaks of financial misconduct can erode investor trust and confidence.
   This can lead to market devaluation, executive turnover, a drop in stock
   performance, and damaged brand equity.
   

Most Common Types of Accounts Payable Fraud

Below are 6 common types of accounts payable fraud you should watch out
for:

• Billing Schemes: Billing schemes occur when an employee or group of
  employees generates
  false payments that are actually paid to themselves. It can happen in
  multiple ways
  • Employees create false invoices in the name of products or services that
    were never delivered or required.
  • An employee who approves payments or controls finances colludes with an
    external party or sets up a shell company. Instead of ordering goods and
    services from your regular supplier, the employee first funnels the
    order through the fake company. That fake or shell company indeed buys
    legit goods from the supplier at normal prices but resells them at a
    marked-up price. Since the employee oversees every transaction, the
    enterprise ends up paying more for the same stuff.
  • Setting up fake vendor accounts or using inactive supplier data (the
    company no longer does business with) to create false invoices.
  • When a vendor receives duplicate payments, they might return the extra
    money; however, your employees, on the other hand, could keep it. Or
    they can create duplicate invoices to create vendor credit so they can
    pocket the vendor’s next payment.
• Check Fraud:
  Offenders can fabricate receipt details by changing the check amount and
  the recipient’s name, or by signing duplicate payment records. Employees
  committing this fraud steal a physical check or forge one, then deposit it
  into an account they control.
• ACH (Automated Clearing House) Fraud:
  ACH fraud happens when an individual or an employee is provided access to
  the AP system and ACH network. This allows them to set up new payees or
  redirect funds to their personal accounts by altering existing payee
  details.
• Expense Reimbursement Fraud:
  Expense reimbursement fraud can be committed by any employee who indulges
  in business-related expenses. Your employee can exaggerate the details and
  amounts on the expense report, submit multiple reports, or create fake
  expenses.
  
• Kickback Schemes:
  In kickback schemes or corporate bribery, employees collaborate with
  suppliers to make extra money on the side. For instance, an employee may
  approve inflated vendor invoices for products and services and then split
  the extra money with them.
• Conflicts of Interest:
  A Conflict of interest occurs when an employee is somehow related to the
  supplier and uses their professional role for personal gain. Employees
  with a conflict of interest can easily overpay, collude with, or provide
  unfair advantages to a vendor.

Best Practices to Detect and Prevent Accounts Payable Fraud

Every accounts payable department must have robust fraud controls in place to
identify and halt fraudulent payments. Most companies integrate layered
workflows, intelligent systems, and risk-aware policies to secure payment
processes. Below are the top best practices that can help organizations not
just detect but proactively prevent AP fraud:

• Implement Segregation of Duties (SoD) Across AP Processes:
  Segregate duties and define roles, divide the vendor creation, invoice
  entry, invoice approval, payment release, bank details update, and fund
  transfers. Avoid having the same individual responsible for cutting
  checks, approving them, and reconciling bank accounts. SoD creates
  interdependence and allows cross-checking by distributing authority across
  multiple roles. It mitigates the possibility of a single individual
  executing and contemplating a fraudulent action. Conduct quarterly reviews
  of user roles to identify and flag SoD violations.
• Deploy 3-way and 6-way Matching Based on Risk Level:
  Matching validates the invoice with other related purchase documents to
  ensure whether they align or not.
  
  • 3-way Matching: PO → Invoice → Goods Receipt
  • 6-way Matching: PO → Invoice → Goods Receipt → Quality Inspection
    Report/SOWs/MSA → Vendor Master Data → Govt Tax Portals/Govt.
    e-Invoicing Portals

  Traditional finance software struggles to map crucial details across
  documents because it relies on static, rule-based validations, something
  fraudsters can easily manipulate. Use AI-led systems to reconcile and
  automate invoice verification with dynamic matching logic that scales
  based on risk.

• Centralize and Standardize Vendor Onboarding:
  Use advanced technologies in your accounts payable system that can:
  • Implement vendor checks pre- and post-onboarding to ensure that the
    enterprise only deals with compliant vendors.
  • Centralize the vendor registration process, which requires complete
    documentation, including bank verification, tax registration, and
    compliance screening.
  • Update vendor records routinely and validate against vendor master data,
    government tax portals, and trusted third-party sources to prevent
    impersonation.
• Define Approval Workflows and Payment Limits:
  Get a better understanding of your approval strategy and payment process
  to identify suspect fraud indicators. It’s best to incorporate:
  • Multi-level approval on the invoice value or department
  • Dynamic routing that adapts to vendor category or historical behavior.
  • Auto-blocking for high-risk vendors or duplicate entries

  This rigorous approval and boundaries force pattern visibility and prevent
  accounts payable fraud through segmented control.

• Monitor Accounts Payable Metrics That Indicate Fraud Risk:
  Monitor accounts payable operational behavior that can lead to control
  breakdowns, inefficiencies, and fraud. Keep an eye on KPIs like:
  • First-Pass Success Rate: Low rates may indicate poor data quality or
    non-compliant invoices.
  • Off-Cycle Payments: Unusual payment timing can be a red flag.
  • Invoice Exceptions per Vendor: Patterns of anomalies may reveal risky
    vendors.
  • Approval Time vs. Payment Time: Significant gaps suggest possible
    manipulation.
  • Bank Account Change Frequency: Frequent changes warrant verification to
    prevent diversion schemes.

  These metrics are the early warning signs of fraud patterns or control
  failures.

