4 Ways to Prevent Vendor Fraud

Review, revise and update your procedures regularly to ensure your company is protected

Posted by Timothy Dimoff in on September 20th, 2016

Fraud is rampant in today’s business world and vendor fraud is a growing type of accounts payable fraud. The definition of vendor fraud is: schemes in which a company’s accounts payable and other payment systems are manipulated for illegal personal gain.

Most fraud schemes last a median of 18 months before being detected.
According to the Association of Certified Fraud Examiners’ (ACFE’s) 2014 Report to the Nations on Occupational Fraud and Abuse, the typical organization loses 5 per cent of its annual revenue to fraud. Nearly one-quarter of the frauds in the report involved losses of at least $1 million and more than 77 per cent of the frauds were committed by individuals in one of six departments: accounting, operations, sales, executive/upper management, customer service or purchasing. Most fraud schemes lasted a median of 18 months before being detected.

Download your free cheat sheet: 16 Ways to Identify Fictitious Vendors.

Vendor fraud schemes can either include fraud committed by vendors acting alone, or some type of collusion or scheme between vendors and/or your employees. Common fraud schemes often include one or more of the following.

Overbilling

The employee can also intercept the duplicate payment when it is returned to the company and deposits it into their own personal account.
This is when vendors submit inflated invoices for their goods and services. In this type of fraud, the invoice might include charges for a greater number of goods than you actually received. Billing schemes can also involve an employee using false documentation to pay money to a shell company, a fake vendor or even manipulating a legitimate vendor account to cause double payment that is then diverted to an account that is under the employee’s control. The employee can also intercept the duplicate payment when it is returned to the company and deposits it into his or her own personal account.

Check Tampering

This involves forgery and altering payee information. The schemes usually involve issuing checks or some other manipulation of checks.

Bid Rigging

This is when both your vendors and employees work together to have you purchase goods or services from a bidder at higher price. Often the employee receives some type of compensation from the vendor for making this happen.

Price Fixing

This is an agreement among competitors to set the same price for goods or services by either jointly establishing a price range or minimum price.

Kickbacks

This is when your employees accept misappropriated funds from vendors for facilitating fraud.

Want to learn more? Watch the webinar: Detecting and Investigating Vendor Fraud.

Combatting Vendor Fraud

There should be clear divisions between the person who authorizes and/or receives goods and services and the person who processes invoices or payments for these goods or services.
There are steps you should take to combat vendor fraud.

Step 1. First and foremost, establish a segregation of duties. This means that there should be clear divisions between the person who authorizes and/or receives goods and services and the person who processes invoices or payments for these goods or services, Make sure there is also division from these duties from the person who receives bank statements or reconciles bank accounts. Also conduct a regular review of all these functions.

Step 2. Be sure to do your due diligence in setting up all vendor accounts. Make sure their mailing addresses do not match those of any of your employees. If they use a P.O. Box, check that it is legitimate. Check all vendor tax ID numbers and telephone numbers, as well as vendor ownership details through state business organization databases. And have someone who does not work in your vendor set-up department review all new vendors on a regular basis.

Step 3. Establish an anonymous fraud hotline for employees and others to report irregularities.

Step 4. Conduct thorough security and financial background checks on all new hires.

Spend the time reviewing, revising, and updating your policies and procedures. If you suspect vendor fraud or another scheme, a fraud expert’s involvement is critical. You may need to hire an investigator or a forensic accountant. They can help you find proof as well as help you to prevent future incidents of fraud.


Timothy Dimoff
Timothy Dimoff

President, SACS Consulting & Investigative Services

Timothy A. Dimoff, CPP, president of SACS Consulting & Investigative Services, Inc., is a speaker, trainer and author and a leading authority in high-risk workplace and human resource security and crime issues.
He is a Certified Protection Professional; a certified legal expert in corporate security procedures and training; a member of the Ohio and International Narcotic Associations; the Ohio and National Societies for Human Resource Managers; and the American Society for Industrial Security. He holds a B.S. in Sociology, with an emphasis in criminology, from Dennison University.

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