Invoice fraud, a menace that’s been casting a long shadow in the corporate corridors, has found renewed vigor in the age of digital transactions. In fact, research shows that invoice payment fraud rose 137.5% in 2023.
Accounts Payable (AP) teams are more likely to encounter invoice fraud compared to other departments because they regularly deal with a high volume of transactions. Payment processes are complex and multi-layered, for example, involving multiple approvals and interactions with various vendors. On top of this, processes are often manual and data heavy, making it difficult to maintain clear visibility over all transactions. This all makes it easier for fraudulent activity to go unnoticed.
Mounting pressures to address invoice fraud
Impending laws are increasing the pressure on financial departments to tackle fraud. For example, the ‘Failure to Prevent Fraud’ (FTPF) offence is being introduced as part of the Economic Crime and Corporate Transparency Act at the end of 2024. The FTPF offence will make it easier for organizations to be prosecuted for fraud committed by employees or third parties that the organization benefits from. The offence will require organizations to implement or enhance existing ‘fraud prevention procedures’. The specific details of these procedures are currently being draw up by Government.
If found guilty, organizations will be subject to an unlimited fine, with the Courts deciding on the appropriate penalty dependent on the circumstances of each individual case. To combat fraud, and avoid criminal conviction, AP teams must arm themselves with the correct tools or risk falling prey to fraudsters.
Director of Financial Automation at Quadient.
Understanding the spectrum of invoice fraud
Invoice fraud involves submitting highly convincing fake invoices or altering the payment details of legitimate ones. Invoice fraud is particularly common as AP professionals often struggle to tell a fraudulent invoice from a real one. Barclays’ Scams Bulletin reveals that invoice and mandate scams increased by 6.9% across March and April 2024, highlighting that scammers are becoming harder to detect. Fraud and Scams Expert at Barclays, Kirsty Adams, highlights the value of double-checking invoices and payment details against previous invoices to avoid incidents of fraud. However, if done manually by AP departments, this can take up copious amounts of time. Organizations need to find a way to do these manual tasks more efficiently, streamline the process, and free up employee’s valuable time.
Another common type of invoice fraud is duplicate payments. These can occur by accident in an overworked AP department, or by a finance function that is highly dependent on manual processes, such as manual data entry. Fraudsters can exploit these vulnerabilities by submitting multiple invoices for the same transaction. In fact, research shows that nearly half (42%) of UK universities double-paid invoices in 2023 – with 8% of those universities being victims of invoice fraud. As almost half of universities are overpaying invoices, sorting out duplicate payments can provide major benefits beyond tackling invoice fraud. This can include reducing financial waste, enhancing budget accuracy, and improving overall financial management and accountability.
For organizations that deal with hundreds of invoices daily, invoice fraud is extremely difficult to spot manually. It often feels like finding a needle in a haystack, searching for red flags among thousands of legitimate journal entries. Organizations need to clamp down on fraud if they are to put themselves in a good position to prepare for the FTPF offence.
Finding the needle in the haystack with AI and automation
To help identify instances of fraud, and find the needle in the haystack, automation and AI excel. Automated AP systems can cross-verify invoices against purchase orders and delivery receipts. This can help AP teams to automatically flag discrepancies within potentially fraudulent invoices for investigation, stopping instances of fraud slipping through in the first place. Research reveals that more than half of organizations (52%) say that without automated invoice matching they are “sitting ducks” when it comes to fraud. Automation can also stop the chance of duplicate payment as the system will create the invoice and track the payment process. This removes the opportunity for fraudsters to submit multiple invoices or for employees to accidently pay twice.
In tandem, AI can help AP departments to quickly analyze large volumes of data and recognize payment patterns and anomalies in real-time, all with 100% accuracy. These anomalies can include, duplicate payments, changes to payment details, or even new vendor information.
Over time, these AI tools continuously learn from new data, improving their accuracy in detecting fraud. This takes the pressure off finance departments as they manage invoices, freeing up time to focus on more complex issues.
Ensuring robust protection against invoice fraud
With fraudulent activity on the rise, and impending laws, AP departments must finalize their preparations to tackle fraud. The FTPF offence represents a major change to corporate criminal liability, dramatically increasing the legal ramifications of invoice fraud. In the current economic climate, organizations simply can’t afford to be found guilty under this offence. With help from AI and automation, AP teams can stop fraudsters in their tracks, keep finances airtight, and retain customer and investor confidence.
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