• Automate Audit Trails and Digital Signatures:
  Ensure every touchpoint in the invoice lifecycle is logged, time-stamped,
  and assigned to a verified user. Adopt systems that log every AP
  transaction in real time, including time-stamps, user credentials, and
  digital approvals. These records are essential for forensic analysis,
  regulatory compliance, and internal audits.
• Train Finance and Procurement Teams to Recognize Red Flags:
  Accounts payable teams can fall victim to phishing attacks and social
  engineering tactics. Therefore, it’s necessary to implement fraud
  awareness training to watch for:
  • Unusual urgency in payment requests
  • Invoices just below approval thresholds
  • Vendors with identical bank details or addresses
  • Frequent “bank account change” requests via email
• Create a Risk-Based Accounts Payable Fraud Metrix:
  Use AI-led systems to classify vendors, invoices, and transactions based
  on inherent fraud risk. Key segmentation factors include:
  • Vendor monitoring: based on history, compliance, and onboarding.
  • Invoice frequency and amount: High-volume vendors may need stricter
    review
  • Payment type: check vs. ACH vs. card

  This will allow you to apply stronger controls proportionally to fraud
  risks.

Strategic Role of AI in Fraud Detection:

To detect fraud, teams have to sift through hundreds of payments each month,
spot sketchy patterns, and verify every data tweak. Legacy systems fail here;
they run on outdated encryption, which makes them an easy target for
cybercriminals. These systems miss out on real-time threat detection, behavior
analysis, pattern recognition, or advanced analytics.
AI, on the other hand, uses machine learning to process data and send alerts
if anything looks odd.

Here’s How AI Detects AP Fraud:

1. Behavior-based anomaly detection:
   AI continuously learns from historical invoice data, vendor behavior, and
   approval patterns. When a transaction deviates from these established
   norms, such as an unexpected vendor location or payment time, the system
   automatically flags the anomaly for review.
2. Context-Aware Validation:
   Unlike rule-based systems that validate fields independently, AI platforms
   assess invoices within their operational context. It validates whether
   amounts align with historical patterns, whether vendor changes raise red
   flags, or if item formats differ from previous submissions.
3. High-Accuracy Data Extraction:
   AI-powered invoice processing tools use advanced Optical Character
   Recognition (OCR) to extract structured and unstructured data from various
   formats, including handwritten ones. It reduces data entry errors and
   ensures accurate reconciliation, making it harder for fake or duplicated
   invoices to go unnoticed.
   
4. Real-Time Risk Scoring and Auto-Flagging:
   AI systems automatically assign risk scores to each invoice based on
   anomaly detection models. If the risk scores surpass a certain threshold,
   it notifies the transaction, alerts the AP team, and suspends payment
   until further review is completed.
5. Cross-System Intelligence:
   When enterprises rely on multiple systems for approving, processing, or
   releasing payments, fragmented workflows can create opportunities for
   breaches or fraudulent activities. AI bridges those gaps effectively. It
   integrates and connects across platforms to analyze data and identify
   suspicious patterns that might otherwise slip through the cracks.

What to Do If You Suspect Accounts Payable Fraud

If your accounts payable system is compromised or is suspected of fraud,
don’t panic and follow these practical steps:

1. Immediately Halt the Payment and Isolate the Transaction:
   Immediately suspend the suspected payment and isolate the transaction in
   your system. Rapid intervention is critical, particularly for wire and ACH
   transfers, where fund recovery options are limited once the transaction is
   completed.
2. Launch an Internal Investigation with a Cross-Functional Team:
   Pull together a group of people from AP, internal audit, and procurement.
   Assign someone to lead the case and coordinate communications. The team’s
   approach will help you identify the details of fraud with unique
   lenses.
3. Preserve All Digital and Paper Evidence:
   Secure all relevant evidence, including system logs, email communications,
   approval records, invoices, and change requests. Do not modify or delete
   any records, as these materials may be critical for forensic investigation
   and regulatory compliance.
4. Notify Relevant Stakeholders Internally and Externally:
   Inform your senior management, legal team, and finance leads as soon as
   possible. If the fraud incident meets regulatory thresholds, contact
   relevant authorities and prepare to engage law enforcement or external
   regulators as required.
5. Conduct a Root Cause Analysis:
   Identify what allowed the fraud to happen. Was it due to a policy gap or a
   lack of dual approval? Was it a system failure (e.g., outdated fraud
   detection logic)? Or was it a human error or deliberate insider
   manipulation? Understand the breach point properly so you eliminate its
   recurrence.
6. Remediate Controls and Strengthen Policies:
   After analyzing the root cause, take corrective measures to enhance fraud
   detection rules. Auditors and regulators usually inspect post-incident
   remediation.
   
7. Consider External Audit, Forensic Review of Accounts, or Legal Action:
   If the fraud incurred significant financial exposure or reputational
   damage, consult a forensic accounting firm or legal counsel. This may
   support insurance claims, recovery actions, or litigation.

Conclusion: Why Fraud Prevention Is a Strategic Imperative

According to the
AFP 2025 report, 79% of organizations experienced either attempted or successful payment
fraud. Meanwhile, over 60% of organizations reported experiencing Business
Email Compromise (BEC) attacks, primarily through fraudulent emails. Agility
is essential in responding to this evolving, intelligent, and costly threat,
which is increasingly difficult to detect. Preventing AP fraud requires more
than just a finance overhaul; it demands modern systems that empower accounts
payable teams with actionable insights and intuitive decision-making tools.
Scry AI’s AP solution
offers just that. It combines intelligent document understanding, machine
learning, and advanced reconciliation to eliminate invoice fraud before it
happens. With real-time anomaly detection and automated audit trails, our
AI-powered AP automation ensures end-to-end visibility, from invoice ingestion
to payment release.