Preventing Fraudulent Behaviour in Accounts Payable

The A/P clerk of a company writes the checks for vendors, and the controller signs the checks. However, if weak internal controls are in place, it can lead to fraudulent behaviour such as creating fake vendors and invoices. To prevent this, companies should implement proper purchase procedures, require approval from the controller, and maintain records of all purchases and payments. Ethical practices should also be encouraged and everyone should be made aware of the consequences of not following them.

Question
The A/P clerk of a company writes the checks for vendors, and the controller signs the checks. The
A/P clerk has devised a plan to give herself a raise. She creates a new vendor for her friend's
business and creates two purchase orders for random car detailing services for $75 and $70. She
writes the checks to pay these new vendors knowing the controller will only pay close attention to
checks over $100. She delivers the checks to her friend to deposit in his bank account, and then he
writes her a personal check for the full amount of $145.
Eventually, what will be the effect of her actions? What can the company do to prevent this type
of behaviour?
Solution
In the given question, the accounts payable clerk in a bid to increase her pay from the company, has
got in to the malicious activity of fraud creating a vendor in her friend’s name and then getting the
same cheques encashed on account of car detailing services to company which do not exist prima
facie. In case the same is cleared by the controller of the company without proper checking and
verification of the invoices, PO and the services rendering slip then it would lead to erosion of wealth
for company and fraud on account of A/P clerk. Indirectly, it would be paid to her.
The primary reason for the same is weak internal control in the company and the amount being
below the materiality limit and hence ignored by the controller, but this would lead to decrease in
assets of the company. This is an example of occupational fraud and the behaviour of A/P clerk is
unethical.
To prevent such type of behaviour, following steps are needed:
1. Proper purchase procedure needs to be there where the purchase can be made only from
the approved vendors (Chron, 2017).
2. All the purchases needs to be approved by the controller once the PO has been raised on the
vendor.
3. All the payments irrespective of the quantum and the amount of the PO should be
supported by the registered invoices and the proof of goods/service delivery.
4. Internal control with respect to the overall purchase and payment processing and
accounting needs to be improved (Dichev, 2017).
5. The ethical practices should be encouraged in the company and everyone who is working as
a part of the company needs to be made aware of the same and what may be the
consequences in case the same is not followed.
6. The cheques and the bills to be cleared should be pre-number and should be in a
chronological order and a record for the same should be maintained.
References
Chron. (2017). five-common-features-internal-control-system-business. Retrieved december 07,
2017, from http://smallbusiness.chron.com/five-common-features-internal-control-system-
business-430.html
Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), 617-632. doi:https://doi.org/10.1080/00014788.2017.1299620