Recognize the Warning Signs of Vendor Fraud
Posted by Brian Stevens on March 25, 2025
Vendor fraud presents a substantial threat to manufacturing companies, affecting their profitability, product quality, and relationships with genuine suppliers. Such fraudulent activities can result in financial losses, tarnished reputations, and legal consequences. It is crucial to take proactive steps to identify and prevent vendor fraud. By recognizing the warning signs and implementing strict controls, companies can safeguard themselves against deceptive practices and preserve the integrity of their operations.
Common Types of Vendor Fraud
- Phantom Vendors
- Description: Employees create fictitious vendors in the accounting system and deposit payments into personal accounts.
- Warning Signs: Photocopied invoices, sequentially numbered invoices, post office box addresses, or addresses matching an employee’s home.
- Fake Invoices with Actual Vendors
- Description: Collusion between an employee and a vendor to submit falsified invoices.
- Warning Signs: Personal relationship between procurement staff and suppliers or employees linked to vendor management.
- Kickback Schemes
- Description: Employees receive payments or benefits from vendors in exchange for contract approval.
- Warning Signs: Fewer bids than expected, widely divergent bids, unexplained deadline changes, higher prices for lower-quality products, informal communication, poor record-keeping.
Preventive Measures
- Strengthen Internal Controls: Separate purchasing functions or rotate responsibilities quarterly.
- Background Checks: Perform checks on new vendors to identify affiliations, ownership, litigation, and financial standing.
- Personal Relationships: Avoid selecting vendors who are family members or close personal friends with your employees.
- Code of Ethics: Review and update annually, requiring signatures from employees and vendors.
- Anonymous Hotlines: Establish separate hotlines for employees and vendors to report concerns.
Conclusion
Proactively addressing vendor fraud risks helps protect financial health, maintain supply chain integrity, and ensure compliance with industry regulations. Conducting fraud risk assessments and implementing financial controls are essential steps in safeguarding against fraud.
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Brian joined Lumsden McCormick in 2020 after spending three years at KPMG. Brian works in the audit department performing audit fieldwork for commercial clients. He is also involved in firm recruitment.