LGT's Profit Sense
While other types of business fraud may capture the headlines, you might be surprised to learn that disbursement fraud schemes are one of the most by most common. The good news is that you can take just a few steps to mitigate losses.
The first step is to gain better control of the vendors to whom disbursements can be made. For example, does your business have a vendor approval process in place, or can checks be issued to anyone? The person who processes accounts payable is often not actively involved in the operations and may not be able to spot that an invoice is not from a valid vendor. If a vendor approval process is not in place, invoices that are received may be added and the new vendor set up based on information provided.
The second step is to ensure that the person that approves payments or signs checks reviews the invoices with the payments and is able to determine if the vendor is valid or not. The person reviewing payments should be involved in operations and have knowledge of vendor relationships. If this is not the case, then the vendor approval process needs to be more robust and defined.
Let’s examine a few basics associated with good vendor internal controls.
First, implement a documented vendor approval process and conflict of interest policy. Someone, other than the requester, should spend the time to perform some due diligence, such as researching the internet and the secretary of state’s website to learn more about the prospective vendor. Time invested on the front end may save you a tremendous amount of time and money on the back end. Depending on the scope of procurement with the vendor, ask for references or financial data to ensure the vendor is viable and established.
What should you be looking for?
It all starts with looking at a company’s existing internal controls and processes to determine how the system can be exploited. For example, how many people are involved in the vendor procurement or accounts payable process? Is there proper segregation of initiation, recording, and approval of payments? Who initiates orders, records invoices, and approves payments, and how hard would it be to circumvent parts of the process that could result in a fictions payment being made.
Key Tests:
- Do you have a vendor approval process or a vendor application for them to complete?
- Did you search the entity on the secretary of state’s website and check the incorporator, address, and registered agent to see if they match any employees?
- Did you attempt to match the submitted and/or verified information such as address, phone number, or identification number to other approved vendors and employees?
- If you pay electronically, do the account numbers agree with any other vendors or employees?
- Have you performed an internet search of the business and does it have a website and independent reviews through Google, Yelp, or other similar websites?
- Have you independently verified the address and does it make sense based on what you know of the vendor?
- Have you checked the phone number to determine it is a valid number? Was the phone answered as a business or an individual?
- Do you know others who use the vendor? Would they provide a positive referral for the vendor?
- Has the vendor provided you with a federal identification number or a Social Security number? Typically provided on an IRS form W-9.
- Did you inquire whether the vendor has a personal or family relationship or any other conflict of interest with anyone at your company?
- Is the mailing address for payment different than the corporate address?
The fact that one of these issues exists may not necessarily mean there is fraud. But, it should be a red flag to make additional inquiries.
Larger companies tend to have more established internal controls and documented internal control policies and procedures for vendor procurement. They also are more likely to have adequate segregation of duties. Smaller companies that do not have these controls in place are the most susceptible. Especially, growing companies that may not have formal policies and procedures and resources that are spread too thin.
Cutting corners to engage – and then start paying – a vendor can be a recipe for financial disaster. Prevent paying a fraudulent vendor by properly qualifying them!
For assistance with performing any of the tests mentioned, or if you need assistance with establishing a proper vendor approval process….
We can help
