As an accounts payable professional it’s critical that you understand what invoice fraud is, how it works and how you can keep your company safe from invoice frauds.
If you are in charge of accounts payable for your organization, then it’s your responsibility to keep your business safe from invoice fraud.
Recently Facebook and Google were tricked out of $123 million in invoice frauds. But whether your business is massive or small, invoice fraud can cost you serious money.
According to the FBI, the amount of money that scammers attempted to steal through invoice fraud grew nearly 140% between 2016 and 2018. Overall, invoice fraudsters targeted more than $12 billion worldwide between 2013 and 2018.
In other words, if your company has not been the target of invoice fraud already then it likely will be in the future.
So, as an accounts payable professional it’s critical that you understand what invoice fraud is, how it works and how you can keep your company safe from invoice frauds.
How Invoice Fraud Works
There are several types of invoice fraud. Some are intricate. Others are simple.
Here’s how the most common invoice frauds work.
Business Email Compromise
Business email compromise is a type of invoice fraud where a scammer poses as a vendor or business partner and convinces a company to pay for services that were never rendered. This is the type of invoice fraud that Google and Facebook suffered recently.
In a typical business email compromise invoice fraud, criminals take over or convincingly spoof the email address of your vendor or business partner.
They monitor the payment process communication between your business and the other party. Then they send a fake invoice or ask for a wire transfer for services or products rendered. Often, the business’s AP department doesn’t realize its fraud and releases the funds.
For example, one of your admins might receive several emails from an email address that appears to belong to a business partner requesting payment for legal services, with wire addresses at legitimate banks.
Your AP admin recognizes the email address and the name of the business partner. The amount due is in line with what the business partner typically invoices. So the admin releases the payment via wire or ACH to the scammer.
Unless you understand and can identify it, this sophisticated form of invoice fraud can continue for months or even years.
False, Inflated and Duplicate Invoices
While business email compromise is a relatively new phenomenon, there are simpler invoice frauds that have been around for centuries.
Unscrupulous vendors or suppliers can commit invoice fraud by knowingly submitting false, inflated, or duplicate invoices.
False invoices are invoices for goods or services not rendered.
Inflated invoices are invoices that are sent with amounts higher than what was agreed to.
And while duplicate invoices are sometimes issued by accident, duplicate invoices are fraudulent if issued knowingly with the intent to defraud – often with a different invoice number.
You need to know how to prevent paying false, inflated, and duplicate invoices.
Collusion and Corruption
Perhaps the most insidious form of invoice fraud is collusion and corruption.
In this type of invoice fraud one of your employees colludes with a vendor or supplier to engage in the invoice fraud.
Together, the employee and vendor use duplicate, false or inflated invoices to defraud your company. The vendor then uses a portion of those funds as bribe payments to the employee.
For example, an operations manager hires a cleaning company for janitorial services at a contracted rate of $500/week. But the employee and vendor then collude to have the cleaning company send invoices for $1000 per week. The employee approves the invoices which then get paid. The cleaning company and employee split the extra $500/week.
This type of invoice fraud is particularly difficult to discover since it involves an insider.
How to Prevent Invoice Fraud
Invoice frauds can cost your company thousands or even millions of dollars.
Now that we understand the most common forms of invoice fraud let’s talk about detecting and preventing it.
Implement Internal Controls
It’s challenging to catch invoice fraudsters. And often impossible to recover money paid to them.
The best strategy for avoiding invoice fraud is to incorporate safeguards into your accounts payable process to make invoice fraud as difficult as possible in the first place.
Start by reviewing and implementing the Generally Accepted Accounting Principles (GAAP) principles for Internal Control Procedures.
Internal controls prevent fraud as well as clerical errors. Solid internal controls also reduce losses from theft of company assets.
These principles include segregation of duties, controlling access to systems and assets, strict rules around authority to approve, record keeping and verification/audits.
But general accounting internal controls only get you so far.
Adopt AP Best Practices
To prevent invoice fraud, you also have to adopt AP best practices.
Here are three AP best practices that will keep your company from becoming a victim of invoice fraud:
- Receipt, Contract, or Purchase Order (PO) Matching. Compare invoices against receipts, contracts, or POs. You will not have a receipt for fake invoices. And matching invoice amounts to contracts or purchase orders eliminates the possibility of duplicate or inflated fraudulent invoices. To avoid internal collusion and corruption schemes be sure that the person matching is not the person contracting/approving (segregation of duties).
- Vendor Name Verification. If you do not recognize the company name on an invoice you need to dig into it. Do a quick Google search to make sure the company is real. Check the company name against your master vendor list or confirm with the approving manager.
- Vendor Address Verification. Another common invoice fraud scheme is to send an invoice with the name and logo of a vendor or supplier you do business with – but with a different payable address. Unless you match the invoice address with the address on your master vendor list you will be sending payment to a scammer.
AP Automation Protects Your Business from Fraud
Do all these steps to keep your business safe from invoice fraud seem a like a lot of work?
They don’t have to be.
AP automation solutions include AP fraud prevention already built in.
AP automation solutions include extensive verification protocols to ensure that all invoices are correct and proper. They make it virtually impossible to pay duplicate or fake invoices.
Automated receipt, contract, or purchase order matching are included in the best AP automation packages. So is automated vendor name verification, automated vendor address verification and automatic checks for duplicate invoices.
Automated and digitized invoice approval also means you can easily create invoice approval workflows that adhere to both GAAP principles as well as AP best practices.
And then managers and other approvers can see both the invoice document as well as the data around the invoice instantly. They can easily validate and approve the invoice on any device from anywhere in the world.
AP automation solutions can also prevent payments from being sent to unknown suppliers or unknown addresses and send alerts to appropriate managers about possible fraudulent activity.
Plus, AP automation includes activity audit trails, giving you deep insight into who authorized payments and what types of verification steps they went through before the approval was given.
If fraud should occur, AP automation will tell you what happened, how it happened, and who was behind it.
Bottom Line – How to Keep Your Business Safe from Invoice Fraud
Invoice fraud is on the rise, and the time to take action to prevent it is now.
If you haven’t done so already, be sure to implement GAAP principles for internal control procedures and follow AP best practices for fraud prevention.
And consider implementing AP automation that includes built in fraud prevention.
Your company will not only save time and money with AP automation, you’ll be keeping your company safe from invoice fraudsters.