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Defending Your Organization: Unmasking the Threat of Vendor Fraud

Organizations lose millions annually to vendor fraud—a complex issue involving collusion among suppliers and employees. Small businesses without robust antifraud tools are especially at risk. Learn what vendor fraud entails and simple steps to prevent it.

Predetermined Outcomes Of Vendor Fraud

Vendor fraud can take one of several forms. Price fixing, for example, is a common scheme in which competitors agree to set the same price for goods or services or jointly establish a price range or minimum price.

Bid rigging is similar. It involves two or more suppliers agreeing to steer an organization’s purchase of goods or services. Potential schemes include bid rotation, where vendors take turns acting as the low bidder, and bid suppression, where two or more vendors illegally agree that at least one of them will withdraw a previously submitted bid — or not bid at all. Complementary bidding is another possible bid rigging scheme. Here, some participants submit token bids with a high price or special terms they know the customer will reject.

Price fixing and bid rigging agreements violate the Sherman Antitrust Act, regardless of whether the prices or bids are “reasonable.” You can help prevent such fraud by performing due diligence on potential suppliers. For example:

  • Verify the vendor’s tax ID number
  • Contact the vendor’s existing and previous customers
  • Perform background checks on the vendor’s owners

To minimize the risk of bid rigging, widely publicize the offer to attract as many eligible bidders as possible. Once bidding is underway, look for suspicious activity, such as unusually low bids that aren’t countered by other bidders.

Inside Jobs

The previously described schemes generally don’t (or don’t necessarily) involve organization insiders. In kickback schemes, however, crooked employees work with suppliers bent on fraud. Vendors bribe workers to submit or authorize payment of inflated or fictitious invoices. They typically incorporate the amount of the kickback payments in the invoice — compounding the amount that victimized companies are overbilled.

To uncover an existing kickback scheme, you might routinely compare invoices with original purchase orders and investigate amounts that seem unreasonably high. You can help prevent kickbacks by requiring that at least two people sign off on invoices for payment. Also mandate that employees take vacation time (so fraud schemes might be detected while they’re gone) and scrutinize employees who seem to have close relationships with vendors.

Vendor Audit

Unfortunately, there are many other vendor fraud scams, including those that use shell companies and, increasingly, cyber schemes. One way to stay on top of this threat is to hire a forensic accountant to perform a vendor audit. Contact us for more information.

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