Invoice validation is the process of verifying the accuracy and completeness of invoices received from vendors or suppliers. Invoice validation ensures that the invoices match the purchase orders, delivery receipts, and other supporting documents, and that the payment amounts are correct and authorized.
Invoice fraud is the act of sending fake or altered invoices to a company, with the intention of deceiving the company into paying more than the agreed amount or for goods or services that were not delivered. Invoice fraud can result in financial losses, damaged vendor relationships, and a tarnished reputation for the company.
How Invoice Validation Works
Invoice validation works by cross-checking the invoice details against various sources of information, such as:
- Purchase orders: The invoice should match the purchase order number, date, quantity, price, and delivery terms.
- Delivery receipts: The invoice should match the delivery receipt number, date, quantity, price, and payment terms.
- Bank statements: The invoice should match the bank account number, routing number, SWIFT code, and payment terms.
- Vendor information: The invoice should match the vendor’s name, address, contact details, tax registration number, and any other relevant information.
- Payment history: The invoice should match the payment history of the company with the vendor.
Invoice validation can be done manually or automatically using accounting software or other financial technology. Manual invoice validation involves comparing each invoice against multiple sources of information and flagging any discrepancies or anomalies. Automatic invoice validation involves using optical character recognition (OCR) technology to scan and extract data from invoices and compare them against predefined rules or patterns.
How Invoice Fraud Works
Invoice fraud works by exploiting weaknesses or gaps in the invoice validation process. Invoice fraud can take various forms, such as:
- Fake invoices: Fraudsters create and send completely fabricated invoices to companies, often for goods or services that were never delivered or carried out. These invoices might appear legitimate using details and logos stolen from real vendors.
- Duplicate invoices: Fraudsters submit the same invoice multiple times with slight variations in numbers or dates. They hope that the company will not notice and process the payment more than once.
- Altered invoices: Fraudsters tamper with genuine invoices before they reach the accounts payable department. They might change amounts, dates, names, addresses, bank account details, tax rates, or other information to make them look different from original invoices.
- Third-party invoices: Fraudsters pose as trusted third parties such as vendors or employees of another company. They send fake emails or messages to request payment for goods or services that were not ordered by them.
For more on the details of how invoice fraud is perpetrated, along with examples, see our post Types of Invoice Fraud.
How Technology Can Reduce Fraud
Technology can reduce fraud by enhancing invoice validation capabilities and providing additional safeguards. Technology can help with:
- Invoice verification: Technology can automate and streamline invoice verification processes by using OCR technology to scan and extract data from invoices and compare them against predefined rules or patterns. Technology can also use artificial intelligence (AI) to analyse data patterns and trends and flag any suspicious activity.
- Invoice approval: Technology can automate and streamline invoice approval processes by using AI to assess invoice data quality and accuracy before sending them for payment. Technology can also use AI to monitor payment transactions and detect any anomalies or errors.
- Invoice reconciliation: Technology can automate and streamline invoice reconciliation processes by using AI to compare actual payments made with actual payments received from vendors. Technology can also use AI to identify any discrepancies or issues that need to be resolved.
Limitations of Technology
Technology is not a silver bullet in preventing or detecting invoice fraud. Technology has its own limitations in this regard such as:
- Human error: Technology cannot replace human judgment or oversight in some cases where human intervention is needed such as verifying complex transactions involving multiple parties or currencies.
- Cybersecurity risks: Technology relies on secure networks and systems to store and transmit data but these networks and systems are vulnerable to cyberattacks that could compromise data integrity or confidentiality.
- Regulatory compliance: Technology needs to comply with various laws and regulations regarding data protection rights for individuals and businesses. For example, some countries may require consent from users before collecting or sharing their data; others may impose restrictions or prohibitions on data collection or sharing.
E-Invoicing and its Benefits for Invoice Validation
E-invoicing is the electronic exchange of invoices between buyers and sellers. It enhances transparency and efficiency of invoice processing by removing manual steps, reducing errors, and increasing compliance. E-invoicing also enables faster collection of payments from customers, which can improve cash flow and reduce bad debts for businesses.
One of the benefits of e-invoicing for invoice validation is that it speeds up the verification process by using digital signatures, encryption, and other security measures. Digital signatures can ensure the authenticity and integrity of invoices, while encryption can protect the data from unauthorized access or modification. These features can reduce the risk of fraud or tampering with invoices.
Another benefit of e-invoicing for invoice validation is that it decreases the likelihood of fraud by providing more traceability and accountability for invoice transactions. E-invoices can be tracked and monitored by the issuing party, the receiving party, or a third-party intermediary such as a bank or a fintech company. This can help detect any anomalies or discrepancies in invoice data or payments.
Mexico and Italy are two countries that have adopted e-invoicing as part of their VAT systems. Mexico introduced e-invoicing for domestic B2B transactions in 2014, followed by domestic B2C transactions in 2019. Italy introduced e-invoicing for domestic B2B transactions in 2019, followed by cross-border transactions in 2022. Both countries have also implemented mandatory e-signatures for B2G (business-to-government) invoices.
(For more on e-invoicing see our post The Benefits of E-Invoicing.)
Invoice validation and fraud detection are essential processes for ensuring the accuracy and security of invoice transactions. Invoice validation ensures that invoices match the purchase orders, delivery receipts, and other supporting documents, and that the payment amounts are correct and authorized. Invoice fraud is the act of sending fake or altered invoices to a company, with the intention of deceiving the company into paying more than the agreed amount or for goods or services that were not delivered.
Technology can reduce fraud by enhancing invoice validation capabilities and providing additional safeguards. Technology can help with invoice verification, approval, and reconciliation using OCR technology, AI, and other tools. However, technology also has its own limitations in this regard such as human error, cybersecurity risks, and regulatory compliance.
Therefore, companies should adopt a holistic approach to invoice validation and fraud detection that combines manual and automated processes, as well as best practices and policies. Companies should also keep up with the latest trends and developments in invoice technology and fraud prevention to stay ahead of the curve.