Accounts Receivable Fraud: What It Is, How It Happens, and How to Prevent It

Every year, organizations lose an estimated 5 % of their annual revenue to fraud.

What makes this alarming is not just the scale, but the source. Much of this loss comes from routine accounting processes, not headline-grabbing scandals. Accounts receivable is one of the most common places fraud hides.

Even more concerning, over 40 % of fraud cases are uncovered through tips, not audits or analytics. That means fraud often runs quietly, sometimes for years.

Accounts receivable fraud sits at the intersection of trust, access, and cash. If your organization invoices customers and collects payments, exposure exists.

This article explains what accounts receivable fraud is, why it happens, how to spot red flags early, and how to reduce the risk before damage compounds.

What Is Accounts Receivable Fraud?

Accounts receivable fraud is the intentional manipulation, misstatement, or theft of receivables-related transactions for personal or organizational gain.

It involves interfering with customer invoices, payments, credits, write-offs, or adjustments in ways that violate company policy or accounting standards.

This type of fraud can be committed by employees, managers, or third parties with access to accounting systems. It often goes unnoticed because receivables balances may still appear reasonable on the surface.

Most accounts receivable fraud falls under asset misappropriation, the most common category of occupational fraud globally. In more serious cases, it overlaps with financial statement fraud, especially when fake receivables are used to inflate revenue.

The core risk is distortion. Cash flow may appear healthy and revenue may look stable. But the underlying reality is very different.

What Is Receivables Fraud?

Receivables fraud is a broader term that covers any fraudulent activity involving money owed to a business.

It includes internal misconduct, such as stolen customer payments or manipulated write-offs, as well as external behavior, such as intentional nonpayment or altered remittance information.

The term is often used interchangeably with accounts receivable fraud, but it also captures scenarios where receivables are deliberately misstated or delayed without directly stealing cash.

In all cases, the result is a gap between reported receivables and actual cash collections. Over time, this affects liquidity, reduces financial clarity, and makes it harder for management to assess true performance.

An Example of Accounting Fraud Involving Receivables

One of the most common receivables fraud schemes is lapping.

How lapping typically unfolds:

Customer A submits a payment:

→ The payment is received by an employee

→ The payment is not recorded

→ The employee keeps the money

Customer B submits a payment:

→ That payment is applied to Customer A’s account

→ Customer B’s balance remains open

Another payment arrives:

→ It is used to cover the previous shortfall

The result over time:

• Receivables appear to reconcile
• Cash shortages are explained as timing differences
• No single transaction looks suspicious on its own

Lapping schemes rely on concentrated control. When one person handles cash receipt, payment posting, and reconciliation, the cycle can continue for long periods without detection.

Other Common Types of Accounts Receivable Fraud

Most accounts receivable fraud schemes fall into a small number of repeatable patterns. Understanding these makes detection significantly easier.

Skimming

• Stealing payments before they are recorded
• Most often involves cash or checks
• Leaves no accounting trail unless external confirmation occurs

Fictitious Sales and Fake Customers

• Creating invoices for sales that never occurred
• Inflates revenue and receivables simultaneously
• Often linked to performance pressure or bonus targets

Unauthorized Write-Offs and Credits

• Writing off valid receivables without approval
• Issuing credits or discounts and diverting the difference
• Frequently hidden in “miscellaneous” adjustments

Manipulated Journal Entries

• Posting unsupported or late manual entries
• Used to override controls or conceal shortages
• Common near period-end or audit deadlines

Each of these methods exploits weak oversight. Process gaps allow fraud to persist.

Is Accounts Receivable Fraud Really That Common?

Yes. Global occupational fraud research shows that asset misappropriation appears in nearly 90 % of all fraud cases, making it the most common category worldwide.

Accounts receivable functions are especially exposed because they involve frequent, high-value transactions tied directly to cash flow. Fraud often hides behind normal business growth. Receivables increase, sales look strong, and collections lag slightly.

Those gaps are easy to rationalize operationally.

Risk increases significantly when a single employee controls multiple steps in the receivables lifecycle. In those environments, fraud can continue without triggering immediate alarms, even when overall accounting appears disciplined.

What Are the Top 3 Types of Fraud?

From a risk and control perspective, organizational fraud generally falls into three categories.

1. Asset misappropriation involves the theft or misuse of company resources. Most accounts receivable fraud falls here.
2. Corruption includes bribery, kickbacks, and conflicts of interest. Receivables can be abused through improper write-offs or preferential treatment.
3. Financial statement fraud involves intentional misrepresentation of financial results. Fake receivables and inflated revenue are common tools.

Accounts receivable fraud often overlaps categories, increasing both complexity and impact.

Red Flags That Signal Accounts Receivable Fraud

Accounts receivable fraud rarely starts with a single obvious event. It reveals itself through patterns across financial data, operations, and behavior.

