Invoice Fraud: What Is It, and How to Recognize and Prevent It?

Invoice fraud is a type of scam that involves the use of fake or altered invoices to request payment from a business. Unfortunately, this kind of ploy can be difficult to track and is usually detected only after confirming details with the supplier.

There are many kinds of invoice fraud, and both small and large businesses are at risk of losing thousands in revenue each year without proper knowledge of how this scam works. So, in today’s post, we’ll discuss everything you need to know about invoice fraud, including its common types and recognizable signs. We’ll also offer key tips to help you prevent invoice fraud.

Let’s get started!

Key Takeaways

• Invoice fraud is a scheme that uses fake invoices to obtain money from businesses.
• The common types of invoice fraud you may encounter are double invoicing, overbilling, fake orders, insider fraud, and phishing attacks.
• Some signs of invoice fraud include missing or inaccurate information in the document, a mismatched services list, and sudden changes in payment terms. Getting invoices from unfamiliar vendors can also be a clear red flag of fraud.
• To prevent invoice fraud, you can use automated tools, implement multi-level approvals, and audit financial transactions regularly. It’s also best to verify vendor details before sending out any payments.
• If you’re a victim of invoice fraud, it’s important to stop payments right away, gather evidence of the crime, and report it to the proper authorities.

What Is Invoice Fraud, and How Does It Happen?

Invoice fraud is a common ploy used to attack businesses and steal their money. It usually happens through fake invoices that charge a business for nonexistent transactions or altered invoices that request inflated payment amounts.

Unfortunately, several factors can contribute to your business being at risk of invoice fraud, such as a weak verification process or a lack of proper finance or invoice management. In both cases, it becomes easier for attackers to slip in fake invoices unnoticed.

Since this scheme isn’t easy to detect, businesses often end up making multiple payments before they are discovered. In fact, according to the Medius Financial Professional Census in 2022, businesses can lose an average of $300,000 in revenue annually to invoice fraud.

One way to protect your business from this scam is by familiarizing yourself with the various types of invoice fraud.

5 Common Types of Invoice Frauds

From double invoicing to overbilling, there are several types of invoice fraud that businesses should be aware of.

Let’s discuss each one below:

#1. Double Invoicing

Not to be confused with split invoices, double invoicing is a common invoice scam where a business is sent multiple invoices for the same project or order. While this can also be due to an honest mistake, some vendors may try to invoice a client several times, hoping they wouldn’t notice the duplicate until after the payment is sent.

Fraudsters may try slightly to alter the invoice details or use a different invoice number for the same order to avoid detection. This type of invoice fraud is often discovered in large companies that work on large-scale projects that require multiple invoices from different suppliers.

Because there are multiple invoices involved, keeping track of which ones have been paid or not can be quite challenging without a rigorous process.

#2. Overbilling

Similar to double invoicing, overbilling is a type of invoice fraud that can come from a legitimate vendor but with significantly inflated costs of the service or products. For instance, if the initial rate for a certain material is $10 per item and the invoice shows that you are being charged $11 per item, then it could be overbilling.

That said, not all invoice discrepancies are due to fraud and can sometimes be a clerical error. Because of this, it’s best to refer to your contract or agreement to review the agreed-upon rates.

You can also verify this information with the supplier before sending any payments to confirm if the rate change is legitimate and what may have caused it. If they are unable to explain the discrepancy, then it’s a clear sign of invoice fraud.

#3. Fake Orders

In this type of invoice fraud, the attacker may submit an invoice to your business for an order or project that doesn’t exist. While this may seem easy enough to avoid, unfortunately, this can be quite common in larger companies that deal with a high volume of financial transactions.

This scheme usually utilizes service providers, like domain or web hosts, that businesses actually use to perpetrate the scam. Because fake orders require the rechecking of purchase orders and receipts, they can easily slip through in organizations that don’t have a detailed review process for invoice payments.

#4. Phishing Attacks

Phishing attacks usually utilize emails to send fake invoices to businesses and receive money in exchange for nonexistent services. Another form of invoice fraud using phishing attacks is when fraudsters send emails claiming that a company’s banking details have changed and redirect the payments into their own accounts.

Since the supplier they are claiming to be is legitimate and one that the business has likely worked with before, they are often tricked into sending the payment.

#5. Insider Fraud

While most invoice fraud attempts are caused by external organizations, there can also be threats from within the company. Insider fraud can happen when employees approve fake invoices or add phantom vendors to the company’s supplier list.

According to invoice fraud statistics from the Association of Certified Fraud Examiners, more than half of all insider fraud incidents stem from these departments:

• Operations
• Accounting
• Sales
• Customer service
• Executive or upper management

Unfortunately, since the scam happens internally, it can be extremely difficult to detect insider fraud without routine reviews or audits of the invoice payments being sent out.

Who Is at Risk of Invoice Fraud?

Businesses are usually the ones at risk of invoice fraud, but this scam isn’t limited to professional transactions alone and can also affect the following organizations:

• Non-profit organizations. These organizations often have limited manpower, so they are often vulnerable to invoice fraud tactics like overbilling, fake orders, and double invoicing.

• Freelancers and contractors. While not commonly targeted, freelancers and contractors can fall prey to invoice fraud attempts that impersonate their clients.

How to Recognize Invoice Fraud: 4 Signs to Look Out For

You can recognize invoice fraud by detecting some common signs or red flags that imply you may be at risk, including:

#1. Missing or Inaccurate Information

One of the most obvious signs of invoice fraud is missing or inaccurate information, such as supplier details or a list of products, in the document.

