Abstract:   Scams involving vendors and suppliers are among the most prevalent — and potentially damaging — types of fraud today. This article describes different types of procurement schemes and offers guidance on how to detect and prevent them.

Beware of procurement fraud

Scams involving vendors and suppliers are among the most prevalent — and potentially damaging — types of fraud facing your clients today. You can reduce losses by helping business clients identify procurement frauds and take critical steps to detect and prevent them.

Common schemes

Common types of procurement fraud include:

Overbilling. Perpetrators can misuse invoices in several ways. For example, they might submit inflated invoices for goods and services. The price could exceed the agreed-upon price or reflect charges for more items than the company received. A vendor also could change the date on a legitimate invoice and resubmit it for multiple payments.

Bid rigging. Bid rigging occurs when two or more competing vendors conspire against a company. In a bid rotation scheme, vendors all submit bids but take turns as the low bidder. In a bid suppression scheme, vendors agree that one or more will withdraw a submitted bid — or just not bid for the company’s contract — to ensure that a particular bid is accepted.

Complementary bid rigging has the same goal but works differently. Competing vendors submit bids with excessively high prices or other terms that will cause them to be rejected.

Kickbacks. Vendors can pay company employees to facilitate the payment of a fraudulent invoice or secure a contract. Typically, the invoice or contract incorporates the amount of the kickback, meaning the company gets hit twice.

Protective measures

Proactive business owners take steps to minimize their risk of procurement fraud. Internal controls, a company’s first line of defense against fraud, can be fortified to reduce the opportunity for dishonest people to commit procurement schemes.

For example, a business might segregate accounting duties to ensure that employees who process invoices don’t also process payments or receive and reconcile bank statements. Or a business can establish an anonymous fraud hotline for employees, vendors and customers to report suspicious behavior and other red flags.

A company might also screen its vendors and suppliers, verifying the business’s name, IRS Form W-9, tax identification number, state business registration, telephone number, address, bank account and internal contact. Any changes in vendor or supplier profiles (along with duplicate payments) require further investigation.

Likewise, background checks should be conducted on employees who 1) order materials and supplies, and 2) pay or approve vendor and supplier invoices. And their mailing addresses can be cross-checked against vendor and supplier mailing addresses to search for any overlap.

Data mining can facilitate these verification procedures. This technology uses software to do targeted analyses of entire data populations. When it comes to fraud detection, companies can employ trend analysis to identify thresholds that, if exceeded, issue an alert triggering further investigation.

For example, a vendor’s average payment amount or the median amount paid per vendor each month can serve as a guideline. If a payment exceeds the average by, say, $10,000 or 10%, the system could trigger an alert that management needs to verify the transaction. Companies also can set up alerts for payments 1) just under limits that would require a manager’s approval before payment, 2) in round dollar amounts, 3) with checks or invoice numbers out of sequence, and 4) where the address for delivery of goods differs from the payment address.

Where there’s smoke …

Procurement fraud often hits companies hard and fast. When a client suspects something is amiss, a qualified forensic accounting expert can help them respond swiftly and effectively.

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