🚩 Financial red flags

• Accounts receivable growing faster than revenue
• Aging balances increasing without a clear business reason
• Frequent or unexplained manual adjustments
• Mismatches between bank deposits and recorded receipts

🚩 Operational red flags

• High volume of write-offs or credits
• Excessive customer discounts
• Activity in dormant or rarely used customer accounts
• Repeated corrections to payment applications

🚩 Behavioral red flags

• Employees refusing to take time off
• Resistance to sharing duties or documentation
• Unusual control over specific processes or reports

🚩 Customer-driven red flags

• Customers claiming invoices were paid but still appear open
• Disputes over invoice amounts or payment timing
• Requests for duplicate invoices more frequently than normal

No single red flag confirms fraud. Consistent patterns do.

Why Accounts Receivable Fraud Happens

Accounts receivable fraud develops when pressure, opportunity, and justification align.

Financial pressure is often the trigger. Employees facing personal debt, job insecurity, or aggressive targets may see receivables as an accessible source of cash. Incentive structures tied to revenue or collections can unintentionally intensify that pressure.

Opportunity enables action. Weak internal controls, limited segregation of duties, and overreliance on trust create openings. Receivables processes often evolve informally, especially in small or understaffed teams, leaving gaps unaddressed.

Rationalization sustains the behavior. Individuals convince themselves the fraud is temporary, harmless, or deserved. Over time, those justifications allow losses to accumulate quietly.

How to Detect Accounts Receivable Fraud Earlier

Early detection depends on consistency:

• Bank deposits should be reconciled to receivables frequently.
• Timing differences should be explained, not assumed.
• Aging reports should be reviewed for patterns, not just totals.
• Manual journal entries deserve scrutiny, especially near period close.
• Customer statements and confirmations introduce an external checkpoint and remain one of the most effective detection tools.
• Most importantly, no single person should control invoicing, cash application, and reconciliation alone.

How to Prevent Accounts Receivable Fraud

Preventing accounts receivable fraud starts with how processes are designed and maintained.

Clear segregation of duties is one of the most effective safeguards.

When invoicing, cash application, and reconciliation are handled by different people, it becomes much harder to commit and conceal fraud.

Well-defined approval policies for write-offs and adjustments add another layer of control, while regular audits increase the likelihood that issues are detected early. Independent reviews further strengthen oversight.

Technology also plays an important role in supporting these controls. Accounting systems with audit trails, role-based access, approval workflows, and structured reconciliation make activity easier to track and harder to manipulate, reducing reliance on trust alone.

People remain a critical part of prevention. Employees who understand common fraud indicators are more likely to question irregularities and raise concerns. Confidential reporting channels help surface issues that may not be visible through data alone.

Ultimately, fraud prevention is less about suspicion and more about building resilient, well-designed processes that hold up under scrutiny.

How Accounting Platforms Like Eleven Help Reduce Accounts Receivable Fraud

Accounts receivable fraud often persists in environments with manual workflows, fragmented documentation, and limited review visibility. These risks are amplified for CPA firms and family offices managing multiple entities.

Platforms like Eleven reduce exposure by automating receivables workflows and minimizing manual intervention, lowering the opportunity for unauthorized changes.

Built-in audit trails and linked source documents make it easier to trace receivables activity during reviews, audits, or client inquiries.

Role-based access supports segregation of duties across teams and entities, helping firms enforce controls consistently.

While software cannot eliminate fraud on its own, platforms like Eleven strengthen control environments and improve early detection in complex accounting structures.

What Happens If Fraud Goes Unchecked?

When accounts receivable fraud goes undetected, damage compounds over time.

Financial losses grow steadily, especially in long-running schemes. At the same time, financial statements become unreliable as receivables are overstated or revenue is misrepresented. Decisions are made on distorted data.

Customer trust erodes as billing errors and disputes increase. In regulated environments, prolonged fraud can lead to compliance failures, penalties, and legal exposure.

Reputational damage often lasts longer than financial loss. Once confidence in internal controls is broken, restoring credibility takes sustained effort.

Final Thoughts

Accounts receivable fraud rarely starts as a crisis. More often, it develops quietly, taking advantage of small weaknesses in processes and oversight.

By understanding how receivables fraud works, recognizing early warning signs, and putting strong controls in place, organizations can significantly reduce their exposure.

For CPA firms and family offices managing complex or multi-entity structures, consistent visibility and disciplined processes are especially important.

Strong systems and clear workflows help bring issues to light earlier, before they escalate into material problems.

If you want to see how a modern accounting platform supports these controls in practice, you can book a demo of Eleven. The demo will show you how Eleven helps teams improve transparency, auditability, and oversight across accounts receivable.