What is Vendor Fraud?

Vendor fraud is fraudulent actions made by suppliers, contractors, or even employees colluding with one of those parties to steal money or to obtain financial remuneration from an enterprise. This takes place by influencing the procurement process or the billing or vendor payment process, and is often done through weak internal controls or a lack of supervision.

Examples of vendor fraud come in many types, including false vendors set up to intentionally funnel payments into fraudsters’ accounts or real vendors that overcharge for goods or services. Some employees may also be involved in receiving bribes, kickbacks, or approving fake or false invoices.

This type of fraud is harmful to your business as it looks like just another part of your business — a blip in a regular transaction, another line in a long-term contract, or a trusted vendor relationship. Many organizations do not even realize they have been victimized until long after the damage has been done.

Common Types of Vendor Fraud

Vendor fraud can take many forms, but it always has one common goal: to steal money from a business in a stealthy manner.

Let’s look at the five common types of vendor fraud found in most businesses.

1. Fake Vendors

This is a type of vendor fraud where the fraudster creates non-existent vendor or company details to receive payments.

How does it happen?

The fraudster (who may be an insider) creates a bogus common law company and then submits bogus invoices to the entity. Because, on paper, the vendor appears genuine, the accounts team approves payments without sufficient checks being carried out.

Example:

A worker in the accounts payable department sets up a fictitious vendor record and then sends invoices for “consulting services” that never occurred. The payments are deposited into a personal bank account in an assumed name.

2. Overbilling

Overbilling occurs when a vendor bills more than the agreed-upon amount for supplies and services, or bills for supplies or services that were not actually delivered.

How does it happen?

The vendor may inflate quantities, raise prices, or charge for premium materials while delivering lower-quality alternatives. In some cases, employees may collude with the vendor to approve inflated vendor invoices.

Example:

A vendor invoices you for 1,000 units of an item, but ships only 800 units. Now, because the invoice isn’t compared to a delivery receipt, the overcharge passes unnoticed.

3. Duplicate Billing

Duplicate billing involves submitting the same invoice more than once to receive multiple payments for the same product or service.

How does it happen?

Fraudsters can attempt to resend an old invoice that appears identical to the previous one, hoping it will go unnoticed. If there is a lack of communication within the team, the invoice may get approved, and your business could fall into the trap of accounts payable fraud schemes.

Example:

An IT services vendor sends the same invoice twice—once by email and once by mail. The accounts payable team, unaware of the duplication, processes both.

4. Kickbacks

This is a type of vendor fraud where the vendor pays a bribe directly to an employee in return for receiving work, or special attention to their product or service (or in return for turning a blind eye to subpar quality).

How does it happen?

Cash or gifts (including extended stays, gifts, or personal services) are given by a vendor to a purchasing manager or procurement officer. In exchange, the employee ensures the vendor continues to receive work and that there is nothing to inspect.

Example:

A facilities manager awards repeated contracts to a cleaning company that provides subpar service. Later, it’s discovered that the manager was receiving cash from the vendor owner under the table.

5. Substandard or Non-Delivered Goods

This vendor fraud occurs when the vendor starts charging for goods or services that the company has rejected.

How does it happen?

If the receiving company doesn’t thoroughly check the quality of the goods, this type of fraud is most likely to occur. In some cases, goods are marked as “delivered” but never arrive.

Example:

A construction company receives a shipment of low-grade steel rods labeled as high-quality materials. The discrepancy isn’t discovered until structural issues arise.

How to Identify Vendor Fraud?

Early detection of vendor fraud can prevent a business from experiencing large monetary damages, a bad reputation, and can even save it from facing legal consequences. But vendor fraud is mostly found in legitimate business processes, and is more difficult to detect without knowing what to look for.

Here are some warning signs and what companies can do to detect vendor fraud before it’s too late.

1. Recognize Warning Signs

Whenever there is a fraud, there will always be some trail or indication that things are not going right.

Here are some examples of early warning signs:

• • Incomplete Vendor Profile: No identification of tax numbers, copied business address, and false contact information.
  • Unusual Vendor Addresses: Almost identical names to legitimate companies, or vendor addresses similar to other businesses.
  • Lack of Online Presence: No brand identity, company website, solidified reviews, or social media presence like LinkedIn.
  • Invoice Timing Patterns: Invoices submitted and paid at unusual times, such as late at night on weekends or before the financial year-end.

