Protecting your Business against Vendor Fraud: Vital Strategies and Tips
Vendor fraud exposes businesses to significant financial loss every year. This article outlines some of the different types of vendor fraud and provides actionable steps that businesses can take to protect themselves.
Imagine your business losing thousands or even millions of dollars through dishonest practices that could have been avoided. Sounds like a nightmare, right? But vendor fraud is a grim reality for so many businesses across the U.S. It is an ugly siphon on hard-earned profits through schemes that aren’t always easy to detect. From price-fixing to kickbacks, there’s almost no limit to what fraudsters might cook up. But here is the good news: knowledge is your best defense. By understanding what vendor fraud looks like and taking proactive steps in its prevention, you will be able to defend the business against these financial predators.
Understanding Vendor Fraud
Vendor fraud can take many forms from simple to complex schemes involving your suppliers and possibly your own employees. Let’s unpack some common areas:
Price Fixing and Bid Rigging
Competitors may engage in illegal agreements to set prices or bid strategies, manipulating the market in their favor. This act not only puts your company at a disadvantage with inflated costs but could also violate antitrust laws.
Kickbacks
In this case, a supplier bribes an employee within your company to choose their product or service at an inflated price or perhaps an employee approves a fictitious invoice for a cut of the action, resulting in financial losses. Kickbacks are hard to detect because it is a type of “off book” fraud in that there is usually no smoking gun, but the organization pays an inflated price for those goods and services (after all the price of the kickback is ultimately paid by the victim company).
Shell Companies and Cyber Schemes
A fraudster may use bogus companies to invoice for services or goods that do not exist, or even use highly sophisticated cyber means to trick your business into paying for fictitious invoices.
Billing
Vendors can bill you for goods and services at inflated prices, goods or services not delivered, or for inferior quality goods or services. All resulting in financial loss.
Preventing Vendor Fraud
Due Diligence
Always do your research before engaging with any vendor. This involves checking their tax ID, calling references, and doing background checks on the owners. You can learn a lot about a vendor by simply looking them up on a search engine or doing a drive by of their business address.
Competitive Bidding Environment
Make a very broad-based publication of the procurement opportunities to attract diverse bidders, and closely monitor the process of bidding for any hint of collusion or other irregularities. Always be on the lookout for signs of internal collusion with the vendors which may include frequent lunches or tickets to things such as sporting events. Include your organizations “fraud hotline” or “compliant line” in requests for proposals so potential vendors can report unfair practices.
Regular Audits
Consider conducting periodic audits of your vendor relationships. Seek legal advice when drafting contracts to include a right to audit clause. A forensic accountant can perform these audits and identify potential discrepancies which could be warning signs of possible fraudulent activity.
Promote Integrity
Train all your employees about the risks of vendor fraud and some of the red flags. Employees should be able to report any concerns about vendor relationships without fear of retaliation.
Segregation of Duties
Always bear in mind that a key element of internal control is the segregation of duties. You wouldn’t want the same person contracting for goods and services, receiving the goods and services, and then also paying the associated invoice. Watch our short video on Separation of Duties on our YouTube channel: https://www.youtube.com/shorts/lOcz0kAKJfM
Final Thoughts
Although fraud from vendors can be a real problem, proactive steps can be taken to reduce its likelihood and possible impact. Strong vetting processes, transparency, and an overall sense of ethics within your team, along with always staying on top of the best ways to remove financial risk, will go a long way in building up your defenses.
Don’t forget that knowledge and vigilance are important tools in the fight against fraud.