Every year, businesses lose hundreds of thousands of dollars to vendor fraud. Sometimes, it’s the vendors themselves who commit fraud.
Other times, employees are involved, often working closely with vendors to embezzle funds or products. Fraud can also occur as the result of a breach of contract, improper disclosure of information, data theft, and more.
Regardless of the type of fraud, the effect is the same: Harm to your company’s finances and in some cases, reputation. The specific risks of any given vendor vary, but they can be mitigated.
A robust approach to vendor risk management, which includes thorough research and monitoring, can stop fraud before it starts.
Knowing some of the most common red flags to look for is also a major step toward combating fraud and preserving your bottom line.
5 Vendor Fraud Red Flags To Watch For
Fraudulent vendors and employees can be sneaky, and it’s not always immediately apparent that something is amiss. That said, there are a few key warning signs to watch for that almost always point to fraud, and require a closer look.
Mistakes can happen, and they might result in an occasional overcharge. However, when you seem to be paying much more to certain vendors than expected, it’s worth investigating.
Although it’s possible for vendors to simply pad their bills to collect more, real fraud involving overcharges often stems from one of two schemes: Fake invoices and kickbacks.
A fake invoice scheme usually involves a vendor working with an employee (or employees) to submit fraudulent invoices to the company. Because they are established vendors, accounts payable doesn’t question the charges, and pays the bill. The proceeds are then split between the vendor and the employer, with no one the wiser.
Kickbacks work similarly. A vendor might establish a relationship with someone in procurement, and offer a payment or other perks in exchange for awarding a contract. Because the payments are made “off the books,” they don’t show up in either company’s bookkeeping, at least on the surface. What usually happens, though, is the vendor charges a higher price to cover the cost of the kickback.
In either case, there are some signs that the fraud is happening. Higher-than-normal (or much higher than quotes) invoices without explanation, shoddy record-keeping, and information communication between vendors and employees outside of company channels are often signs that something is going on.
2# Improperly Vetted Suppliers
Any new vendor should be thoroughly researched and evaluated before being added to your vendor pool. Before any contracts are signed, a new vendor should be approved by multiple layers of management.
This is because working with an improperly vetted supplier could be setting you up for fraud. Without a strict approval process, employees can circumvent the proper channels when making deals.
This could mean unknowingly contracting with a fraudulent vendor, or it could mean that the employee is involved in an embezzlement scheme and accepting kickbacks. In either case, without a background check, you could be asking for trouble.
3# Business Deals Without a Defined Purpose
During a review of your books, you find a vendor who is being paid a monthly retainer for consulting services.
Upon further research, you discover that the “consultant” is actually an employee’s brother, and has never provided any measurable service to your company. Yet there he is, in the system as a vendor.
A business deal that doesn’t have any defined purpose, but is still resulting in payments, is a major red flag of fraud. On the surface, it appears legitimate, but there’s no actual business value.
To combat this, all contracts must have a clear, assignable purpose, and undergo regular review to ensure obligations are being met.
4# Information Doesn’t Match Up
Another key reason to conduct thorough background checks of prospective vendors is to uncover information that doesn’t match up. This means checking on addresses, phone numbers, social media profiles, details in business listings and on licenses, and looking into the details provided by the vendor.
For example, someone committing fraud may provide information related to years they weren’t even in business, or list an address that doesn’t exist or isn’t actually a business. It’s your responsibility to conduct due diligence, or risk losing assets to fraud.
5# Invoice Fraud
Finally, vendor fraud isn’t always complex. It may just be a case of someone submitting phony invoices. A busy purchasing department may allow an invoice to slip through.
However, there are some telltale signs that an invoice is fraudulent; at the very least, they warrant additional investigation. Invoices for even amounts, for amounts that are consistently just below the quoted price, photocopied, or have consecutive numbers are all red flags to fraud.
They may be easily explained, but it’s always better to ask questions than to lose money — or worse — to a bad actor.
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Author: Anees Saddique