15 Ways to Prevent the Most-Common AR Frauds

Think AR fraud can’t happen at your organization? Think again.

Here’s five real life horror stories and actions you can take today to prevent from becoming the next victim.

Example #1: Employee Embezzlement and Unauthorized Adjustments

A senior AR clerk at a mid-sized manufacturing company took advantage of their access to the accounting system to process unauthorized credits to customer accounts. The employee then redirected refund payments to a personal bank account they controlled.

The scam cost the business more than $500,000 over three years. It was eventually detected by an internal audit that identified an unusually high number of credit adjustments.

How you can avoid this kind of fraud:

1.      Implement dual approval for credit adjustments.

2.      Conduct regular audits of AR adjustments and refunds.

3.      Restrict employee access based on role requirements.

Example #2: Fake Customer Accounts and Phantom Sales

A sales executive at a logistics company created fake customer accounts and issued invoices to the phantom clients. The executive then used these fraudulent sales figures to boost their performance metrics to earn higher bonuses.

The fraud inflated revenue reports by $2 million and was only detected when a customer verification audit found multiple accounts with non-existent addresses. AR records helped nail the scammer because its records revealed no payments had ever been made on these accounts.

How you can avoid this kind of fraud:

1.      Require customer verification before extending credit.

2.      Conduct monthly reconciliations to flag unpaid invoices.

3.      Use automation (AI-based tools are ideal) to spot anomalies in AR records.

Example #3: Divert Payments by Using Fake Vendor Bank Changes

An AR supervisor at a healthcare company received an email requesting a change in bank account details for future payments. Without verifying the request, the supervisor updated the payment details, redirecting nearly $800,000 to a fraudster’s account..

The fraud was detected because the actual vendor followed up regarding missing payments. A forensic audit of banking transactions was conducted and revealed the unauthorized changes.

How you can avoid this kind of fraud:

1.      Require dual verification (phone and email) before making any bank detail changes.

2.      Implement multi-factor authentication for account updates.

3.      Train employees on phishing and social engineering scams.

Example #4: Collusion Between AR Staff and Customers

An AR manager at a retail company conspired with a customer to extend fraudulent credit terms. The manager tried to get away with it by writing off the unpaid invoices as bad debt.

The total loss exceeded $1.2 million and was detected when an internal audit flagged multiple unpaid invoices that were consistently written off as bad debt.

How you can avoid this kind of fraud:

1.      Enforce segregation of duties between those with credit approval and collections responsibilities.

2.      Require executive-level approval for large credit limit increases and write-offs.

3.      Review bad debt write-offs regularly (minimally, quarterly) to detect unusual patterns.

Case Study #5: Delayed Payment Posting and Fund Misappropriation

An AR clerk at a construction company delayed posting customer payments and instead deposited checks into a personal account. The fraud went unnoticed for two years, resulting in a $450,000 loss.

The fraud was detected when a customer complained about late fees on an invoice they had already paid. An external audit then found discrepancies between payment dates and system entries.

How you can avoid this kind of fraud:

1.      Require same-day recording of all received payments; don’t allow delays to pile up.

2.      Restrict bank deposit access to authorized personnel only.

3.      Perform random spot audits of cash and check deposits.

 Weak internal controls, lack of oversight, and employee misconduct have led to significant financial losses for countless organizations– learn from their mistakes. Strengthening AR controls—such as requiring dual approvals, automating verification processes, and conducting regular audits—can help you mitigate fraud risks.