Trustmi Talks

What is Invoice Fraud and How Can You Avoid It?

The Trustketeer
8 min
What is Invoice Fraud and How Can You Avoid It?
What is Invoice Fraud and How Can You Avoid It?

Protecting your bottom line directly impacts your business’s profitability, sustainability, and growth. Invoice fraud is a common problem that can threaten the success and well-being of your business. To safeguard your financial resources, preserve trust with stakeholders, and maintain integrity with your vendors, you must understand how to avoid invoice fraud.

For the average middle-market business, invoice fraud costs an estimated $280,000 per year. In 2022, 34,000 invoice fraud cases were reported, with many others going uncounted because they went unnoticed.

What Is Invoice Fraud?

Invoice fraud is a deceptive practice that involves the manipulation or fabrication of invoices to illicitly gain financial advantage. This commonly occurs by inflating charges or creating fictitious transactions. 

Businesses face heightened risks of invoice fraud in scenarios where third-party vendor invoices  are processed without stringent oversight, enabling bad actors to submit false or exaggerated invoices. 

Incorrect invoices are more likely to go unnoticed in environments where verification processes are inadequate, manual entry systems are predominant, or internal controls are weak. For instance, in subcontractor billing arrangements, unethical parties may exploit loopholes to submit inflated invoices. In vendor relationships, dishonest suppliers may fabricate invoices for goods or services never rendered, thus defrauding the company. Or, even when it’s business as usual, a threat actor compromises a vendor or organization and submits false invoices or makes requests to change bank account information to divert funds from a real vendor.

6 Common Types of Invoice Fraud

What are the most common types of invoice fraud threatening businesses worldwide? Here are six fraudulent practices you should know about so you can implement effective preventative measures and safeguard financial integrity.

Fake Invoices

A fake invoice occurs if your company is fraudulently billed for goods or services that were never provided. This fraud most often occurs where there are lax verification procedures in place. Additionally, a lack of cross-referencing with purchase orders or contracts makes it possible for fake invoices to go unnoticed.

Duplicate Invoices

Sometimes, copies of legitimate invoices are (either intentionally or accidentally) resubmitted for payment, causing your company to pay out twice if you don’t catch the error. This issue typically occurs when there are deficiencies in invoice tracking systems or human errors in your manual entry processes. Companies without automated duplicate detection mechanisms in place are at a higher risk for this kind of issue, which can result in fraud.

Overcharging

Are you getting a fair price for your goods or services? If you have limited oversight on pricing agreements or don’t regularly benchmark market rates, you might not know what costs to expect. Overcharging often happens when vendor relationships are not regularly reviewed, allowing vendors to exploit trust and overbill for their services.

Phishing Attacks

Within the past decade, there has been an increase in cybercriminals targeting a business through deceptive emails or communications. These phishing attacks often impersonate legitimate vendors or clients, directing employees to pay fraudulent invoices. In 2023, phishing attacks rose by 2% with 94% of cyber decision-makers targeted by fraudulent emails. When employees are not adequately trained to identify phishing attempts they may make unauthorized payments, give out sensitive credentials, or enable ransomware.

Unfilled Subscriptions

Recurring invoices may continue after a service or product is no longer provided. In today’s world of subscription models and automated billing, it’s not uncommon for these kinds of invoice errors to occur (by mistake or on purpose). Similar to fake invoices, these are more likely to slip through the cracks when you don’t have an invoice verification process in place and don’t compare your expense sheets to your expected costs.

Insider Fraud

In some cases, the concern may stem from bad actors on the inside. Insider fraud means your own employees create and approve fraudulent invoices for personal gain. This is most likely to occur when there's a lack of segregation of duties or you don’t have a double entry system in place. Insider fraud is more likely to occur in environments with weak ethical cultures, a lack of authorization requirements, or when there's insufficient whistleblower protection.

The Impact of Invoice Fraud

Financial

Perhaps the most obvious outcome of invoice fraud is the direct cost paid out. Invoice fraud directly impacts a company's finances through overpayments, unauthorized transactions, or payments for undelivered goods or services. Invoice fraud can also erode profitability by undermining the company's ability to invest in growth initiatives or meet financial obligations. Additionally, invoice fraud can impact the financial performance of a company because of the time and resources required to sort through the incorrect records.

Legal

Companies can face litigation and compliance violations with certain forms of invoice fraud. Affected parties, including vendors, clients, or regulatory authorities, may take legal action that leads to costly litigation proceedings. Additionally, fraudulent activities can violate laws and regulatory requirements, potentially resulting in fines, penalties, or sanctions imposed by governing bodies.

Reputation

Public exposure of invoice fraud damages stakeholders' trust in the company's integrity and reliability. A financial scandal can potentially damage business relationships with customers, partners, or investors. Negative publicity surrounding invoice fraud can even tarnish the company's brand reputation, making it less attractive to potential clients or investors.

8 Tactics To Prevent and Detect Invoice Fraud

The best way to stop fraud is to recognize the signs of fraud and have practices in place to reduce the risk. Here are eight ways you can improve invoicing and invoice processing at your company to lessen the chances of fraudulent payments.

Vendor Due Diligence

Thoroughly vet vendors before engaging in business transactions. Verify their credentials, reputation, and track record to ensure legitimacy. Implement processes to ensure protection on invoice payments from supply chain attacks.

Segregation of Duties

Strengthen internal controls by segregating duties and implementing approval workflows for invoice authorization. For example, have one person authorize invoices, another verify them, and a third person process payments.

Verification Procedures

Make sure every invoice aligns with the goods and services your business has received for the month. Reduce the risk of payment errors by establishing a rigorous verification process that includes cross-referencing with purchase orders, contracts, and delivery or service completion records. Make sure your business also has a robust bank account validation process in place so that you know you’re paying the right vendor or supplier.

Regular Audits and Reviews

Conduct regular audits of invoices and financial records to detect any discrepancies or irregularities. Perform periodic reviews of vendor contracts and agreements to ensure compliance.

Employee Training

Provide comprehensive training to employees on recognizing common invoice fraud schemes, such as fake invoices, duplicate invoices, and phishing attacks. Educate them on proper invoice handling procedures and the importance of adhering to company policies and protocols.

Use of Technology

Implement advanced software solutions and automated systems for invoice processing and payment authorization. Utilize features such as duplicate invoice detection, digital signatures, and secure payment portals to enhance security and efficiency. Utilize automated systems with powerful AI features for invoice processing to minimize manual errors and enhance efficiency.

Enhanced Security Measures

Strengthen cybersecurity measures to safeguard against phishing attacks, malware, and unauthorized access to financial systems. Implement multi-factor authentication, encryption, and regular security updates to protect sensitive data.

Vendor Onboarding and Management

Maintain transparent and open communication with vendors. Establish clear expectations, terms, and conditions for all transactions. Monitor vendor performance and address any concerns or discrepancies promptly. Conduct regular audits of vendor relationships and leverage technology to detect anomalies or suspicious activities in the invoice payment process and securely onboard new vendors.

Safeguard Your Business Finances with Trustmi

Are you looking for an end-to-end payment platform that helps safeguard your business? We can help you level up with smarter technology.

Trustmi provides your business with advanced fraud and error detection to identify suspicious payment patterns and prevent fraudulent transactions before they occur. Its robust verification processes and real-time monitoring capabilities help reduce errors and ensure that payments are directed to the intended recipients accurately. 

By leveraging Trustmi's comprehensive payment risk assessment tools, businesses can enhance security, streamline payment workflows, and minimize the likelihood of unauthorized or erroneous payments. Reduce your risk of invoice fraud with Trustmi. Book a demo to learn more.