How to prevent invoice fraud

What is invoice fraud? How can businesses avoid it?
Kenneth Leung
Fraud Lead
February 1, 2024
read time
1 minute
Reviewed by
February 28, 2024

Vendors provide goods and services to help businesses develop products that they then sell to customers. An important step in this process is invoice payment, which has quickly become one of the leading sources of payment fraud, causing financial loss for thousands of businesses. 

In general, the best way to prevent invoice fraud is to remain vigilant, train your staff to recognize it, use proper authentication practices, and double-check everything.

In this guide, we provide a more comprehensive overview of invoice fraud, how it works, and steps businesses can take to help prevent it from impacting them. 

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What is invoice fraud?

Simply put, invoice fraud is a fraud scam where businesses are deceived into paying fake invoices for nonexistent or overpriced goods and services or otherwise mistakenly sending payments to a scammer's account.

The high volume of invoices businesses often manage and the manual nature of the process have made invoice scams a popular method used by fraudsters to steal money from companies. 

If they're susceptible to invoice fraud, then why do businesses use invoices? 

Deferred payments, often managed using invoices, are a popular payment method used by businesses because this approach helps companies manage cash flow effectively and improve their accounts payable turnover ratio

However, businesses (and vendors) are increasingly moving away from paper invoices in favor of digital invoice payments.

We will cover this later in this post, but while this reduces the likelihood of paper invoice fraud occurring, digital invoice fraud can be just as tricky. 

How does invoice fraud work?

Invoice fraud attempts to take advantage of accounts payable departments and business owners by deceiving them into paying for goods and services they never received or at higher prices than contractually agreed to. 

In general, fraudsters take steps to pretend to appear as trusted vendors or at least have fake invoices appear as real. 

Here is a more comprehensive list of methods fraudsters use to execute invoice fraud: 

1. Vendor account takeovers

Account takeovers are a common type of invoice fraud where a scammer gains control of a vendor's billing system – either by exploiting security vulnerabilities or social engineering – and sends fake invoices to a business, tricking them into paying for goods or services that aren't actually provided.

A business email compromise, resulting from a hack or otherwise, could make vendors susceptible to account takeovers. 

Even if you have a strong relationship with your vendors, it’s important that you remain mindful of any behavioral changes in electronic communications and keep a close eye on inbound invoices for any suspicious signs. 

2. Internal employee fraud

Employee fraud occurs when a company’s own staff creates or approves fake invoices to steal money from the business. 

3. Sending fake invoices

This type of invoice fraud occurs when a business receives phony bills for products or services they never bought, created by scammers who are impersonating legitimate vendors to steal money.

What makes this type of invoice fraud difficult to detect is that the invoice may appear real – with information like bank account numbers, email account addresses, vendor account details, social media account URLs, and other info to help pass off the document as real. 

4. Vendor fraud

Vendor fraud for invoice fraud occurs when a dishonest supplier sends a business inflated or false invoices for products or services, intending to illegally obtain more money than they're owed.

5. Bill padding

Bill padding is a fraudulent activity where a vendor inflates a bill or invoice with extra charges for goods or services that weren't actually provided in order to get more money than they should.

6. Sending duplicate invoices

Duplicate invoices refer to a scam where a business intentionally sends several identical bill payment requests for a single expense, tricking them into paying multiple times for the same service or product.

7. Misdirection

Misdirection is an impersonation technique that occurs when scammers redirect payment for a legitimate invoice into a fraudulent account, typically by providing false banking details or by convincing a business to change their payment information.

8. Phishing

As we covered in our first blog post, phishing in invoice fraud is when scammers use deceptive emails pretending to be from legitimate vendors, aiming to sneak past cybersecurity measures and steal sensitive information that allows them to issue or redirect payments fraudulently.

Phishing emails may move through your spam filters, so be extra careful when reviewing invoices received through email!

How do I know if an invoice is real?

When it comes to invoice fraud, trust your instincts and stay sharp. If you're reviewing an invoice and something doesn't quite add up or seems off, there's a good chance your gut feeling is pointing you in the right direction. 

A healthy dose of scrutiny, skepticism, and attention to detail is often your best line of defense against these crafty scams.

When in doubt, you can always reach out to a vendor provider via email or phone call to help verify that an invoice is accurate. 

How to spot a fake invoice

The following practical recommendations are some of the most effective invoice fraud detection and prevention steps you can take to spot a fake invoice: 

1. Invoice details look off

Compare the “vendor” information and payment details on every invoice with the information you have on file to check for any discrepancies. 

2. Look for unusual or strange formatting

If you see a suspicious invoice with formatting or spacing issues that look off compared to what you ordinarily receive from a vendor, this is a red flag. 

