How to Spot a Fake Invoice and Prevent Invoice Fraud

Last Updated November 20, 2024

Effective business accounting involves more than just ensuring all invoices are paid and processed properly. It also means verifying that bills sent your way are legitimate and not an act of invoice fraud.

Unfortunately, if your team receives a fake invoice and doesn’t spot it in time, it can create serious problems for your bottom line. By understanding how invoice fraud takes place and how to identify fake invoices, you can prevent major financial issues that could devastate your business.

What Is Invoice Fraud?

Invoice fraud is a scam that targets businesses in an attempt to fraudulently receive money from their accounts payable. Invoice fraud can come in many forms. In some cases, hackers and scammers will send fake or altered invoices in an attempt to get money from a business for services that were never provided. In other instances, a legitimate vendor could attempt bill fraud by overbilling a client or intentionally sending duplicate invoices.

If your team doesn’t know what to look for, invoice fraud can lead to significant financial losses. Invoicing scams that result in money getting sent to fraudsters can also hurt your company’s relationships with legitimate vendors who did nothing wrong.

Invoice Fraud Statistics—A Growing Concern

Invoice fraud detection has become an increasing priority for businesses because of how much the problem has escalated over the last few years. Research from 2024 reveals that 44% of businesses have received fraudulent invoices, with an average of 13 attempts per year. Even more troubling, an average of nine of the 13 attempts are successful, with businesses losing approximately $133,000 per fake invoice fraud.

Even if your own company’s invoices aren’t as large as this, you could still be targeted by scammers creating fake invoices and invoice manipulation tactics from seemingly legitimate vendors. Enhanced cybersecurity practices and focused accounts payable guidelines are an absolute must.

Common Bill Fraud Tactics

Sending a completely fake invoice from a fake vendor isn’t the only method scammers might use to try to receive payment from your company. The following are common bill fraud tactics your team must watch out for.

Duplicate, Altered, and Fabricated Invoices

A duplicate invoice occurs when the same invoice is submitted to a company multiple times. In some cases, the invoice numbers or dates that appear on the document will be slightly altered so that the invoice will appear to be for a new order. Scammers and shady vendors may use this tactic to get recurring payments for services that were never rendered. Scammers may also intercept a legitimate invoice and alter the payment details so money goes to them rather than the vendor.

In other instances, scammers might use information to create fake invoices, imitating the invoices you would receive from a vendor you actually use. With stolen logos and details, they submit an invoice that looks legitimate but is actually paid to their own account for products or services that were never provided. The legitimate vendor isn’t even aware of the issue.

Invoice Email Scams

Email spoofing and phishing scams are some of the most common ways invoice fraud occurs. Cybercriminals will send fake emails that look like they come from a legitimate vendor. However, the invoices are fake (including alternate banking details). In some instances, the emails will contain links to a fraudulent site designed to steal payment information from the payee.

Overbilling

Overbilling is when a vendor charges more for their products or services than what was originally agreed upon. This type of vendor invoice fraud could also include billing for more products than were actually provided. The excess charges are fraudulent, even though the vendor itself is real.

Intercepted Payment

If payments are sent online through unencrypted means, scammers can intercept the payment information and then use your account data to process fraudulent payments.

Advance Fee Fraud

Some scammers will provide an invoice that asks for an advance payment or deposit prior to providing goods or services. After the advance fee is paid, the fake vendor cuts off communication and never delivers the promised results.

How to Identify Fake Invoices

Invoice fraud prevention starts by knowing how to spot a fake invoice.

In business accounting, the standard process to prevent getting duped by fraudulent bills is called invoice verification. Here are the steps to complete this process and protect your business:

1. Compare the Invoice with Purchase Orders

The first order of business is to compare the invoice to its corresponding purchase order. This allows you to ensure that the invoice details match the pricing, quantity, and types of products or services that were included in the original purchase order. Any discrepancies should be communicated to the vendor. And, of course, if there isn’t a corresponding purchase order to go along with the invoice, that is a major red flag.

