Invoice fraud: What it is and how to protect your business

Invoice fraud can silently drain your business if left unchecked. From inflated charges to fake vendors, fraudsters are using increasingly sophisticated methods to exploit gaps in your accounts payable process.

In this guide, we'll break down how invoice fraud works, what to look for, and how to prevent it using smart controls and automation.

What is invoice fraud?

These tactics are designed to bypass standard checks and divert funds from a business.

Fraudsters may impersonate trusted vendors, alter invoice details, or create entirely fake vendor accounts. In some cases, internal employees collaborate or overlook key details, making the fraud harder to catch. Without strong verification processes, these invoices can pass through business systems unnoticed.

Common types of invoice fraud

Invoice fraud can take many forms, and some are easier to detect than others. Recognizing how these tactics work in practice is the first step to preventing them. Here are some common types of invoice fraud to be aware of:

Understanding these patterns makes it easier to implement controls that directly target the weak points fraudsters exploit.

How invoice fraud affects your business

Invoice fraud strikes at the heart of your business operations, threatening financial stability and operational integrity. Beyond immediate monetary losses, it creates ripple effects that can damage the business's functionality and relationships:

• Cash loss: Payments made to fraudulent vendors reduce available capital and impact cash flow. Small amounts may go unnoticed at first, but over time they can add up to significant losses.
• Damaged vendor relationships: If legitimate vendors experience issues due to impersonation or delays in payment, it can strain partnerships and cause reputational harm.
• Operational inefficiencies: Investigating fraud requires time, resources, and coordination across finance, legal, and procurement teams. This slows down routine processes.
• Reputational risk: Vendors, customers, and even employees may question the reliability of internal controls if fraud becomes known.
• Regulatory exposure: Depending on your industry, undetected fraud could result in failed audits or non-compliance penalties, especially if financial reporting is affected.

Protecting your business against invoice fraud requires vigilance across all departments. By understanding these effects, you can implement stronger controls and maintain the financial health of the business.

Impact by industry or company size

Understanding how invoice fraud specifically targets different industries can help businesses implement more targeted prevention strategies.

Understanding the specific fraud vulnerabilities within your industry is essential when developing effective prevention strategies. By recognizing the common schemes targeting your sector, you can implement targeted controls that address the highest-risk areas before fraudsters have an opportunity to exploit them.

Red flags to identify invoice fraud

Staying vigilant against invoice fraud requires recognizing suspicious patterns before payments are processed. These red flags serve as early warning signs that something may be amiss with an invoice:

• Unfamiliar vendors: Invoices from vendors with no prior history, or sudden changes to contact or payment information, should be verified
• Mismatched details: If invoice amounts, line items, or dates don’t match the corresponding PO or delivery confirmation, that’s a sign something may be off
• Duplicate submissions: Watch for repeated invoice numbers or amounts submitted close together. This could signal accidental or intentional duplication
• Urgent or unusual payment terms: Requests for same-day payment or large discounts for immediate processing can be used to bypass scrutiny
• Missing documentation: A lack of supporting POs, receipts, or internal approvals should always trigger further review
• Formatting inconsistencies: Fraudulent invoices may use generic templates, lack branding, or have incorrect company details

Train your team to recognize these warning signs and establish clear protocols for flagging suspicious invoices. A culture of healthy skepticism can be the strongest defense against fraud attempts.

Invoice fraud vs. invoice errors

Not every discrepancy on an invoice indicates malicious intent. Understanding the difference between deliberate fraud and honest mistakes can save your business time, resources, and unnecessary strain on vendor relationships.

Remember that even honest mistakes can become costly if they occur frequently. Implementing strong verification processes protects the business from both deliberate fraud and recurring errors that affect the bottom line.

How to prevent invoice fraud

Preventing invoice fraud requires a combination of internal controls, automation, and team awareness. Let's walk through how to protect your business using a practical example. Let's say you receive an invoice from your regular office supply vendor for $2,450 worth of printer toner cartridges.

1. Verify vendor details

Before processing payment, check that the vendor information matches your records. In this example, you notice that while the logo and company name look right, the invoice lists a different bank account number than previous invoices from that vendor. This is an immediate red flag.

2. Implement a multi-step approval process

Invoice approval should not come from a single person. For the $2,450 toner cartridge invoice, have one team member confirm the order was actually placed, another verify receipt of goods, and a third approve the payment amount against the purchase order.

3. Call to confirm changes

When you spot the different bank account on the vendor's invoice, don't email the address on the invoice. Instead, call the established vendor contact using the phone number from your records (not the one on the suspicious invoice). Your contact confirms they haven't changed their banking details. You've just caught a fraudulent invoice.

4. Match against purchase orders

Use 2-way matching to check whether the invoice for $2,450 of toner cartridges corresponds to an actual purchase order. If records show you only ordered $1,200 worth of supplies, or no recent order at all, something's wrong.

5. Train your team

Make sure everyone handling invoices knows what to look for. Show them the fraudulent vendor's invoice as a training example, pointing out the subtle differences from legitimate ones.

6. Establish payment thresholds

Set up approval levels based on invoice amounts. For example, for invoices over $2,000, require additional verification steps or senior management approval.

7. Leverage technology

Use accounting software that can flag unusual transactions and provide audit trails. Smart systems would note that $2,450 for toner is significantly higher than typical office supply orders and flag it for review.

By following these steps, you'll create a solid defense against invoice fraud without sacrificing efficiency. Remember, a few extra minutes of verification can save thousands of dollars and countless headaches down the road.

What to do if you detect invoice fraud

Discovering invoice fraud requires swift, decisive action to minimize financial damage and strengthen the business's defenses. Following structured steps will help you address the immediate threat while creating a foundation for preventing future attacks:

• Stop payment immediately: If a suspicious invoice is still pending, place a hold on the payment until verification is complete.
• Notify your bank or payment provider: They may be able to reverse or freeze transactions if caught early.
• Alert internal teams: Include finance, legal, compliance, and IT to coordinate the investigation and response.
• Preserve documentation: Collect all related invoices, emails, approvals, and transaction records. This will support any internal or external investigations.
• Report the incident: Depending on the scale, notify law enforcement or regulatory bodies like the FTC.
• Contact your insurance provider: Some business policies include coverage for financial fraud. Understanding the options can help reduce loss.

Time is critical when responding to invoice fraud. By establishing these response protocols before an incident occurs, you'll be better positioned to recover funds and protect the business from recurring threats.

Prevent invoice fraud with Ramp

Ramp's comprehensive platform offers built-in safeguards to protect your business from invoice fraud schemes. Our intelligent features work seamlessly with your finance workflows to create multiple layers of protection.

With Ramp, you can:

• Detect duplicates and anomalies early: Ramp automatically flags unusual activity before payments are sent
• Keep your data safe: Secure, cloud-based storage keeps invoices protected with role-based access
• Automate 2-way and 3-way match: Get the ultimate protection against fraud and errors. Our automated invoice matching validates your invoices against purchase orders and item receipts.

With Ramp as a partner, you can focus on growing your business while we help keep your finances secure from increasingly sophisticated fraud attempts. See how Ramp's invoice management software works with an interactive demo today.