April 16, 2024

Protecting Your Business from Invoice Fraud: The Importance of a Strong Approval Workflow

Lars Nielsen

What is Invoice Fraud?

Invoice fraud occurs when a scammer sends a fake invoice to a company, pretending to be a legitimate supplier or vendor. The invoice may look authentic, with the correct branding, layout, and even the right contact information. However, upon closer inspection, there are usually subtle differences, such as a slightly different email address or bank account details.

Fraudsters often target businesses with lax AP processes and weak internal controls. They may send invoices for goods or services that were never ordered or delivered, hoping that the company will pay without verifying the legitimacy of the invoice. In some cases, the scammer may even intercept and alter a genuine invoice, changing the payment details to their own bank account.

The impact of invoice fraud can be significant. According to a report by UK Finance, 26% of large businesses in the UK have fallen victim to invoice fraud, despite 84% not fully understanding what it entails (UK Finance, 2023). The financial losses can be substantial, but the damage doesn't stop there. Invoice fraud can also harm vendor relationships, disrupt business operations, and tarnish a company's reputation.

The Role of an Approval Workflow in Preventing Invoice Fraud

One of the most effective ways to prevent invoice fraud is to implement a strong approval workflow. An approval workflow is a formal process that outlines how invoices are reviewed, validated, and approved before payment is made. It ensures that the right people are involved in the process and that proper checks and balances are in place to catch any suspicious activity.

Here are some key elements of a strong approval workflow:

  1. Segregation of duties: No single person should have the ability to create, approve, and pay an invoice. By separating these responsibilities, you reduce the risk of collusion and make it harder for fraudsters to manipulate the process.
  2. Invoice matching: Before an invoice is approved, it should be matched against the corresponding purchase order and receipt of goods or services. This three-way matching process helps ensure that the invoice is legitimate and that the company is only paying for what they actually received.
  3. Vendor verification: All new vendors should be thoroughly vetted before they are added to the system. This includes verifying their business registration, tax ID, and bank account details. Any changes to vendor information should also be carefully reviewed and approved.
  4. Approval thresholds: Set clear thresholds for invoice amounts that require additional approvals. For example, invoices over a certain GBP amount may need to be approved by a senior manager or the finance team.
  5. Audit trail: Every action taken in the approval process should be logged and timestamped, creating a clear audit trail. This helps with accountability and makes it easier to investigate any suspicious activity.

By implementing workflows that include the processes mentioned above, you can highly decrease the risk of falling victim to fraudulent invoices.

Best Practices for Preventing Invoice Fraud

In addition to implementing a strong approval workflow, there are several best practices that businesses can follow to reduce their risk of falling victim to invoice fraud:

  1. Train your employees: Educate your staff, especially those in the finance and accounting departments, on how to spot the signs of a fake invoice. This includes checking for inconsistencies in the vendor's name, address, or bank account details, as well as being wary of any unsolicited invoices or urgent payment requests.
  2. Verify new vendors: Before adding a new vendor to your system, take the time to verify their legitimacy. This may involve checking their website, calling their listed phone number, or even visiting their physical address. Be especially cautious of vendors who contact you out of the blue or pressure you to make a quick decision.
  3. Keep your vendor database up to date: Regularly review and update your vendor database to ensure that all the information is accurate and current. Remove any inactive or suspicious vendors, and make sure that any changes to vendor details are properly verified and approved.
  4. Use secure payment methods: Whenever possible, use secure electronic payment methods like ACH or wire transfers instead of paper checks. These methods offer better traceability and can help prevent check fraud.
  5. Monitor your accounts regularly: Keep a close eye on your company's financial accounts and reconcile them regularly. Look out for any unusual transactions or discrepancies, and investigate them promptly.

The Benefits of Using an AP SaaS Solution

By using an AP SaaS solution like Corpay One, businesses can enjoy several benefits beyond just preventing invoice fraud. Here are a few key advantages:

  1. Increased efficiency: It automates many of the manual tasks involved in invoice processing, such as data entry, matching, and routing for approval. This can save your team a significant amount of time and reduce the risk of errors.
  2. Better visibility and control: You have real-time visibility into your invoice processing workflow. You can track the status of each invoice, see who has approved it, and even set up custom alerts and notifications. This level of transparency and control can help you make better decisions and catch any issues early on.
  3. Improved vendor relationships: You can ensure that your vendors are paid on time and accurately. This can help improve your relationships with your suppliers and even open up opportunities for better terms and discounts.
  4. Scalability and flexibility: As your business grows and evolves, you can easily add new users, vendors, and approval workflows as needed, without having to worry about hardware or software upgrades.

Invoice fraud is a serious threat that no business can afford to ignore. By implementing a strong approval workflow and following best practices like vendor verification and employee training, you can significantly reduce your risk of falling victim to this type of scam.

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