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:
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