Unfortunately, regardless of how much technology advances, fraudsters will continuously find ways to scam companies. One of the most common ways is through vendor fraud, which has been projected to cause a total loss of $10.24 billion in 2022 alone. Typically, vendor fraud originates from one or multiple sources and, if not detected, costs businesses greatly.
That’s the reason why it is crucial for businesses to be informed about vendor fraud and learn how to prevent it. Only then it is possible to be protected and escape from fraudulent attacks.
But what are the best ways to identify and prevent vendor fraud? In this blog, we will first explain what vendor fraud is, how it impacts businesses, and with which methods they can prevent it.
What is vendor fraud?
Vendor fraud can be described as illegal practices that are committed for personal gain. Those practices can be carried out by a vendor, multiple vendors, or even an employee. Vendor fraud is usually targeted at the accounts payable (AP) of a company by faking a vendor or recipient’s account information to redirect payments.
Fraud attempts are often conducted by the following parties:
- One or multiple employees
- One or multiple vendors
- Collaboration between vendor(s) and employee(s)
- An external entity that modifies a vendor’s payment information but is unknown to everyone
You can see that the multiple options of collaborations that make vendor fraud possible are adding complexity to the problem. So how does that impact businesses?
How does vendor fraud impact businesses?
Generally, businesses that have poor security measures in place are at risk and most impacted by vendor fraud. Typically, these businesses tend to be small to medium-sized organizations as they depend on smaller employee teams that manage financial transactions.
Smaller teams often don’t have strong controls or robust checks in place, either because the budget is not available or because they underestimate the risk of vendor fraud. Because of the smaller team size, oftentimes one employee is in charge of receiving invoices as well as authorizing payments, which makes it very tempting and easy to manipulate financial records.
Of course, this doesn’t mean that larger organizations aren’t at risk. But with their larger amount of resources, bigger staff, and capabilities, they are more likely to have checks and controls in place that lower the risk of vendor fraud.
In general, as organizations grow, they comply with more laws and regulations that allow them to prevent fraud. This makes it increasingly harder for scammers to pull off fraudulent schemes. It is still important to keep in mind that also fraudsters are becoming more sophisticated, so it isn’t out of the question that even larger organizations become the victim of complex fraud schemes.
Shocking real-life examples show how vendor fraud can cost businesses millions of dollars. For example, a business called Utz Quality Foods paid $1.4 million to a vendor for products that were never actually received. In another case, the telecommunications administrator of the Lincoln Land Community College forged his superior’s signature to authorize payments, which allowed him to steal over $700.000.
We want you to be able to recognize vendor fraud so that you can protect your business. This is why we will have a look at different fraud schemes next.
Vendor fraud schemes
There are different vendor fraud schemes that put businesses at risk. In the following, we will discuss some of the most relevant schemes, but the list is not exhaustive.
- Check tampering
- Billing fraud
- Accepting bribes
- Cyber fraud
- Price fixing
- Employee skimming
Check tampering is happening quite frequently. Employees or third parties intercept a check and either sell it on the darknet or alter it to deposit the money into their own bank account.
Billing schemes are executed by faking an invoice for payment (also known as invoice fraud) that isn’t actually owed and is then paid unknowingly. This happens by either altering a valid one or faking the whole invoice.
Bribes and kickbacks are also known as procurement fraud. Usually, it happens when vendors, employees, or a mix of both work together to commit fraud in any phase of the procurement process.
Here are a few examples of how that can look like:
- Overbilling for goods or services
- A buyer doesn’t receive the agreed-upon number of goods
- Duplicate invoice to charge twice for the same goods or services
- Employees being bribed by vendors during the contract negotiation process in exchange for kickbacks
- Vendors collaborate with each other to manipulate the procurement process
Cyber fraud is conducted in many ways. One way is to steal money through emails, by hijacking software, or phishing attempts. Businesses that manage transactions through a computer (so basically all businesses) are especially vulnerable to cyberattacks.
Price fixing is often done with the help of internal employees of a business. Vendors collaborate with each other to set a minimum contract price. Like this, businesses have to pay more regardless of which vendor they choose to work with.
Employee skimming can be conducted in many forms. Some are more complex than others. A few examples are listed below:
- Writing false checks
- Stealing a few dollars/euros every time a sale is made
- Stealing debit or credit card information
- Stealing and cashing the check of colleagues
Businesses are at high risk to be scammed by either one of the above-mentioned fraud schemes. Therefore, it is important to identify vendor fraud as quickly as possible and find effective ways to prevent it. How to do that will be discussed next.
Identifying and preventing vendor fraud
There are several ways that allow businesses to identify and prevent vendor fraud. Some measures can be applied to the internal practices of an organization, but there are also measures that affect the vendor directly. Let’s have a look at the possibilities:
It is wise to have precautions and vendor management practices in place that allow you to measure the potential risk of a vendor. This could look like the following:
- Due diligence on vendors in the enrollment process → This allows you to verify vendor details such as email addresses, contact numbers, contact persons, bank accounts, and more. Here you have the chance to check that the vendor’s information doesn’t match with any employee’s information or other existing vendors.
- Maintaining a central vendor database → This allows you to have an overview of billing volumes and a separate list of high-risk vendors. If you spot any inconsistencies in payments, it is much easier to track from which vendor those come from.
Previously, we already mentioned that vendor fraud is often conducted with the help of one or more employees. That’s why it is important to have employee measures in place that allow you to detect fraud quickly. Effective measures could be:
- Anti-fraud training → Training raises awareness of potential risks but also teaches employees how to act in situations in which they are confronted by fraudulent vendors or colleagues.
- Separation and rotation of employee duties → If tasks most vulnerable to vendor fraud are separated and not conducted by one and the same employee, the risk of vendor fraud is already minimized. It can also help to rotate procurement tasks and perform random check-ins and audits.
- Background checks → Before hiring new employees, it is important to conduct background checks to minimize the risk of hiring scammers.
Invoice matching methods
Invoice matching is one of the most effective ways to prevent vendor fraud. It is used to match vendor invoices against other documents such as purchase orders (PO), inspection slips, or packaging slips.
There are several ways to do invoice matching such as two-way matching, three-way matching, and four-way matching. All of the methods add a different complexity, but also a security level to the accounts payable process. How exactly invoice matching is used as a fraud prevention method is explained in the following.
Fraud prevention using invoice matching by Klippa
Invoice matching is a great way to prevent vendor fraud, especially when done automatically. With software solutions such as Klippa SpendControl the accounts payable process can be automated in several ways.
Klippa’s software enables you (with the help of OCR) to automatically enter and save data from financial documents such as invoices and purchase orders in your database. Once all necessary information is extracted from documents, the matching process is executed in a matter of seconds.
Information on the invoice, purchase order, and other financial documents can be compared and matched. That way, it is much easier to detect information discrepancies and be alerted of a possible fraud case.
Next to invoice matching, Klippa SpendControl can also detect document fraud through EXIF data and copy move analysis, making it hard for fraudsters to altercate an invoice. Additionally, the software is able to detect duplicates, which helps you avoid paying an invoice twice.
At this point, managers or other responsible people have the chance to interfere and prevent vendor fraud from happening. Vendors and/or employees that are involved can be reported, while at the same time, your business is protected from illegal payments.
Do you want to know more about Klippa and how SpendControl can help you prevent fraud using invoice matching? Please book a free demo below or contact one of our experts.