Preventing Invoice Fraud

Invoice fraud can sneak up on small business owners. Fraudsters don’t want their misdeeds to be noticed and they do their best to conceal those misdeeds. At some point, missing money becomes noticeable, but it can take years before the fraud is ever detected. Most small businesses simply don’t have the resources to detect fraud early on.

You don’t need to be a large company or employ expensive tactics to stay one step ahead of fraudsters. In this article, we’ll show you how to prevent one of the most common types of small business thefts: invoice fraud.

1.) Start with Good Internal Controls

Preventing problems within a business starts with good internal controls. Internal controls are like laws for a country. If everyone knows how to behave and there are methods in place for resolving problems, there’s less chance of a small problem turning into a big problem.

The first step in creating internal controls is to document current processes. Documenting your processes allows both existing and new employees to get on the same page. Documentation also removes tribal knowledge from the company, ensuring no one person leaves the company with key knowledge that no one else knows has.

Creating documentation isn’t enough to establish good internal controls. Documentation must also be kept updated. As your team resolves new problems, add the solutions into the appropriate documentation. Updated documentation is, in fact, a living document, which doesn’t go out of date.

2.) Switch out Accounts Payable Personnel

When one person holds all the keys to each door, what’s to keep him/her from entering into any door at any time. Such a person has no accountability. Someone needs to watch over the watcher.

If you have one person managing accounts payable, you’re basically giving him/her free rein to handle invoices, write checks, and pay bills, whether any of those activities are fraudulent or not. As part of good internal controls, switch people out of their roles. There are a few benefits to rotating people.

One benefit is that someone else gets to see what’s going on with the books. This will make it difficult for any one person to maintain a fraudulent scheme over any period of time. Additionally, switching out roles means other people are learning and becoming familiar with accounts payable. If you have only one person handling accounts payable and he/she decides to quit, what will you do? Having someone else within the company who is able to quickly step in solves the problem.

3.) Use 3-Way Matching

Three-way matching involves a little more effort within accounts payable, but is worth it. For each invoice, there should be a corresponding purchase order and receipt. Matching all three documents means accounts payable can better verify one document from the other two. The additional validation makes fraud more difficult.

4.) Separate Accounting Processes

Similar to #2, don’t allow any one person to handle your entire accounting (A/R, A/P, authorization, and check writing). Each area should have a different person working in it. Apply #2, as well, for even better fraud prevention.

5.) Go Digital

Many small businesses, believe it or not, still use tons of paper as their primary source of records. The 2016 Report to The Nations Global Fraud Study found that asset misappropriation was the largest form of fraud in businesses. The most common type of asset misappropriations was creating and altering physical documents.

You might counter that by saying that customers and vendors are the ones using paper, forcing you to import their tactics. Yes, it is true that you may have to deal with large amounts of paper due to customer and vendor practices. But, if you start invoicing suppliers and customers digitally and allowing them to pay online, you can greatly reduce the amount of paper involved. Scanning in some of those documents will further help to reduce paper.

With fewer paper documents to modify, fraudsters will have a difficult time pulling a fast one on you.

6.) Automate Your Accounting

This might sound like #5 above, but not everyone who is digital is also automated. Also, you already have to be digital before you can automate. Now the question: how does automation help prevent invoice fraud?

Anywhere humans are involved in a process means there’s a chance for fraud to occur. Automation removes the human element. You can’t completely remove people from your accounting processes, but like many of the other tips mentioned, you can reduce the areas that people must be involved and establish better internal controls.

Some examples of accounting automation include:

  • Sending out invoices.
  • Late notice follow-ups.
  • Accepting invoice payments and recording them in the books.
  • Receiving bills digitally and paying them automatically, assuming certain criteria are met.
  • Matching payments to orders, creating a receipt, and sending them out.

Some automation makes use of artificial intelligence to identify potential fraud. This is yet another level of detecting fraud without a human needing to be involved.