Protect your business against invoice fraud

Billing and invoice fraud: What it is and how to protect your business?

Running a business is exciting, but keeping track of finances can be a headache, especially when it comes to bills and invoices. But what if those bills and invoices themselves turn out to be fake? That's where billing and invoice fraud come in.

So, what is billing fraud?

Simply put, it's when someone deceives you into paying for something you don't owe. This can be fake invoices, inflated prices, or even duplicate charges.

Billing and invoice fraud ranges from phantom billing – charging for non-existent products or services – to padding invoices with unperformed work or exaggerated costs. Fraudsters might also double bill, charging you twice for the same service or even duplicating invoices.

They may also impersonate suppliers, creating fake companies with similar names, or make tiny tweaks to real invoices, such as changing a digit on bank accounts or phone numbers, or altering website domain names to divert payments.

Fraudsters rely on your trust and that busy companies – especially SMEs – may not have the time, resources or people to carry out thorough checks.

And don’t underestimate the threat. AFP Payments 2023 Fraud and Control Survey revealed 65% of businesses experienced attempts or actual incidents of billing fraud in 2022. SMEs are also 2x more likely to be targeted.

It's not just the immediate financial hit for both individuals and businesses. It shakes trust in legitimate companies, making everyone wary of future transactions. Accusations of fake invoicing can also seriously damage a business’s reputation, impacting partnerships and sales. And the implications can be just as severe for you if you wrongly accuse another company, with unnecessary disputes and potential legal headaches added to the mix.

The bad news is invoice fraud is surprisingly common. According to the Association of Certified Fraud Examiners (ACFE), invoice or billing fraud makes up 20% of all occupational fraud cases, costing each business around $4,200 monthly. For small businesses especially, that can be a devastating blow. SMEs are also twice as likely to be the target of billing fraud.

Types of billing and fake invoicing

Fraudsters are constantly looking for new ways to access your funds. And with all the focus on technology and cybercrime, it can be easy to miss something as common as an invoice, especially for time-poor, multitasking business owners.

Here are some of the most common types of billing and invoice fraud to look out for:

Overbilling

This is where a supplier charges you for goods or services at inflated prices. It could be a simple mistake but might also be intentional fraud.

Fake invoices

Fraudsters might create invoices for entirely made-up goods or services that were never supplied.

Duplicate billing

This scheme involves submitting multiple invoices for the same goods or services, hoping you'll pay them twice.

Shell company schemes

Fraudsters set up fake companies with seemingly legitimate names and websites, and issue invoices for non-existent services. They often have a limited online presence and vanish quickly after receiving payment.

How to detect billing and invoice fraud

Fortunately, invoice or billing fraud can often be spotted when you know what to look for. Some red flags to be aware of include:

Unusual invoice patterns

Keep an eye out for changes in invoice amounts or payment terms, which could be someone trying to inflate costs. For example, you might see a sudden jump in the price of a regular service or a change in the number of something you consistently order. And if a supplier with 30-day payment terms suddenly requests immediate payment, investigate further.

Lack of supporting documents:

Always ask for detailed receipts or proof of delivery. Missing paperwork should sound alarm bells. This could be anything from missing itemised lists on the invoice to a lack of receipts or delivery confirmation for physical goods.

Suspicious supplier behaviour

Take care if a new supplier or seller has limited contact information or little online presence. For example, if they have a generic email address and a phone number that goes straight to voicemail, that’s cause for concern. Be wary too of suppliers who pressure you into making immediate payments or offer unusually large discounts.

How to spot fraudulent activity

The good news is several red flags can effectively signal billing and invoice fraud, such as:

Unexpected charges for products or services you didn’t order or can’t recall.

Vague billing descriptions or unfamiliar wording. Legitimate invoices should clearly detail the services or products you’re being billed for.

Unusually high fees. Compare your current invoice to past invoices for the same service or product. A sudden jump in price could be an attempt to pad out the invoice.