For an invoice to be valid, it should have the following information:

• Unique invoice number
• Date of issuance
• Invoice due date
• Complete breakdown of the products or services provided and their corresponding rates
• Total amount due
• The supplier’s complete name, contact details, and address
• Invoice payment terms

Any discrepancies in this information could mean that the invoice is fake or is coming from a non-legitimate source. To be sure that the missing information isn’t a simple clerical error, it’s best to verify the order details with your supplier before processing payment.

#2. Unfamiliar Vendors

If you suddenly receive an invoice from an unfamiliar vendor that isn’t on your approved supplier list, it’s best to be cautious before sending any payments. Phantom vendors are a common invoice fraud tactic that can lead to thousands of lost revenue.

To ensure that you aren’t being scammed, it’s best to reach out to the vendor directly and verify their information.

#3. Sudden Changes in Payment Terms

Fake invoices can be hard to spot, especially for untrained professionals, but one common sign of a scam is sudden changes in the payment terms. Fraudsters may try to create a sense of urgency to pressure you into sending the payment without verifying the invoice first.

Another red flag is sudden changes to a supplier’s bank details, especially when it comes to recurring invoices, as it could be a form of phishing or insider fraud. To ensure that you are paying the right account, consider reaching out to the supplier directly and confirming the change.

#4. Mismatched Service List

Another thing you should look out for in your invoice is a mismatched service list or when the breakdown of services and products on the invoice doesn’t match what was initially agreed on.

While extra charges can sometimes be added to an invoice later on, it can be a red flag if the supplier doesn’t inform you about the change beforehand. This means that the discrepancy may be intentional and a clear sign of invoice fraud.

4 Simple Ways to Prevent Invoice Fraud

To prevent invoice fraud, it’s important to understand its various types and the common red flags to be aware of.

Here are four simple ways to reduce the risk of fraudulent activity in your business:

#1. Use Automated Tools

Using automated tools like Paystub.org’s invoice generator is an excellent way to prevent fraud, as it ensures consistent documentation and makes it easier to spot fake invoices. Moreover, our generator provides professional invoice templates that automatically include all necessary client information and calculate the total cost of the services listed to help you avoid any discrepancies.

#2. Verify Vendor Details

A simple tip for invoice fraud prevention is to verify vendor details before providing any payment, especially if the client recently requested a change in their banking details. While this can be difficult to do in bigger and more established businesses, it’s a crucial step to prevent falling for fake orders and other types of invoice fraud.

#3. Implement Multi-Level Invoice Approval Processes

One of the best ways to prevent invoice fraud is to implement a multi-level approval process for invoices. By involving multiple employees or departments, it will be much harder for double invoices, fake orders, and overbilled invoices to slip through and get approved.

Moreover, multi-level approvals add a layer of security to your invoicing process that can help combat insider fraud.

#4. Audit Financial Transactions Regularly

Proper invoice management and regular audits are surefire ways to combat invoice fraud, as they help you stay on top of all your business’s financial transactions. By routinely reviewing bank records and invoice statements, you’ll be able to detect any unusual payments or irregular patterns that can signal fraudulent activity.

What to Do If You’re a Victim of Invoice Fraud

If you are a victim of invoice fraud, it’s crucial to act fast to avoid losing more money.

Here’s what you can do:

• Stop payments immediately. While the person or organization that committed invoice fraud is overall liable, it’s your responsibility to notify your bank and stop payments immediately. It’s also important to report the transactions as fraudulent and ask them to reverse the transaction, if possible.

• Gather evidence. Once the bank is settled, you’ll need to gather evidence of the fraud. This can include copies of your contract or agreement with the supplier, conversations, or any document that can prove that the invoice is fraudulent.

• Report the incident to the authorities. Lastly, you’ll need to file a report with the Federal Trade Commission or with the local authorities.

Final Thoughts

Invoice fraud is a common scam that many businesses can fall prey to, but by recognizing the common red flags of fraud and taking the proper measures, you can protect your finances and secure your business.

One of the ways to prevent invoice fraud is by utilizing an invoice generator like Paystub.org to create your invoices. Our handy tool provides you with templates to create standardized invoices and makes it easier to keep track of all your business transactions. With a detailed record of all invoices you provide, you are less likely to be at risk of invoice fraud.

Invoice Fraud FAQ

#1. How do I know if an invoice is real?

To know if an invoice is real, you can confirm with your supplier, double-check its details against your company’s records, and compare the invoice number with the purchase order number. Any discrepancies in these areas mean that the invoice is fake.

#2. Can I dispute an invoice?

Yes, you can dispute an invoice, especially if there are issues with it or if you have proof of fraud. To do so, you would need to gather evidence and proper documentation and then proceed with the invoice dispute.

#3. What are the red flags for invoice fraud?

The red flags for invoice fraud include duplicate invoices, a missing invoice number, and incorrect information on the invoice. If you receive an invoice with these red flags, it’s best to return it right away and report the incident.

#4. Can I ignore an invoice?

You can’t ignore an invoice, as failing to pay can lead to legal consequences. Invoices often have a due date and a specific period of time when you are expected to provide payment, and it’s best to adhere to this deadline to avoid penalties.

#5. How to report fake invoices?

To report fake invoices, you can submit a formal complaint to local law enforcement or the Federal Trade Commission. Just make sure you provide the necessary proof and documentation to support your claims.