How to recognize and stop AP invoice fraud: understanding the threat and key red flags

Advances in technology and the growing interconnectedness of business ecosystems are creating untold opportunities to innovate and cut costs. Unfortunately, they also make it possible for financial fraudsters to invent ever more sophisticated scams.   

One of the vital finance functions where fraud has the potential to inflict significant damage is Accounts Payable (AP). Organizations where processes rely on manual intervention are most at risk.

Fraud is corrosive, harming your business both reputationally and financially, making it essential to eliminate fraudulent activity. The first step in combating and preventing fraud is to understand the common types of AP fraud and recognize the red flags that can help protect your organization.

The many faces of AP invoice fraud

AP fraud can be loosely defined as any deceptive practice in the payment processes of an organization. It can take various forms, including phantom transactions, covert collaborations, and technological impersonation. Fraudsters are not always faceless criminals “out there”; the threat is often much closer to home, internally, from a colleague with whom you may have worked for many years.  

Financial criminals leverage the vulnerabilities of your AP processes which may include deficient internal controls, highly manual and paper-based processes, internal leaks, and deficient vendor management. 

AP fraud takes on many forms. The most common are invoice fraud, check fraud, vendor fraud, ACH fraud, and billing schemes, but the list keeps growing as new technologies and systems create more opportunities for foul play from both inside and outside the organization. 

Of all these criminal schemes, invoice fraud is the most prevalent, and has the potential to do most harm. It involves submitting invoices for goods or services that were never ordered or provided in the hope AP teams mistake them for the real thing. 

To stop this from happening, AP agents have to be alert to any telltale signs that an invoice could be fraudulent. So what should they be looking out for? We explore this in our next section.

The most common red flags for AP fraud

In the fight against AP fraud, early detection is crucial. Fraudulent activities often leave behind subtle signs, and recognizing these red flags can make the difference between catching a potential threat early and facing substantial financial loss. By staying vigilant, AP teams can spot inconsistencies, unusual patterns, and suspicious behaviors that may indicate fraud. From sudden changes in vendor details to unexplained payment requests and discrepancies in documentation, each red flag offers an opportunity to scrutinize and verify the legitimacy of transactions before processing. Here, we outline some of the most common red flags for AP fraud to help protect your organization’s financial integrity and prevent costly incidents.

Vendor information is unusual, missing, or altered

• Invoices from vendors that have recently changed their contact information, bank account details, or company address without previous notification. 

• A vendor’s email address that uses a free provider, such as Gmail. 
• Invoices that list the same address as one your employee’s. 
• Key details such as a tax ID or purchase order (PO) number are missing.

Payment to unknown accounts

• Instructions to remit payments to unfamiliar or non-standard bank accounts should set alarm bells ringing loudly. 

Unusual or suspicious vendor behavior 

• Requests for urgent payment. Unsolicited and urgent demands for payment, often accompanied by high-pressure tactics or unusual discounts, should be scrutinized carefully. 

• Unexpectedly high volumes A sudden increase in the volume of invoices from a particular vendor or within a specific timeframe may signal fraudulent behavior. A surge in overall invoice volumes warrants further examination. 

• Inflated invoices. Increases in payments to particular vendors without corresponding increases in goods or services supplied.  

• Round-figure amounts. Invoices with round-figure amounts, especially without detailed breakdowns of the charges, may be indicative of a lack of authenticity. A pattern of consistently rounded amounts could also be a sign of fraudulent practice. 

• Spelling, grammatical errors, or low-quality invoices. Typos, grammatical mistakes, or unprofessional language on invoices can point to fraud. Invoices that look unprofessional or photocopied are another red flag.

Lack of supporting documentation 

• Inconsistencies with Purchase Orders. Discrepancies between the details on an invoice and the corresponding PO could indicate an attempt to defraud you.  

• Absence of POs from PO vendors. Invoices without a matching PO should catch your attention, as legitimate transactions typically involve proper documentation. 

• Missing Goods Received Notice. The absence of GRNs can indicate that goods or services were not actually delivered, raising questions about the invoice.  

• Duplicate invoices. Receiving multiple invoices with identical or similar details, such as invoice numbers or dates, or identical goods or services, could indicate an attempt to get you to process duplicate payments. 

Others

• Lack of physical delivery. Receiving invoices for goods or services that were not actually rendered should be investigated. 

• External complaints. Complaints from suppliers about late payments or non-payments when your records suggest you have already paid them could signal an issue. 

Conclusion: staying proactive against AP Fraud

Recognizing the red flags of AP fraud is the first step in protecting your organization from financial losses and reputational harm. By being alert to suspicious vendor behavior, discrepancies in documentation, and unusual payment requests, AP teams can catch potential fraud before it escalates. However, identifying these signs is only part of a comprehensive fraud prevention strategy.

To build a strong defense, it’s essential to adopt proactive measures that both detect and deter fraud. Three key strategies form the foundation for combating AP fraud: operational, cultural, and technological solutions. These strategies empower your team to prevent fraudulent activity before it has a chance to impact your organization. When combined, they create a robust framework that keeps your organization one step ahead of fraudsters, fostering a secure and resilient AP process.

Strengthening your AP defenses with Cevinio

Cevinio AP Automation provides a powerful layer of protection in the fight against AP fraud. With advanced automation features like multi-level approval workflows, data validation, data analytics and compliance checks, Cevinio helps your AP team detect inconsistencies, reduce manual intervention, and maintain a clear audit trail for every transaction. By centralizing and streamlining AP processes, Cevinio enables your team to stay vigilant and responsive to potential fraud risks, ultimately safeguarding your organization’s financial health.

If you’re ready to strengthen your AP defenses and prevent fraud from impacting your business, get in touch with us today. Our team is here to help you create a more secure, efficient, and resilient AP process.