Thursday, January 3, 2013

Vendor fraud takes many forms

Vendor fraud is like a leaky water main. Little by little it drains your company's resources, but is often hard to detect. One survey found that U.S. businesses lose $65 billion annually to fraud, or about 5% of their revenues. And much of that fraud is committed by company suppliers, with or without the help of insiders.
Common schemes include the following:
  • Overbilling. A supplier may alter an invoice by nudging the unit price higher or paring down the quantity to be delivered. Although billing departments make honest mistakes when preparing invoices, a pattern of such anomalies may warrant investigation.
  • Bid rigging. One of your employees, often in collusion with a vendor, may bypass certain suppliers and award a contract to a higher-priced firm — for a piece of the profits.
  • Kickbacks. To secure a company's business, a vendor may cut a deal with an insider. A portion of the vendor's revenue may be "kicked back" to the employee as compensation for steering business a certain way.
  • Fictitious vendors. In some cases, an employee will scour vendor files and find a company that's no longer in business. Using that firm's name and letterhead, the employee then prepares invoices and steers payments to a personal post office box or bank account.
  • Delivery fraud. Sometimes goods show up at the shipping dock, but they're damaged. Or the quantity to be delivered doesn't match the packing slip. Again, honest mistakes happen. But if such "mistakes" occur week in and week out, be suspicious.
To prevent vendor fraud, consider implementing these policies:
  • Establish an anonymous fraud hotline. Most frauds are exposed by tips, often from those inside the company. To find the leak, you may need to dig.
  • Screen new hires. Rigorous background checks can prevent problems later on. Someone who's been convicted of embezzlement at another company may not be the best choice for your purchasing department.
  • Validate your vendors. To prevent fictitious vendor schemes, regularly review each supplier's tax identification number, street address, and contact information. Remove duplicate files and purge defunct vendors from your records.
  • Watch the shipping dock. Log every delivery and compare packing slips with goods delivered. Set specific delivery times, preferably when business is slow, so your employees can concentrate on the matter at hand.
  • Get regular audits. If employees know that the auditor is coming, they may think twice about conspiring with vendors.
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