To Catch a Thief: How to Spot and Stop Vendor Fraud

KEN TORNHEIM, CPA, CFE

Manufacturers often have hundreds of transactions pass through their purchasing department each month. This volume of business, along with different pricing and billing policies used by vendors, makes these departments susceptible to employee and vendor fraud. Let’s take a closer look at common vendor-related fraud scams and how to minimize your risks.

Who are your vendors?

A common type of purchasing scheme involves fictitious vendors. Here, an employee in the purchasing department might set up a bogus supplier in the accounting system and then deposit payments to the supplier into their personal checking account.

Warnings of fictitious vendors include invoices that are photocopied, sequentially numbered and from companies that have post-office box addresses or addresses that match an employee’s home address. Also be wary of invoices with amounts that consistently fall just below sums that require approval for payment and, depending on your business, invoices for round dollar amounts.

Is it a bogus invoice?

Some purchasing scams require collusion between an employee in the purchasing department and someone at the vendor’s office. For example, a vendor might submit falsified invoices, and then an employee in the purchasing department will deposit refunds into their personal account or split duplicate payments with their accomplice at the supply company.

Connections between procurement staff and suppliers may provide clues to these types of schemes. Is an employee related to, or otherwise linked with, the owner or management of a supplier? If so, that employee should not make purchasing decisions that involve that vendor.  

What about kickbacks?

If you perform contract work, you also might be susceptible to kickback schemes. That is, the person who approves the contracts could be receiving kickbacks from vendors. Red flags include fewer bids than expected or required, widely divergent bids on the same projects and unexplained deadline changes.

Kickbacks also might occur if it seems like you are paying higher prices for lower-quality products. Cash payments to employees can be difficult to detect because those payments are not reflected in the company’s books. However, they are probably reflected in higher pricing from the vendor. Even fraudulent vendors must cover their costs. Companies should look for consistent shortages, poor recordkeeping and informal communication (such as mobile phone calls or personal emails) between purchasing staff and suppliers.  

What can you do?

You can prevent vendor fraud by targeting one of the legs of the fraud triangle: motive, opportunity and rationalization. Many preventive measures strengthen internal controls and develop policies and procedures to prevent theft, thereby reducing the opportunity to commit fraud. Measures to consider include:

Separate Functions
For example, no employee should be authorized to handle most or all of your purchasing procedures. The person who orders supplies and materials, for instance, should not check shipments or approve invoices. Consider separating these functions or rotating who is responsible for them on a quarterly basis.

Conduct Background Checks
Consider background checks on new vendors. Such checks can provide information on the vendors’ affiliations, ownership, financial standing, litigation, and regulatory or legal violations or suspensions. This information can help you weed out vendors with dubious histories.

Implement a Formal Code of Ethics
Companies should state in writing how they expect employees and vendors to conduct business. This document should be reviewed and updated annually.  Employees and vendors should be required to sign it every year, even if nothing changes. Annual reminders will reinforce the idea that the company considers ethical, professional business practices a priority.

Provide Anonymous Reporting Hotlines
These can be an effective way to detect purchasing frauds, especially those involving collusion. It often makes sense to set up two hotlines, one for employees and another for vendors. Giving vendors a separate hotline makes them more comfortable sharing concerns and allows them to ask questions about the business’s ethics practices.

Fortify your defenses

Not being able to trust your vendors is not something many people want to think about. A Certified Fraud Examiner (CFE) or forensic accountant can help review any questionable transactions and discuss ways to secure your systems against future scams.  

For more information, contact Ken Tornheim at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.

AI is Poised to Transform Supply Chain Management

JOYCE CARLSON

Digital transformation is essential for today’s competitive businesses to progress within their industries.  Artificial intelligence (AI) is currently one of the most progressive avenues of achieving technological evolution in manufacturing. It has become so ubiquitous that last year dictionary publisher Collins named “AI” the word of the year because it “has accelerated at such a fast pace and become the dominant conversation of 2023.” Some brief highlights that capture the essence of the practical uses that AI has to offer in the revolution of the manufacturing industry follow:

Reaping the benefits – employing AI in multiple aspects of your business

AI is much more than an online app and embraced as an evolution of thinking while putting ideas into real practice. One area poised for huge potential advantages is within supply chain management. AI’s ability to process vast amounts of data can make supply management more efficient, productive and profitable. Practical Examples and benefits to the supply chain system often include:

Forecasting
Because AI can process enormous amounts of data rapidly, it can generate more accurate forecasts of supply and demand. Immediate access to a broad spectrum of data, such as sales history, market trends, seasonal fluctuations, weather patterns, component prices, crop yields etc. can put projections at your fingertips.  Critical discussions of company performance and capabilities become significantly more relevant. 

Risk Management
AI can quickly analyze a variety of risk factors in real time, such as natural disasters, public health emergencies, geopolitical events, labor issues, materials shortages and port congestion. Armed with this information, manufacturers can anticipate supply chain bottlenecks and prepare to implement contingency plans as soon as they are needed.  A broader knowledge of industry characteristics are gained in real time with a greater ability to take action.

Inventory Management
AI can track and analyze inventory instantaneously. This promotes a greater ability for manufacturers to optimize inventory levels based on anticipated needs.  Slowing of inventory turnover and other problems can be detected quicker allowing businesses to optimally allocate its resources.

Transportation Logistics
Real-time tracking enables AI to pinpoint the location of materials and products across the supply chain. Various factors, can easily be considered such as traffic patterns, weather conditions, delivery windows and customer locations, streamlining delivery routes and schedules.  Greater accuracy in estimating timeliness of deliveries creates better communication opportunities in case schedules do not go as planned.

Enhancing employee productivity

It is important to keep in mind that AI is unlikely to replace people and should be viewed as an important tool for success.  With any online source, accuracy is key to achieving goals.  Obstacles in using AI successfully can range from mismatching AI capabilities to poor quality data.  Manufacturers can address challenges by staging the roll out and implementation of AI and by consolidating data internally.  By focusing on benefits, the work force can experience more sustained personal satisfaction by eliminating the need to perform certain routine, repetitive tasks.  AI gives the company and its people the opportunity to focus on what they do best – using their professional judgment, experience, creativity and ethical values to make strategic decisions, manage relationships, handle complex negotiations, drive innovation.  Smart use of AI in a business model can otherwise help your company achieve its goals while stimulating a positive overall environment.

For more information, contact Joyce Carlson at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.