What is billing and invoice fraud?

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20 Jun 2024

What is billing and invoice fraud?

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.

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.

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 Small business cybersecurity mistakes to avoid for additional tips on protecting your business online.

How to help combat billing and invoice fraud

Here are some ways you can do your part to help protect your business:

  • Implement robust internal controls. Establish clear procedures for reviewing and approving invoices, such as a two-person approval system, where one person checks the purchase order and another approves the invoice.

  • Invoice clarity. Compare new and past invoices for the same supplier or service. Look for inconsistencies in pricing, quantities, or even small details like formatting changes.

  • Reconcile invoices regularly. Don't let invoices pile up. Regularly reconcile them with your purchase orders to ensure everything matches.

  • Supplier due diligence. Always conduct thorough background checks on new suppliers. Take time to research them online, look for reviews, check their website for legitimacy, and verify their contact information.

  • Clear communication. Make sure your suppliers or vendors understand your preferred invoice format and what supporting documents you need.

  • Employee training and awareness. Educate your staff on how to identify potential fraud and the red flags to watch.

  • Embrace technology. Consider using software that automatically detects irregular billing patterns and flags potential fraud, or blockchain technology that can enhance invoice transparency and security by creating a fixed record of transactions.

Billing and fake invoicing are a serious threat to businesses of all sizes. 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.

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.

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