Simple Ways to Prevent Your Business from Being Scammed by Invoice Fraud

 One of the most common ways that a business can be defrauded is through a false invoice. By definition, a false invoice is one where there is a request for payment submitted to a company but no goods or services are provided.

Whether in collusion with someone inside the company, or by leveraging a pre-existing business/supplier relationship, the ‘supplier’ issuing a false invoice is counting on the company not having strict accounts payable systems or reporting mechanisms.

We’ve written about accounts payable fraud, so in this post we’ll get into some details about how invoice fraud is committed and what your company can do to avoid it.

Train your accounts payable team to recognize false invoices

This seems obvious, but without processes in place to verify the legitimacy of invoices being received, an AP team might go ahead and pay bills that aren’t real, without thinking twice.

What should flag your team to the possibility that an invoice is false:

  • Logo looks copied from another source, is low resolution or is in fact incorrect
  • Account information changes for electronic payment: invoice fraud is committed by taking a legitimate invoice and changing the banking details. Checking the invoice against vendor information (or better yet, automating that task) is your best way to avoid this
  • Contact information, like email address or mailing address, should also be verified, as someone engaging in fraud might create an email address with the same handle but a .org or .net address, rather than the original .com
Avoid invoice fraud by implementing a three-way matching system

A three-way matching system is pretty much infallible! This process requires that the information on the supplier invoice match: 

  1. The purchase order originally issued, which includes the order number, quantity and unit price of the items ordered
  2. The goods receipt/packing slip or receiving report from the received goods

Any invoice that doesn’t match at one or more spots is flagged for investigation. Typos occur and human error is inevitable, but by matching the invoice to what was requested and what was actually received, businesses can ensure that they aren’t routinely paying false invoices.

While more efficient if implemented for orders over a certain value, a three-way matching system that is integrated into an accounts payable system will allow automatic flagging of invoices that don’t meet the test, saving time and money.

 An end to end verification system like this is least likely to be hit with fraud because it involves different areas of the supply chain. If there are ongoing issues with invoices, purchase orders or receipt reports, it’s much easier to establish where the workflow issues are occurring that need to be addressed.

Discrepancies in quantities ordered versus received can be checked—which is another way to defraud a company—and approvals for ordering can be verified, to stop internal fraud, where an employee is ordering items for their own use or to re-sell.

Exception reporting will help to flag invoice fraud

If your company’s accounts payable system is automated, it likely also includes the ability to engage in some degree of manual override to correct or adjust fields on any of the three documents previously mentioned: purchase order, invoice, or receiving report.

In order to ensure that invoice fraud isn’t being committed internally by employees, by overriding fields to create a three-way match, an exception report should be integrated that is provided to management level employees of any manual overrides that take place.

The ability of an employee to issue cheques to a fake company or to falsify quantities/prices to ‘skim off the top’ becomes impossible with these processes in place. Particularly with the three-way match system, the level of collusion that would be required within different areas of the organization makes it less likely that invoice fraud will occur. With automated accounts payable and invoicing systems, the work is less manual and the safeguards will be in place to ensure that your company isn’t ever paying more than it should!