How to Spot Invoice Fraud (And 7 Ways To Stop It)

In the US, companies lose an average of $300,000 annually to fraudulent invoices. Despite more security tools and measures being available to us today, the increase in remote working has meant many companies lack visibility and control of their accounts payable (AP) processes, making them an easy target for scammers. Fortunately, the risk of invoice fraud can be mitigated with the right strategies.

What is invoice fraud and how does it occur?

Invoice fraud is a malpractice in which scammers submit invoices or other payment requests that are fake or contain false information to your organization in the hopes that you will pay it. There are many ways fraudulent activity can occur. For instance, in some cases, a fraudster may intercept real invoices and switch the bank details with their own or they may hack into the IT systems of your company or your suppliers to adjust the account number on invoices.

Types of invoice fraud

Below are some of the most common types of invoice fraud that AP departments need to be aware of.

Duplicate payments

Not all duplicate invoices are fraudulent, such as vendors resubmitting invoices if a payment delay has occurred, but they can be a popular tactic for criminals looking to exploit organizations. However, if there are gaps in your AP department's invoicing processes or they rely on manual data entry, dishonest vendors can submit duplicate invoices fraudulently.

Fake invoices

Scammers can create fake invoices that appear as though they’ve come from one of your suppliers, but with different bank details attached. Often, this type of phishing scheme involves criminals using email addresses that differ slightly from the real ones, making it difficult for busy AP personnel to differentiate the legitimate from the fake. The rise of remote working has led to more instances of common phishing scams, with 44% of organizations reporting an increase in business email compromise (BEC) attacks (where the attacker hacks executive or employee emails to request invoice payments).

Labor mischarging

Vendors can scam organizations out of money by including false information about labor carried out or staff members involved on an invoice, allowing them to extract more money from unsuspecting companies.

Non-delivery of products or services

This type of fraud occurs when a company orders a product or service and an invoice is submitted by the vendor but the product is never delivered. Non-delivery can be difficult to spot as invoices typically come from trusted vendors, but feature fraudulent details. This way, scammers can capitalize on the fact that no one will question the invoice’s authenticity.

Internal fraud

Most of the attempts companies make to combat invoice fraud focus on the threat of external scammers. PwC reports that 31% of fraud cases have an internal perpetrator, so it’s important to look inside your organization too.

Internal fraud involves employees in an organization’s AP department diverting payments intended for a vendor’s bank account to another by changing details in the system. Once the payment is successfully made, they revert the details to avoid being caught.

8 signs of invoice fraud

According to one survey, 29% of respondents didn’t know how to spot a fraudulent invoice or were unsure if they would know how. With this in mind, here are some common signs of invoice fraud all AP departments should be aware of.

• Abnormal invoice volume activity
• Unaccounted for goods/services on the invoice
• Discrepancies between a purchase order and invoice
• Unusual sender requests
• Suspicious links in an email
• Strange or erratic employee behavior
• Emails originating from unknown vendors
• Text that pressures you to pay immediately

How to protect your organization from invoice fraud

There are several steps you can take to protect your business from falling victim to invoice fraud.

1. Deploy 3-way matching

Essentially, 3-way matching involves cross-referencing an invoice with its purchase order and delivery receipt. This ensures that all details are correct and legitimate. Doing this can help your AP department to identify unauthorized transactions before they are processed and prevent you from losing revenue.

2. Check in with existing suppliers

Retain a close connection with your suppliers by checking in regularly to ensure that any payment details are up to date and verified. This way, you can stay on top of legitimate invoices and fraudsters trying to swindle your organizaiton by pretending to be a trusted source.

3. Move away from paper documents (and go digital)

Switching to a paperless invoicing system can help you to weed out fake requests. The digital invoicing software will flag exceptions where payment details don’t match, reducing pressure on your AP teams and minimizing the risk of human error allowing fraudulent activity to go undetected.

4. Track invoice activity frequently

It’s important to frequently monitor invoice activity to highlight any anomalies or suspicious payments. Do this by developing seamless workflows within your AP department to keep track of any incoming and outgoing payments to your organization.

5. Closely monitor invoice amounts

Be sure to double check payment amounts against the cost of goods or services received. It’s a good idea to enlist more than one person in your AP department for this task, as this will reduce the potential for human error.

6. Educate your employees about the risk of fraud

One of the best ways to prevent invoice fraud is to ensure your employees are equipped with the knowledge and skills they need to detect and prevent it before it happens. Create and enforce a set of guidelines that details how to check invoices properly before paying them.

7. Embrace AP automation for maximum protection

Manual payment processes make your organization an easy target for fraudsters to deceive with familiar but false information. AP automation reduces the risk of invoice fraud by centralizing all of your accounts payable activities in one place, giving employees and managers complete visibility into every step of the payment process. You can also set up automated payment controls to protect against fraud, including dual-factor authentication and positive pay tools. Additionally, automated AP solutions allow for electronic payments, minimizing the risk of other traditional methods.

Although invoice fraud poses a significant risk to companies of all sizes, adopting the right preventative measures and bolstering your AP department with robust automation software can reduce the potential of attack.