
4 Ways to Prevent Vendor Fraud
Review, revise and update your procedures regularly to ensure your company is protected
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.
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
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
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.