Handling vendor and billing fraud schemes

By Jason Ligon, CFE

It’s 4:30 p.m. on a Friday, and you’ve had a rough week as the accounts payable clerk at a large, growing manufacturing company. As usual, your facilities manager drops an invoice on your desk for ABC Maintenance Services for immediate payment. ABC Maintenance has been a vendor for more than a year and is paid $4,500 a month, but for some reason, they only want to be paid via check. What’s more, the address for the vendor is a post office box.

Now that you think about it, you’ve never seen any employees from ABC Maintenance at the plant, and your company already employs several maintenance staff. You know your manager and corporate controller don’t care about invoices under $5,000, so why should you investigate further and delay leaving work?  Process the invoice, have the check rubber stamped by your manager, and get your weekend started.

But could this be billing fraud?

When evaluating your company’s fraud risk, you should always consider the likelihood and significance of the underlying risk. According to the Association of Certified Fraud Examiner’s Report to the Nation, corruption, noncash fraud, and billing fraud are the most likely and significant fraud risks in the manufacturing and distribution industry. Noncash and billing schemes are especially prevalent in manufacturing compared to other industries because of the inventory being managed (noncash) and the reliance on third parties to provide raw materials and support (billing).

Billing fraud schemes are often the method used to commit fraud over a long period of time and account for some of the largest losses. While many company executives believe their internal controls appropriately mitigate billing related risks, they should keep in mind that a fraudster will only commit a criminal act if they have identified a control gap or weakness.

Some of the most common internal billing schemes are:

  • Fictitious vendors. In these cases, an employee creates a fake vendor in your purchasing/procurement system then generates payments to the fake vendor.
  • Fictitious invoices. – An employee creates a fake invoice to generate a payment from the company. This scheme is often coupled with a fictitious vendor.
  • Manipulation of vendor information. By changing (often temporarily) the vendor’s payment information to his or her personal information, an employee can generate a fraudulent payment to himself or herself.
  • Legitimate invoices unrelated to the business. In these instances, an employee submits a legitimate invoice for services unrelated to the business. Sometimes, this involves forgery of, or tampering with, the invoice description.

Of course, employees aren’t the only source of billing fraud schemes; vendor fraud can be quite common. External vendor and billing frauds typically involve inflated quantities or rates, poor or substandard quality products, and duplicate billings.

Fear not. While spotting a fake or forged invoice can be arduous, you don’t need to be a trained investigator to monitor for potential billing frauds. Warning signs include but are not limited to:

  • Increases in costs not justified by increases in production or revenue.
  • A large number of vendors or vendors unknown to management.
  • Limited or missing information in accounting records related to vendors (missing addresses, contact information, payment information).
  • Numerous corrections, errors, refunds, or duplications of invoices.
  • Missing documentation such as purchase orders or contracts.
  • Timing issues such as late or early payments.

If you’re experiencing any of these symptoms, there are several easy steps to help determine if billing fraud may be taking place. Your top priority should be ensuring internal controls are performing as designed. Even if your written policy addresses segregation of duties and approval processes, it can’t guarantee  employees are executing them properly. Make sure that any employee with the authority to approve payments to vendors has reviewed all necessary documentation, including purchase orders, bills of lading, and contracts. To avoid manipulation of vendor data, assign separate individuals to process payments and create vendor profiles in your accounting system.

While growth is a positive business outcome, it can increase the likelihood of vendor and billing fraud. Growing companies often struggle with internal controls issues as employees are overextended and management permits a more relaxed control environment. If you’re experiencing significant growth or if you haven’t evaluated the strength of your internal controls in several years, consider performing an internal controls study or hiring an outside firm to provide assistance.

Above all else, be proactive. Roll up your sleeves and dive into the information you’ve already collected. Data analytic techniques can help you spot anomalies and provide insights into your cash outflows. Here are several ways to evaluate your data to detect potential fraudulent activity:

  • Generate a vendor transaction report and drill down on vendors that have a large number of round-dollar transactions, duplicate amounts, or one-time vendor payments.
  • Examine your supplier and vendor list to determine if key information is missing from vendor profiles.
  • Examine your supplier listing audit logs to see if vendor information is being frequently changed.

If something looks suspicious, do some research into the vendor and its employees. Review websites and social media to determine if the vendor is legitimate and provides products and services related to your industry.

When you suspect vendor or billing fraud is occurring, it’s crucial to act quickly and diligently to correct the matter. Collect enough evidence to support your claim and consult your attorney about how to deal with the employee or vendor before making an allegation. The right legal and forensic accounting team can help you uncover additional stolen funds, protect you from future losses, and coordinate with law enforcement to achieve a positive outcome. We strongly urge victims of fraud to seek prosecution to help prevent the individual(s) from committing fraud in the future. Prosecution may also be required if you’re filling an insurance claim to help recover lost funds.

We Can Help

Jason Ligon is based in our Charlotte office and has more than 10 years of experience providing litigation support, forensic accounting, and investigation services to clients. If you need assistance or have any questions, please contact him at jason.ligon@elliottdavis.com or (980) 201-3921.