What is Supplier Invoice Fraud?
Any large organization or one experiencing a period of growth is susceptible to the increasing risk of supplier invoice fraud. You may feel that your accounts payable process is as efficient and watertight as it could possibly be, however, as your invoice volume and supplier base increases, so too does the risk of fraudulent activity.
According to a recent report by PWC, payment related fraud occurs more often than any other type of procurement fraud.
While supplier invoice fraud is most commonly committed by suppliers, occasionally, organizations also fall victim to fraud by their own employees. There are a number of different ways in which supplier invoice fraud can occur.
This type of fraud occurs when an invoice is created and then submitted for payment for products or services that were never actually delivered or carried out. In this scenario, a supplier could be working alone, but often they collude with an employee of the invoiced organization in order to ensure that the illegitimate invoice passes through the AP process.
Suppliers may also include false information on an invoice, regarding the numbers of staff employed and/or hours worked on a particular order for the purpose of inflating an invoice and increasing the payment they receive.
Another common case of supplier invoice fraud experienced by organizations is when suppliers attempt to provide inferior quality products to those ordered.
One of the biggest costs experienced by accounts payable departments is through the payment of duplicate invoices. They are not always the result of supplier invoice fraud, however.
Sometimes a supplier will re-submit an invoice if there has been a delay with the payment. If any gaps exist within the AP department’s PO and invoice matching process, these invoices will sometimes end up being paid twice.
However, such gaps in the AP process are sometimes exposed by dishonest suppliers who choose to submit duplicate invoices fraudulently.
While most organizations are aware of the risk of supplier invoice fraud, the majority of actions to prevent it occurring focuses on suppliers.
However, according to PWC’s Global Economic Crime and Fraud Survey 2018, internal invoice fraud now outweighs supplier fraud.
Internal fraud occurs when an employee involved in the processing of invoices obtains a legitimate supplier invoice and rather than making the payment to the supplier’s bank account, diverts it to a different bank account. The employee temporarily changes the particular supplier’s bank account details in their organization’s AP system before reverting the details to avoid detection. The legitimate invoice can then be paid to the supplier.
Contained in a recent article by Purchase to Pay Network is a high profile example of employee invoice fraud, where Oxfam was subject to an internal invoice scam totaling £65k.
Supplier invoice fraud and internal fraud are very real threats to large and growing organizations. Thankfully, according to Levvel’s Supplier Management Report, many are treating risk prevention and compliance as a top supplier management goal.
How to Detect Supplier Invoice Fraud
While many organizations are beginning to prioritize supplier invoice fraud prevention, knowing what kind of things to look out for is key to any prevention efforts. Here are four of the biggest ‘red alerts’ for detecting invoice fraud:
Abnormal invoice volume activity
If you have a strict purchasing policy in place, that prevents your procurement team from maverick spending, why are you now receiving more invoices? If this does occur, you should check if the number of purchase orders (POs) matches the number of invoices. Where there are invoices that cannot be matched to a corresponding PO, there is a danger that you may be subject to either third-party or duplicate payment fraud.
Invoiced goods/services not accounted for
Similar to having a high number of invoices, if you received a request to make a payment for a good or service that does not appear to have been delivered, you could be the victim of third-party supplier invoice fraud. Regular monitoring of inventory levels will help prevent this type of fraud.
Discrepancies between a PO and invoice
A high number of exceptions in the matching process of a PO and an invoice may be down to human error or an inadequate automated matching system, however, you should not rule out the possibility that you may be the subject of labor mischarging supplier invoice fraud.
Erratic employee behavior
While it is not easy to attribute erratic employee behavior to invoice fraud, it is certainly something to consider, particularly with internal fraud now exceeding external fraud. Your controls around the review and payment of invoices may be inadequate and/or there may be cultural issues within your organization that are fueling employee fraud.
Tips for Preventing Supplier Invoice Fraud
Once an organization is equipped with the knowledge of the various types of supplier invoice fraud and internal fraud that exist and is aware of the biggest signals, there are then some very important actions that should be taken to prevent it from occurring.
Automated 3-way matching
The process of matching an invoice to a PO and supporting goods receipt note (GRN) is the most comprehensive method of processing a supplier invoice and also serves as a great method for validating different parts of the supply chain. If you are able to match all three documents, you are far less likely to end up paying a fraudulent invoice.
Robotic Process Automation (RPA) is a software that has transformed the three-way matching process in recent times and is protecting organizations from fraudulent activity more than any other tool or process has ever before. RPA allows organizations to fully automate tasks that are highly repetitive, prone to human error, rules-based and time sensitive.
With RPA able to read an invoice at different levels, including both header and product, if an invoice contains all required data to match it against the corresponding PO and GRN, it will be moved through the process automatically, without any need for human intervention. However, if certain data is missing or conflicting, which may be down to fraudulent activity, the software will flag this, allowing AP staff to investigate the issue.
Supplier due diligence
The potential of supplier invoice fraud occurring can often be prevented as early as the selecting and onboarding of suppliers. In a recent blog, we discussed the steps involved in ensuring supplier compliance. You need to ask yourself if the supplier is capable of continually maintaining a high quality of service. You should gather specific information about the goods/services they are providing and also set out clear rules and policies from the outset. With these boxes ticked off, you are far less likely to find yourself involved with a potentially fraudulent supplier.
Segregation of duties
Invoice fraud often occurs when an employee has free rein within the AP process, making it easier for them to either collude with a supplier or carry out fraudulent activity on their own.
If you allow the same person to both handle financial transactions and record them, for example, that person has a much easier path to fraudulent activities.
Segregation of duties, however, is the principle that no single individual is given the authority to carry out two or more conflicting sets of duties. Within a typical AP function, those who submit POs cannot approve invoices. Similarly, those who select and onboard suppliers cannot be responsible for paying invoices. Additionally, all actions must be verified or approved by another team member to protect against bias which might contribute to fraudulent actions.
These are just two examples of the segregation of duties that should exist within a Finance department, which becomes all the more complex the larger the organization.
Having an automated procure-to-pay solution can greatly assist the segregation of duties, with approval workflows governing who approves invoices and configured permissions ensuring that no individual is able to carry out conflicting activities within the system.
Focus on your employees
As discussed, technology is essential to preventing supplier invoice fraud. However, employees are also of huge importance, particularly concerning the prevention of internal fraud.
Internal fraud is often the result of a complex mix of conditions and human motivations. According to PWC, employees are largely compelled to commit fraud through opportunities, incentives, and rationalization.
In order to both educate employees about the steps to take to prevent fraud and to better understand the motivations to commit it, a balance needs to be struck between putting controls in place and also focusing on the culture and environment within which your employees work.
When you have a mixture of adequate controls for preventing fraud, such as automated three-way matching and segregation of duties, a company culture that promotes openness around reporting suspicious behavior, and also a happier group of employees, you will significantly minimize the risk of internal invoice fraud.
The threat of supplier invoice fraud and internal fraud are growing all the time. However, when aware of the types of fraud that exist, the warning signs that suggest it could be taking place, and the strategies for preventing it, your organization will be best placed to nullify its potential.