Every year, companies in the United States lose millions of dollars due to vendor fraud. These schemes can be multifaceted and often include the collaboration of numerous vendors or suppliers, along with employees of the defrauded company. Small companies that don’t use robust vendor software or employ other anti-fraud measures are especially susceptible. But knowledge is power. Learn what vendor fraud is and how to prevent it.
Predetermined Results
Vendor fraud can take several forms. Price fixing is a frequently used strategy that involves competitors agreeing to set the same price for goods or services, or to jointly define a price range or minimum price.
Bid rigging is similar. It results from the agreement of two or more suppliers to direct a company’s purchase of goods or services. Bid rotation, in which vendors take turns acting as the low bidder, and bid suppression, in which two or more vendors illegally agree that at least one of them will withdraw a previously submitted bid — or not bid at all — are two bid rigging techniques. Another possible bid rigging strategy is complementary bidding, in which certain participants place token bids with a high price or special stipulations that they know the customer will reject.
Agreements to fix prices or rig bids violate the Sherman Antitrust Act, regardless of whether the prices or bids are “reasonable.” You can thwart such fraud by conducting due diligence on potential suppliers. For example:
- Confirm vendors’ tax ID numbers,
- Contact vendors’ existing and prior clients, and
- Conduct background checks on vendors.
To reduce the possibility of bid rigging, widely publicize the offer to draw in as many qualified bidders as possible. Once bidding has begun, watch for especially low bids that are not contested by other bidders.
Inside Jobs
The strategies discussed above generally don’t (or don’t always) involve company insiders. However, in kickback schemes, dishonest employees collaborate with vendors committing fraud. Vendors bribe employees to submit or allow payment of fraudulent or inflated invoices. They generally include the amount of the kickback payments in the invoice, compounding the amount overbilled to victimized businesses.
To detect a kickback scheme, compare invoices to original purchase orders on a regular basis and examine amounts that appear unusually high. You can help prevent kickbacks by requiring at least two individuals to sign off on invoices before they are paid. Require employees to take vacation time (so that fraudulent schemes can be detected while they are away) and investigate employees who have close relationships with vendors.
Vendor Audit
Unfortunately, there are many other vendor fraud schemes, such as those that use shell businesses and, increasingly, cyber scams. Hiring a forensic accountant to conduct a vendor audit is one way to stay ahead of this problem. Contact us for more information.
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