Pressure to pay immediately. Most suppliers offer a payment window. Be cautious if suppliers apply pressure to pay an invoice immediately, especially if they’re new.

Limited or inconsistent contact information can be a sign of a fake company. Do they have a website? Is their phone number disconnected or going straight to voicemail?

How to help protect against billing and invoice fraud

Staying financially secure in the dynamic small business world can seem like a chess game.

While you're focused on growth, managing people, and keeping customers happy, there's another threat lurking – fraud. And it’s not just cybercrime like hacking and stealing data. Fake invoices and billing scams can drain your hard-earned cash and damage your supplier relationships.

What’s the most effective way to prevent fraud?

There are several more steps you can take to help protect yourself. Technology can be a powerful weapon in tackling billing and invoice fraud and needn’t cost the earth.[3] Think about:

Automated monitoring systems

These constantly scan transactions in real time, using clever pattern recognition to spot anything unusual or suspicious before it can drain your bank account. Plus, they can handle lots of data, so they're perfect for businesses that are growing fast.

Secure payment platforms

Using features like end-to-end encryption and two-factor authentication, these digital payment systems add extra layers of security beyond a password.

Blockchain technology

Blockchain is a secure system that saves a record of all invoices and payments that are made for your business. Each transaction is verified by a network of computers, making it permanent and visible to everyone involved. This ensures that payments are processed quickly and accurately. As a result, blockchain can enhance security, help to reduce costs, and increase efficiency in processing payments.

Automated invoice processing systems

These streamline the entire invoice management process, automatically matching invoices with purchase orders and delivery receipts, and flagging any inconsistencies for efficient and accurate handling.

Outside tech, other simple and practical measures include:

Internal controls. Implement a two-person approval system where one person matches the purchase order against the invoice, and the second checks the supplier is genuine and approves the payment. For larger invoices, include approval from a senior staff member. For an extra layer of scrutiny and security, rotate approval duties across the team.

Keep on top of invoices. Don't let invoices pile up. Mistakes happen in the rush, so regularly compare them to POs for accuracy. Accounts payable automation software can streamline this process and catch discrepancies more efficiently.

Do your research. Always vet new suppliers thoroughly. Research them online, check reviews, make sure their website's genuine and confirm contact details.

Train your team. Educate employees on identifying potential fraud and common red flags.

Keep a paper trail. Always keep copies of purchase orders, invoices, receipts, and other relevant documents for an invaluable paper trail if there’s a dispute or investigation.

Carry out regular audits of your payment processes to highlight any weaknesses and tighten security.

Stay informed. Fraudsters constantly adapt their tactics. Keep up-to-date on the latest billing and invoice fraud schemes by following specialist organisations like The Association of Certified Fraud Examiners (ACFE), subscribing to industry publications or attending relevant webinars.

What is the impact of fraudulent activity?

Billing and invoice fraud can have a significant ripple effect on your business. Possible consequences can include:

Financial losses

Fake invoices can drain your cash flow, leave you struggling to meet your financial obligations, erode profits and hinder growth. One large, fake invoice can severely affect an SME, impacting your ability to pay employees, suppliers, and other creditors.

Damaged relationships

Investigating a potentially fake invoice can create tension and distrust. Wrongly accusing a legitimate supplier can damage your long-term business relationship. Retracting legal action can also be time-consuming and embarrassing. And even if everything goes smoothly, it can still cast a shadow and raise questions about your financial controls.

Reduced efficiency

Dealing with the aftermath of billing fraud can be a significant drain on your resources. Investigating suspicious invoices and potentially changing supplier relationships all take time and effort away from your core business activities.

Read our 9 common small business cyber security mistakes article for additional tips on protecting your business online.

Billing and fake invoicing are a serious threat to businesses of all sizes, draining your cash and damaging your reputation. By understanding the different types of fraud, how to detect them, and taking the proper steps, you can keep your business safe and your finances secure, ensuring your business keeps running smoothly.

For more information about billing and invoice fraud and how to stay protected, get in touch with our V-Hub Digital Advisers for 1-2-1 support.