Common signs include a letterhead that looks like it was created with Adobe Photoshop,  a template that looks like something you could pull from Google Images, grammar issues, or font and spacing that are inconsistent.

3. The invoice doesn’t match an open order 

The invoice should line up with a purchase of goods & services you've made for the purposes of your business. This is where 3-way match validation capabilities can come in handy. 

4. The “vendor” demonstrates an unusual sense of urgency

Vendors typically set clear expectations, dates, and payment processes with businesses they work with, so there should be very few surprises when it comes to processing invoices

If there's a sense of pressure from the vendor to fulfill the invoice in a rushed manner, there is a high likelihood that a fraudster might be pretending to be your vendor and sending you a fake invoice. 

How to prevent invoice fraud

Finance teams are often busy and, depending on your monthly vendor payment volume, taking extra precautions to ensure invoices you are receiving and paying are accurate

There are a few practical steps you can take to help prevent invoice fraud from impacting your business. 

1. Do your due diligence with every invoice

Pay close attention to the details of the invoice as mentioned above, verify directly with the vendor if the invoice was sent by them, and ensure the invoice provided matches the goods and services that you have purchased as part of your business operations.

2. Check-in with your point of contact

Simply pick up the phone and call the vendor directly to confirm that the invoice was generated and sent by them.

3. Train your staff to be aware of the signs

Have regular staff training on how to detect common red flags of fraudulent/altered invoices using the practices mentioned above

4. Scrutinize invoice details with 2-way or 3-way matching

Always use a 2-way or 3-way matching to verify and authenticate an invoice received for goods and services rendered. Ensure details on the invoice match your business records.

5. Beware of advertising your suppliers on public platforms

Social engineering in invoice fraud is when tricksters pretend to be your usual vendors or bosses to get you to send them money. If you put your business out there on public sites, scammers might be watching, ready to act like they're the real deal and take your payment.

6. Consider an AP automation or automated invoice processing tool

AP automation simplifies and eliminates manual steps in the invoice management and vendor bill payment process using software, workflow planning, and change management.

A significant reason why finance teams are susceptible to invoice fraud is that the accounts payable process is time-consuming; they may not have time in the day to validate every single invoice that comes in. 

This is why it’s important to consider an AP automation platform that can help you automate many of the manual processes involved in processing payables, including approval workflows and payment.

This is why it’s important to consider an AP automation platform that can automatically check and verify invoice details against purchase orders and existing records, flag inconsistencies, navigate approval workflows, and process payment. 

Read our guide to accounts payable for more information.

7. Pay it forward by doing your part with your accounts receivable 

Lead by example with your accounts receivable process, digitize invoices where you can, and be responsive to customers who ask to verify invoices that are sent in your company’s name. It goes a long way!

What to do if you're a victim of invoice fraud

In the US, here are the top three things your business can do if you fall victim to invoice fraud: 

  1. File a complaint online to the Federal Trade Commission (FTC) or call 1-877-FTC-HELP.
  2. Lodge a report on the Internet Crime Complaint Center (IC3) on their website. 
  3. Contact your local law enforcement agency to file a police report, especially if the fraud involves a significant amount of money loss from your business.

How Rho helps prevent invoice fraud

The Rho platform has a built-in AP automation capability called Rho AP. 

In seconds, the Rho platform processes thousands of supplier invoices at scale – all in the same fee-free platform where you can manage your expenses, banking, and treasury.

Translation: Your finance team (even just a team of one) can eliminate hours spent managing hundreds of invoices each month manually.

There are three platform capabilities in particular help prevent invoice fraud by freeing up your time to review invoices more thoroughly: 

  1. Rho customers can send invoices to a dedicated Rho email inbox, which will flag when a vendor you don’t have on file sends you an invoice.
  2. Rho’s platform is customizable to include multiple invoice approvers so that there are layers of review which can help to prevent human error.
  3. Rho’s AP automated invoice duplicate detection system alerts you to already paid invoices that have been resubmitted.

Wrap-up: Help prevent invoice fraud and automate AP with Rho today

Fraudulent invoices are a widespread tactic used by criminals to target businesses. However, there are practical steps you can take today to help you prevent this invoice fraud from impacting your company. 

If you are interested in learning more about how the Rho platform can assist your invoice fraud prevention and streamline your accounts payable process, sign up to speak to a Rho specialist today!

FAQs about invoice fraud

What is a ghost invoice?

A ghost invoice in the context of invoice fraud is a fake bill sent to a company for goods or services that were never delivered, often created by someone looking to collect payment without providing anything in return

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