Invoice Fraud: What It is and How to Avoid It

Threats to businesses can take many forms. Invoice fraud is one of the less spoken-about perils that has cost some enterprises millions of dollars. It is a widespread scam designed to exploit common loopholes in financial and operational processes and can, therefore, affect any industry or organization.

What exactly does invoice fraud involve, and how can businesses avoid them? Let’s find out.

Understanding Invoice Fraud

Unlike most other scams, these are not random mass-scale attacks. Invoice frauds are targeted schemes that swindlers plan with meticulous precision, often after researching a business.

But how can your organization get duped by such a scam?

●      Fake invoices

This is when a bad actor misleads your team with a fraudulent invoice that looks identical to the one sent by a legitimate vendor. It could bear the exact logo, company information, and template and may even refer to a payment you regularly make to the respective supplier. To make it extra tricky to detect, the invoice could arrive from an email address that closely resembles the one that the vendor typically uses.

How can a scammer plan a fraud with this level of detail? One possibility is a data breach on the vendor’s side. Criminals could hack into a vendor’s IT network and collect the information they require. Sometimes, they may gain insider information with the help of an employee working at the supplier or in your organization.

●      Legitimate invoices with altered payment details

By infiltrating a vendor’s IT system, fraudsters can alter the bank information of genuine invoices and siphon money to their accounts.

They could also send you emails impersonating regular suppliers to inform you about changes to their bank accounts. Mistaking these communications for legitimate ones, your finance team could inadvertently divert payments to fraudsters.

●      Duplicate invoices

It is not just unknown scammers who could trick you. Even deceptive suppliers may target you for various invoice frauds.

Billing clients twice for the same service or product is one such common scam to be aware of.

●      Invoicing for extra items

The vendor can sneak in additional products and services into an invoice when a payment involves a substantially large transaction.

To make it extra difficult to identify these items, they can break down the total amount into smaller billable components.

How Can You Protect Your Organization From Invoice Fraud?

Guarding against invoice scams is relatively easy when you adopt adequate security measures.

Strengthen Your Security Infrastructure

Weak security systems allow cyber scammers to infiltrate your networks, alter or steal business data, and monitor communications, all of which could ultimately lead to invoice-related fraud.

Therefore, investing in strengthening your IT infrastructure with reliable and up-to-date solutions is essential for avoiding scams.

If you don’t have the in-house expertise to identify security requirements, seeking help from an external consultant would be worthwhile.

Set Up Policies and Protocols

When policies and processes are vague or not stringent, there is a higher risk of mistakes, intentional abuse, and non-compliance.

However, by establishing standard guidelines, you can guide employee actions, minimize errors, introduce necessary checks, and strengthen the organization’s overall security.

Some of the areas to cover include:

  • Confirming invoices prior to processing payments by checking them against the approved purchase orders and goods received notes.
  • Checking vendor details on invoices, including name, address, contact data, invoice numbers, and remittance information.
  • Preventing duplicate invoicing by maintaining necessary logs.
  • Verifying bank account changes requested by vendors before processing pending payments.
  • Maintaining standard payment methods and cycles to prevent hasty transactions and unorthodox payment modes that are unsafe or difficult to trace.

An important point to address as you prepare policies and SOPs is internal compliance. The fact is, employees do not follow security guidelines in 58% of organizations. So, establishing processes and protocols is not enough if you want them implemented as intended.

You must include them in employee handbooks, create awareness, communicate your expectations, devise a monitoring mechanism, conduct regular audits, and incentivize compliance. Don’t forget to simplify all established guidelines to eliminate ambiguities and make them easier to understand and follow.

Train Your Staff

Human errors are at the root of almost every invoice scam. The good news is many can be rectified with adequate training.

  • Help your employees understand invoice-related threats, the different schemes devised, and common red flags that could give them away.
  • Generate awareness about cyberattacks, such as business email compromise (BEC), hacking, phishing, and malware, that could expose the organization to data and financial theft. Educate them about how they could avoid or prevent these by, for example, using secure internet connections, strong passwords, and company-recommended software.
  • Teach them techniques to identify and verify authentic vendor communications. For instance, they could use Nuwber to reverse search unfamiliar numbers and look for language tones and phrases in written communications that seem unusual for the vendor. Checking email addresses against those used by suppliers is important, too.
  • Provide regular feedback to help employees fall in line with the organization’s security and general policies and protocols.

Assign Responsibilities

Mistakes, negligence, and deceptive activities are prevalent when organizations fail to define individual responsibilities. You can avoid these and create greater accountability by establishing job roles and allocating responsibilities for critical tasks.

In addition, assign KPIs and integrate performance-tracking mechanisms to minimize errors and improve protocol compliance.

Leverage Automation

Invoice scams often go unnoticed in understaffed finance departments, where accountants constantly shoulder heavy workloads. This is when manual verifications are more likely to result in errors.

You can prevent them by integrating automated workflows that can replace manual checks and relieve your team from time-consuming, repetitive tasks.

Screen Vendors

A supplier screening process is mandatory for any organization to mitigate vendor-related fraud, such as invoice scams.

Prepare a checklist to vet suppliers as part of the registration process. Conduct background screenings, check references, and arrange site visits where necessary.

Vetting their security infrastructure and ensuring their security protocols align with yours is essential, too.

To Recap

Invoice fraud is a prevalent threat that every organization must guard against, regardless of its scale or industry. Remember, unknown bad actors, registered vendors, and even your employees could direct these scams when you least expect them. So, taking a holistic approach to organizational security is imperative for curbing their threats.