2. Conduct Regular Audits and Reconciliations

Regular audits are one of the best and proven methods to find out discrepancies in vendor records, invoices, and payments. Consider the following:

• • Three-Way Matching: Before approving payment, be very clear that purchase orders (POs), invoices, and receiving reports are all correct.
  • Random Spot Checks: Time to time, keep doing random audits of vendor transactions to detect irregularities.
  • Vendor Master File Reviews: Stay updated with vendor records and look for any inactive accounts or suspicious entries.

3. Use Technology and Data Analytics

The latest tech-driven accounting software and procurement systems can be a huge help in detecting scams.

• • Analyze Vendor Records: Monitor every spending on vendors and check for unexpected spikes.
  • Use Tools: Implement duplicate detection tools in your workflow that can flag repeated invoices, identical amounts, or recurring vendors.

4. Strengthen Onboarding and Verification

A strong relationship with the vendor is initiated with industry-standard onboarding protocols. You need to perform:

• • Business Credential Verification: Verify business licenses, tax ID numbers, and relevant documents.
  • Background Checks: Do background checks if it is a high-spend vendor.
  • Bank Account Verification: Check if the bank details of the vendor match the registered business name.

5. Build a Culture of Transparency

In some companies, even if an employee notices suspicious activity, they remain silent due to fear. Encourage everyone to speak up.

• • Schedule Fraud Awareness Programs: Teach every individual in your company how to detect red flags and report unusual signs.
  • Create an Ethics Policy: Set boundaries with vendors. Any policy violation could lead to consequences.

The earlier you identify these suspicious activities, the fewer chances there will be of Vendor fraud.

Tips for Vendor Fraud Prevention

You can prevent vendor fraud by making small things right. Fraudulent schemes from vendors are found both in large and small businesses, so it is important to understand how to tackle vendor fraud with ease.

Below are a few strategies that can help you prevent vendor fraud.

1. Solidify Internal Controls

The internal process of the company has to be strong. Weak internal processes often lead to massive scams. Don’t let that happen. Cover every loophole a fraudster might exploit.

2. Delegate Duties

There shouldn’t be one employee who holds full control of the procurement-to-payment cycle. Every step must go through different individuals. Be it purchase approvals, invoice processing, or payment authorization, there should be different employees for every process.

3. Three-Way or Four-Way Matching

Don’t settle for fewer matching mechanisms. Always make sure you are matching key documents like the purchase order, goods received note, and invoice before approving payment.

4. Approval Hierarchies

Set up multi-level approval hierarchies for larger transactions to ensure efficient processing. For example, a $500 payment can be approved by the accounts head, but if it exceeds $500, it will require the involvement of the finance manager. Furthermore, if the payment exceeds $10,000, it will require the managing director’s approval to finalize.

5. Limit Manual Entries

Say no to manual entries. Fraud activities are most likely in a company that follows a manual method, as it is easier to manipulate key documents. Introducing an automated system that can take care of your finances and reduce the risk of vendor fraud is essential. This way, you will get trusted vendors that help your business thrive.

How Moon Invoice Helps You From Vendor Fraud?

If your business is using manual processes for all financial operations, then the chances of vendor fraud will increase. When you execute everything manually, you might miss suspicious activities that could cost your business. This is why you should select a vendor management software like Moon Invoice to manage vendor data efficiently.

Moon Invoice helps you manage dedicated vendor portals for the smooth operation of goods and services. With the help of Moon Invoice software, you can create and manage vendor credentials, including business name, phone number, personal number, and addresses.

Here are the key features of using Moon Invoice:

• • Automated Invoice Generation: Automated invoice generation ensures consistency in pricing, tax rates, and formatting.
  • Duplicate Detection: Detects the same invoice or the same payment request made previously.
  • Vendor Onboarding Controls: Quickly verifies tax IDs, bank information, and corporate legitimacy.
  • Centralized Vendor Database: A centralized client and vendor database ensures accurate billing information every time.

Vendor fraud can be prevented if you use vendor management software in your workflow.

The Bottom Line

Vendor fraud is not one type. There are different types of vendor fraud. It can be overbilling, duplicate invoices, kickbacks, and poor standards of goods, all with the same agenda of illegal financial gain. Detecting vendor fraud early is necessary to keep your business safe from massive losses.

Manually detecting vendors is the toughest job in the world. So, what can you do differently? Introduce an automated software that can take care of your finances, starting from invoice matching to final billing.

Try Moon Invoice today and manage customers & vendors seamlessly. Take a free trial now!

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