Businesses of all sizes are at risk for invoice fraud. This type of fraud occurs when someone posing as a legitimate vendor sends an invoice to a business for services or products that were not actually provided. The goal of the fraudster is to get the business to pay the invoice and release the funds, without ever checking to see if the invoice is legitimate.
As a CFO, Controller, or VP of Finance, it’s important to be aware of this type of fraud and how to prevent it. Your number one priority should be protecting your company’s finances, and that starts with knowing how to spot invoice fraud.
Invoice Fraud, How To Spot And Prevent Invoice Fraud
There are a number of reasons why an organization’s accounts payable department might pay one of these fraudulent invoices. Accounts payable departments are frequently behind in their responsibilities. Many simply want to remain afloat and pay as many bills as possible without conducting adequate research. This is how many fraudsters are able to take advantage.
Fraudulent invoices are often created using similar, but fake vendor information that’s been taken from a real invoice. This can happen if an organization doesn’t keep tight control over its vendor master file. If an organization has ever conducted business with a real vendor, there’s a good chance the fraudster’s invoice will go undetected. The best way to prevent this type of invoice fraud is to have a centralized system where all vendor invoices must be approved before they’re paid.
Another type of invoice fraud occurs when an employee creates a fake invoice and submits it for payment. This is more common than you might think, and it can be difficult to detect. The best way to prevent this type of fraud is to have a robust system of internal controls in place, including segregation of duties and proper documentation.
10 Ways to Safeguard Your Business from Invoice Fraud
Here are a few tips on how to prevent invoice fraud:
Educate Your Employees
Of course, the best defense against invoice fraud is a well-educated workforce. Make sure your employees know how to spot red flags, such as:
- Invoices for products or services that were never received
- Invoices from new vendors that have not been approved
- Requests to pay invoices via wire transfer or prepaid debit card
- Sudden changes in vendor payment instructions
By educating your employees and implementing proper internal controls, you can help protect your business from invoice fraud. Have you been a victim of invoice fraud? Share your story in the comments below.
Automate Your Accounts Payable Processes
Another way to help prevent invoice fraud is to automate your accounts payable process. By automating, you can:
- Eliminate paper invoices
- Require approval by multiple people before payment is made
- Match invoices to purchase orders
- Integrate with your accounting software
By automating your accounts payable processes, you can help reduce the risk of fraud and make it easier to catch any suspicious activity.
Do Your Research
When you’re dealing with vendors, it’s important to do your research. You should:
- Check that the vendor is legitimate
- Make sure you understand the terms of the agreement
- Read reviews from other customers
- Get everything in writing
It’s also a good idea to keep communication lines open with your vendors. If you have any questions or concerns, don’t hesitate to reach out.
Be Wary of Red Flags
There are a few red flags that can indicate invoice fraud:
- The invoice is for an unexpected purchase
- The payment date has been changed
- The bank account information is different from what you have on file
- You receive an invoice for a purchase you don’t remember making
If you see any of these red flags, reach out to the vendor immediately.
Don’t Switch Payment Methods Too Often
Another method that fraudsters use to deceive us is by requesting a change in payment methods. You may pay a vendor using a credit card or an ACH, for example. Someone posing as the merchant contacts you and asks you to switch to wire transfer payments, for instance, right on the fraudulent invoice. “Please remit payment via the new method to the following account number.” They may even send a fake invoice to support their request. This is how many businesses have been tricked into paying for goods or services that were never rendered.
If you do need to switch payment methods, make sure that you confirm the request through a separate channel. For example, if you typically communicate with vendors via email, make a phone call to confirm any changes in payment method. This extra step will help to ensure that you are not the victim of invoice fraud.
Beware of Spoofed Emails
Fraudsters often spoof legitimate vendor emails in an attempt to collect payment on a fraudulent invoice. This is why it’s important to double-check the email address of the sender before you open any attachments or click any links.
If the email looks suspicious, even if you think you recognize the sender, contact the vendor directly to confirm that they sent the invoice. Do not reply to the email or click any links.
Check Your Accounts Regularly
This one may seem like a no-brainer, but it’s important nonetheless. Regularly check your accounts payable to catch any fraudulent invoices before they’re paid.
If you have a lot of invoices to manage, consider using an automated system that can flag any suspicious activity, such as duplicate invoices or payments to unfamiliar vendors.
Know Your Vendors
This is another important step in preventing invoice fraud. Make sure you know and trust the vendor before you make any payments.
If you’re not familiar with the vendor, do some research to make sure they’re legitimate. You can also ask for references from other businesses that have used their services.
Be Wary of Unusual Requests
If a vendor asks you to pay an invoice via wire transfer or prepaid debit card, be wary. These are not common methods of payment, and they could be a sign that the vendor is trying to avoid detection.
It’s also important to double-check the invoice for any red flags, such as an unusually high amount of strange charges. If something doesn’t look right, contact the vendor to ask questions before you make payment.
Keep Detailed Records
Make sure you keep detailed records of all the invoices you receive and pay. This will help you track spending, catch any fraudulent charges, and dispute them if necessary. Records should include the vendor’s name, contact information, invoice number, and payment amount.
Employ 3-Way Matching
You should already be using three-way matching. This is when you compare the invoice to the purchase order and the goods or services received before paying. If there are any discrepancies, you can catch them early and avoid paying for something you didn’t receive.
3-Way matching can help prevent invoice fraud, but it’s not foolproof. That’s why you should continue to be vigilant and review your records regularly.
Invoice fraud is a serious problem, but there are steps you can take to protect your business. By being vigilant and informed, you can avoid becoming a victim of this growing threat.
The best thing to do is stay inform and educate your employees regularly about the latest scams so you can avoid them altogether. Have any concerns about an invoice? Reach out to your vendor or the Better Business Bureau for help.
By taking a few simple precautions, you can protect your business from invoice fraud.