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How to Detect and Prevent Invoice Fraud

Updated on :  

08 min read.

Every organisation, big or small, is vulnerable to invoice fraud. Invoice fraud is a present threat for the accounts payable teams across the globe. Even a few fake invoices could result in thousands, if not millions, of losses for an organisation.

What is Invoice Fraud?

Invoice fraud happens when the fraudsters send fake invoices to businesses with strong accounts payable processes to extract money from them. They target companies based on their location and size of operations and then narrow down on the organisation’s suppliers like office supplies, food vendors, cleaning services, etc.

With all such information, these fraudsters create phoney invoices on behalf of these suppliers that look legitimate and send these invoices to the targeted organisation’s accounts payable department requesting the release of payment.

Four Common Types of Invoice Fraud

Duplicate and Fake Invoices – Fraudsters sneak in duplicate or fake invoices both within and outside the business. These invoices are generally of meagre amounts, which makes them difficult to identify and track. These fake invoices usually involve compliance services, food bills, office supplies, and subscriptions.

Shell Companies – Invoicing through shell companies is one of the prevalent forms of invoice fraud. These companies are business entities that don’t have any physical presence except their mailing address. Fraudsters, mostly disgruntled employees, use fabricated details to collect disbursements from their false billings.

Phishing – Phishing schemes occur when the fraudsters trick an organisation’s accounts payable department into transferring funds by pretending to be a legitimate company. They typically duplicate the contact details, such as the email of the authentic supplier, which they use for sharing fake invoices with the target companies. 

Over or Mischarging – Some vendors include fake information in their invoices concerning numbers of personnel employed or hours worked for inflating the invoice value.

Penalties Under GST Law for Invoice Fraud

Fake invoices cause major loss of revenue for the government and result in misuse of taxpayer’s money; hence the government has laid laws to curb the same. Both the supplier and the receiver of such fake invoices are liable to a 100% penalty of Input Tax Credit availed or GST evaded. Also, the brokers and practitioners involved in facilitating such transactions will be held liable for a penalty of 100% of the GST amount. 

It may be noted that in addition to the penalties, there’s imprisonment as per the provisions laid down in the GST Act for Invoice Fraud for a term that could extend up to five years.

How to Detect Invoice Fraud?

While organisations today have started prioritising the prevention of invoice fraud, knowing the potential ‘red flags’ holds the key to detecting them. Listed below are some of the ways to mitigate the risk of invoice fraud:

  • Scrutinising Invoices – It is well established that most of the accounts payable teams struggle to pace up with the overbearing number of invoices, but this shouldn’t stop them from examining every invoice diligently before approving. They should pay attention particularly to supplier names, contact information, bank details, and amount invoiced.
  • 3-Way-Match – Matching the invoices to the purchase orders and goods/service receipt notes is a great way to avoid paying illegitimate invoices. 
  • Proper training – Fraudsters will always look for opportunities for exploiting the vulnerabilities in your processes. Hence, it’s crucial to ensure that the staff is provided regular training, particularly those making payments.

Tips to Prevent Invoice frauds

Preventing invoice fraud is quite frustrating, but employing the below tips will help reduce the chances of your organisation falling victim.

  • Process Automation – When the accounts payable process is automated, the system flags invoices with conflicting data. This flagging allows the company staff to investigate the same before approving.
  • Segregating the staff duties – Segregation of duties refers to the principle that no individual carries out multiple sets of duties conflicting with each other. 
  • Keeping the morale high – More often than not, the disgruntled employees are involved in fraud. Happy employees will rarely commit any fraud and perhaps will be eager to catch fraud from external sources.