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Do Your Vendors Really Exist? How to Prevent Fictitious Vendor Payments

June 26, 2019

No matter how careful you may be in managing your company’s accounting systems, it’s all too easy for someone to slip in a phony vendor or two. It happens at companies of all sizes, but there are steps you can take to detect and altogether prevent payments to fictitious vendors.

How does this crime begin? In simple terms, a fraudulently created invoice is usually submitted for payment for goods and services that were never received or rendered. Services are easier to conceal as it is easier to track the receipt of a tangible item than a service. With a service, there is usually not documentation regarding the shipping and receipt of goods.

Controls are sometimes compromised due to people in a hurry to enter (and pay) the invoice. But is the vendor legitimate? Ask yourself these questions:

  • What due diligence have you conducted to verify and establish a vendor in your accounts payable system?
  • Does the company even exist?
  • Who owns the company, and do the owners appear related to anyone in your company?
  • Has such a relationship been previously disclosed?
  • Does your company prohibit transacting business with entities owned or affiliated with employees or members of their family?
  • Is there a purchase order or, better yet, a written contract?
  • Has the service been solicited for bid, or are there multiple quotes?
  • Does the address correspond to a residential or a commercial district?

 Prevention begins by having thorough vendor setup procedures in your company’s accounting system. It is well worth spending the necessary time on due diligence before entering a new vendor in the system. Always have multiple people involved in authorizing the creation of a new vendor; one person controlling the entire vendor setup from inception through payment authorization is a recipe for vendor payment fraud.

Getting Started

It’s never a bad idea to verify the information on the invoice with a trusted source. Put together a checklist focusing on key questions.

  • How long have they been in business?
  • Is the address a mail drop, a post office box or a residential address?
  • What about the phone number? Is it listed on the invoice?
  • What about an email address?

The next step is doing your research.

  • Search the address and phone number with your database of existing vendors and employees
  • Look for duplicate addresses with different vendors
  • Check vendors who only use post office box for a mailing address and verify legitimacy
  • Search state business registration databases to confirm ownership

 Adequate segregation of duties with regard to vendor setup, vendor selection, invoice approval and payment is essential to establishing and maintaining adequate internal controls. The more staff that are involved in the process, the less likely your company will be the victim of a fictitious payment scheme.

Spending a little time implementing a thorough vendor setup program is essential in preventing fictitious payment fraud. If you need assistance with reviewing your existing vendor setup program, or creating an effective vendor review program, please call your MarksNelson professional at 816-743-7700 for assistance.

About THE AUTHOR
At MarksNelson, we pride ourselves on our commitment to innovation and technology. This fuels our professionals' drive to work with you, not for you - bringing comprehensive and innovative solutions to the conversation and helping remove uncertainty from the outcome. >>> READ MORE
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