Vendor fraud

A hot topic in the fraud world is Vendor Fraud. What is Vendor Fraud? Vendor Fraud is the intentional improper payment of funds by an organization to either real or fictitious vendors, or both.
Vendor fraud may result from employee fraud, where an employee or group of employees, colluding with one another, defraud the organization by circumventing its internal controls over the accounts payable and purchasing systems.
Alternatively, Vendor Fraud may result from an external organization committing fraud without any insider assistance.
Lastly, vendor fraud may result from an external organization colluding with one or more employees inside the victim organization (usually with a kick-back arrangement).
In our experience, the organizations most likely to fall victim to Vendor Fraud are small to medium size businesses. This is because they often lack the critical mass of employees needed to maintain the appropriate level of segregation of duties to prevent and detect Vendor Fraud. Similarly, we see organizations that are growing at a pace faster than internal controls can keep up with the growth in revenues and operations. Tech start-ups are particularly vulnerable to operations outpacing internal controls.
As forensic accountants and Certified Fraud Examiners, we look for "red flags" or common indicators of vendor fraud when we are brought in to assist the victim organization. It is important to keep in mind that while these are often indicators of fraud, they may also be indicators of controls not working as intended, coupled with employee ineptitude. Whether an act is fraud or error ultimately comes down to the intention behind the act. Here are some of the fraud indicators we typically look for:

• Duplicate invoices paid to vendors (similar invoice numbers, e.g., inputting similar invoice numbers using zeros so as to override a system control that is designed to detect and prevent invoices being paid more than once. An example of this is invoice 1, invoice 01, and invoice 001 - the same invoice being processed and paid three times.
• Multiple invoices paid to the same vendor for the same amount on the same day or within the same payment period.
• Payments made to vendors outside of regular business hours.
• Changes made to vendor names in the accounting records after the checks have been run and printed. (This is a common scheme that we encounter in smaller businesses.)
• Vendors being paid amounts larger than what their contracts will allow, without proper change order approvals.
• Payments made to vendors constantly below approval thresholds. E.g., an approval threshold is set at $10,000 and payments are regularly made for $9,500.

What can organizations do to protect themselves against Vendor Fraud?

• They should vet their vendors before transacting with them. Know-Your-Vendor ("KYV") is an essential part of doing business, in particular with lesser known organizations. Run the background checks, ask them for information, make sure that they are not on any government watch-lists, make sure that they have a solid business reputation.
• Verify addresses, phone numbers, emails, etc.
• Run vendor information against employee information, looking for matches in names, addresses, phone numbers, etc.
• Verify vendor tax ID's
• Look for duplicate payments

It sounds like a lot of extra work, particularly for organizations that have limited resources. The alternative is to consult with experts in this field and have them perform one-off or periodic (quarterly, bi-annual or annual) check-ups to detect fraud before it gets out of hand.

We offer these services and more to our clients.

Contact us to learn more about Vendor Fraud and how TRACE can help you prevent and detect Vendor Fraud