Vendor Fraud What it is and How to Prevent it
“Vendor Fraud What it is and How to Prevent it” by Ian Mansfield | Associate – Audit & Assurance
Employee fraud is an unfortunate reality faced by every organization, big and small. Any employee who feels enough pressure and sees an opportunity has the ability to commit and rationalize fraud. Environments where trust is high and controls are weak are especially susceptible to employee perpetrated fraud. In order to design and implement controls to combat occupational fraud, it is important to understand how some of the most common frauds are committed.
Asset misappropriation is by far the most common form of occupational fraud, with median losses of $125,000. Vendor fraud is a method of asset misappropriation that utilizes an organization’s cash disbursement activities to funnel funds into an employee’s pocket. Vendor fraud typically falls into two different categories: billing schemes and corruption schemes.
Billing schemes involve the manipulation of an organization’s cash disbursement activities for an employee’s own personal gain. Through the fabrication of false documents, a fraudster prompts a payment to either an existing vendor or a shell company which the employee intends to intercept. Often perpetrators of billing schemes set up a shell company under their own control. Without strong internal controls, the shell company can be added as a vendor within an organization. The fraudster can then invoice on behalf of the shell company and collect illicit payments for personal gains.
An organization’s legitimate vendor accounts can also be exploited to execute vendor fraud. An employee can deliberately overpay on a genuine invoice with the intention of personally collecting the vendor refund.
Corruption schemes occur when an employee has an inappropriate relationship with a vendor involving bribes, gratuities, conflicts of interest, or extortion. Unlike the billing schemes described above, corruption schemes involve direct contact and collusion between internal and external parties.
Individuals within an organization’s purchasing department are the most susceptible to this form of fraud. Rather than fraudulently collecting cash disbursements from their company, these fraudsters rely on payment from vendors in exchange for undue or unethical influence on purchasing decisions which favor a particular vendor.
Vendor Fraud Prevention
There are several simple strategies an organization can adopt to lower the risk of vendor fraud. Access and additions to vendors lists should be restricted and reviewed regularly. Segregation of duties should be implemented such that separate individuals are responsible for submitting purchase orders, approving vendor invoices, and authorizing payments.
It is important to consider all potential risks of fraud, both external to and within an organization. Although the risk of fraud can never be eliminated, properly designed and implemented controls can minimize the opportunity for fraud.
If you suspect vendor fraud is occurring, contact us to learn how we can help at 330.867.7350.