2. Check the Invoice Number and Date

The invoice number and date should fall within expected timelines for when your most recent transaction with a vendor took place, as well as for the number of transactions you have had with a particular vendor. Any discrepancies should be investigated.

3. Check Goods Receipts

Your accounting team should also compare invoice details with goods receipts, which acknowledge the quantity and quality of goods received. This is typically recorded with a delivery note or goods received note. You should confirm that the number of units listed on the invoice matches how many were delivered—if a delivery was made in the first place.

4. Confirm Payment Information

Prior to processing payment, all vendor information must be verified. This includes the vendor’s name, address, tax identification number, and payment details. Any mismatch between the invoice and official company records is a clear warning of fraud. Requests for rush payments are also a common tactic used by scammers.

What Happens if You Become a Victim of Invoice Fraud

Becoming a victim of invoice fraud can have serious consequences for your business. Tracking down online scammers and attempting to reclaim fraudulently processed funds is often not possible, which can significantly hurt your cash flow.

The direct financial losses from falling victim to a scam aren’t the only possible problem. Insufficient funds could make it harder to pay your legitimate bills on time, straining your relationships with legitimate vendors. Failure to pay those legitimate invoices could result in late fees, canceled contracts, and other penalties that harm your business’s operations.

Other Tips to Secure Your Business and Prevent Fake Invoice Scams

Due to the severe financial impact of invoice fraud, having clear processes in place to secure your business and prevent fake invoice scams must become a top priority. Here are some essential first steps.

1. Improve Cybersecurity

Start by ensuring that your business’s cybersecurity is up to today’s standards. Firewalls can help prevent spoofing and phishing emails from reaching your team’s inboxes in the first place, greatly reducing the risk of online fraud. Invoices should only be processed and paid while on a secure network, using encrypted methods to prevent data theft.

2. Have Clearly Outlined Accounts Payable and Receivable Processes

Your accounts payable and receivable processes should have a clearly outlined system for reviewing invoice details and activity, including the validation of supplier data and using a multi-stage authorization system before making a payment. Ensuring that every invoice is verified and appropriately vetted will allow your team to catch fraud and unintentional billing errors.

3. Use Software to Organize and Analyze Invoices

Accounting software can make it much easier to track, analyze, and organize invoices. Some data analytics tools can even help identify inconsistencies or potential signs of fraud in invoices received, making it easier for your team to flag suspicious bills.

4. Provide Training

Finally, make sure your accounting team receives sufficient training regarding cybercrime and invoice fraud. When your team knows what to watch out for—whether in an email or an invoice—they will be less likely to make a mistake that causes a significant financial loss.

In-Summary: Invoice Fraud

Invoice fraud is a growing problem across practically every industry, and it can be absolutely devastating for small businesses. However, by understanding the warning signs, setting up clear processes for managing invoices, and improving your cybersecurity, you can greatly reduce your risk of becoming a victim.

Invoice Fraud FAQs

Is creating fake invoices illegal?

Yes, those who create fake invoices are often subjected to both civil and criminal penalties that include jail time, fines, asset confiscation, and loss of business licenses.

What is the penalty for bill fraud?

Penalties for bill fraud may vary depending on the type of fraud that occurred, the amount of money that was fraudulently obtained, and the scammer’s prior criminal history. Federal fraud charges can result in 20 to 30 years in prison.

How do invoice email scams work?

Invoice email scams typically work by tricking the recipient into thinking they are paying an invoice to a legitimate vendor. A fake email often uses stolen logos or invoicing documentation but alters the payment details so they receive the payment instead of the vendor. Alternatively, they may direct the email recipient to a fraudulent link that is used to steal payment information.

How do you report fake invoice scams?

You can report fraud to the FTC and your state’s attorney general’s office for advice and assistance. You should also contact your bank and other relevant financial institutions to report the fraud—in some cases, this can allow them to freeze or cancel the transaction.