Vendor Fraud

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Vendor fraud can be committed by employees acting alone or in collusion with vendors. This type of fraud can also be committed by vendors on their own.

Examples of vendor fraud are:

Billing schemes - In a billing scheme, an employee generates false payments to himself/herself using the company’s vendor payment system either by creating a fictitious vendor (shell company) or by manipulating the account of an existing vendor.

Bribery and kickbacks - An employee participates in a bribery scheme when he or she accepts (or asks for) payments from a vendor in exchange for an advantage.

Check tampering - A check tampering scheme involves forging, altering or creating unauthorized checks. An employee steals checks for payment to a vendor and alters the payee or forges the vendor’s signature to deposit them in his or her personal account.

Over billing - A vendor pads invoices to charge the company for more goods than it ships or to charge a higher price than agreed. This can be done in collusion with an employee, who receives a kickback or by the vendor alone to defraud the company.

Price fixing - This type of fraud occurs when competing vendors collude among themselves to set a minimum price or price range. This makes both vendors’ prices appear competitive and ensures the company pays an inflated price no matter which vendor is chosen. While employees of the company are not usually involved, they sometimes provide information to the vendors about pricing and budgets to facilitate this fraud.

To prevent and detect vendor fraud:

  • Conduct thorough background checks on new employees.
  • Implement checks and balances on payments to vendors.
  • Separate the functions of check preparer and check signer.
  • Rotate duties of employees in procurement.
  • Conduct random audits of vendor files.
  • Conduct due diligence when setting up vendors by verifying:
    • Vendor’s business name
    • Tax Identification Number (TIN)
    • Phone number
    • PO box and street address
    • Bank account
    • Vendor contact person
  • Use data mining to uncover anomalies and patterns.
  • Compare vendor addresses with employee addresses.
  • Implement a dual review process for master vendor file management.
  • Review the vendor master file to check that volume of billing is reasonable and consistent.

16 Ways to Identify Fictitious Vendors

  1. Look for vendors whose mailing addresses are PO boxes.
  2. Identify companies that are not on a list of approved vendors.
  3. Look for invoices with even dollar amounts or no taxes added.
  4. Flag invoices for vague services or services that don’t seem necessary.
  5.  Look for payments without supporting documentation.
  6. Compare names, addresses, bank account numbers and telephone numbers of vendors and employees.
  7.  Look for vendors who are also health or life beneficiaries of an employee.
  8. Look for invoices created using Microsoft Excel or Word invoice templates.
  9. Identify vendors with above-average revenues for investigation.
  10. Look for invoices from the same vendor with consecutive invoice numbers.
  11. Compare names of vendors with other similar vendor names and investigate whether payments have been diverted from one to the other.
  12. Check names of accounts payable employees against Secretary of State records to determine whether they are principals or registered agents of a company that is a vendor.
  13. Look for vendors without a taxpayer identification number or with an invalid one. A valid taxpayer ID number has nine digits with the first two digits separated by a hyphen.
  14. Compare employer identification numbers, taxpayer identification numbers or DUNS numbers to see if more than one vendor has the same number.
  15.  Look for drastic changes in prices, services or products provided by a particular vendor.
  16. Look for vendor names that consist only of initials and match those against employee initials.