In today’s technology-driven world, savvy fraudsters have increasing opportunities to siphon money from their employers.
And they do so with alarming regularity, costing companies five per cent of their revenues each year, according the ACFE’s 2014 Global Fraud Study.
The Most Common Types of Occupation Fraud
Of the three categories of occupational fraud, asset misappropriations are the most common, according to the ACFE, occurring in 85 per cent of the cases in the study. And disbursement fraud is among the most common fraud types in this category.
The procurement cycle is a challenging area for detection and prevention.
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It’s an area in which it’s relatively easy for fraudulent vendors and unethical employees to cause significant damage.
But by adopting best practices and using the tools and technology available, companies can reduce this risk substantially, says John Brocar, Director at Ryan Fraud and Forensic Recovery, LLC, a company that specializes in disbursement risk analytics, loss prevention and fraud management.
Use Data for Detection
“A company’s ability to gather, process and evaluate large quantities of data can determine its ability to prevent and detect disbursement fraud. Technology such as link analysis, data visualization and predictive modeling, can help companies to identify patterns and anomalies in records of vendors and transactions.”
One of the most basic ways to detect disbursement fraud is to conduct a high-risk vendor analysis, looking for certain characteristics that may indicate a fraudulent vendor or scheme.
Using data analysis tools, a company can authenticate vendors in its records and identify those that may be suspicious.
6 Ways to Authenticate Vendors
1. Conduct Vendor-to-Employee Matching
Compare vendor addresses to a clean list of companies, starting with the zip code.
“You can use social media to identify undisclosed relationships,” says Brocar.
“Also, look for a vendor who is now an employee or someone who is in the system as both a vendor and an employee. Check emergency contact addresses for employees against vendor addresses.”
2. Look for Related Party Transactions
Research high-risk vendors by obtaining state incorporation records and using the registered agent information to compare those details against employee records.
3. Find Vendors with Residential Addresses
The vendors you pay the most money to generally have a physical office, says Brocar. He suggests using a third-party vendor to assist with address verification and cleansing.
“By utilizing an address cleansing service you will learn the type of address, whether it’s vacant, seasonal, a prison, a commercial mail service, etc.,” he says.
4. Review Early Payment Exceptions
“Some fraudulent vendors will request accelerated or expedited payments,” says Brocar. “Run a report of payments and look for those who are getting quick payments.”
5. Use Third Party Data Sources
Such as TIN matching.
6. Use Third Party Data to Find Bad Vendors
“You can research this at the federal, state and city level for free,” Brocar says.
Invoice Red Flags
There are other areas of the disbursement cycle that can be monitored for suspicious characteristics.
Invoices, for instance, are a valuable source of data. “Pull physical invoices and check for red flags,” says Brocar.
Some red flags to look for are:
- Consecutive invoice numbers
- Even dollar amounts on invoices
- Outliers, such as very large or unusual amounts
- Amounts that fall outside the pattern predicted by Benford’s Law
In the ACFE study, proactive data monitoring and analysis was used by only 35 per cent of the victim organizations, but the presence of this control was correlated with frauds that were 60 per cent less costly and 50 per cent shorter in duration.