Staying Vigilant: A Guide to Preventing Vendor Fraud

Vendor fraud can go undetected for years and the consequences only worsen with time. An investigation into vendor fraud brings down the finance function’s operational efficiency. It can cause delays as systems must be examined, risk assessed and overhauled. Additionally, suppliers miss out on owed payments.

Vendor fraud, unsurprisingly, takes a toll on a business’s financial health. American businesses, on average, lose $300,000 to fake invoice fraud every year. In most cases, law enforcement struggles to get this back.

The impact of vendor fraud goes beyond operational and financial loss – the reputational damage can impact relationships with customers, suppliers and stakeholders.

So, what are the most effective methods procurement and finance teams can implement to prevent or reduce the risk of vendor fraud?

Here are some best practices:

Regular Vendor Audits:

Regular monitoring of your vendors is the best way to prevent big financial damage caused by fraud. Thoroughly examining vendor master files should be a good starting point.

Invoice Matching Rules:

The right approach to invoice matching can reduce vulnerability to vendor fraud by comparing invoices submitted by the vendor with financial documents such as purchase orders, payment receipts and inspection records. You can conduct a one-to-one match or perform a three-way match as necessary.

Efficient Vendor Management:

A robust vendor management system effectively helps in combating potential vendor fraud. It streamlines processes that could be exploited for fraud in manual systems, balancing accessibility for stakeholders with risk reduction for the accounts payable team.

Also Read: How to Detect and Avoid Procurement Fraud

Multi-level Payment Approval Process:

Creating a multi-level payment approval process is necessary to prevent vendor fraud. Avoid the risk associated with a single employee responsible for reviewing owners’ invoices every time. Instead, ensure that invoices are reviewed by multiple employees across departments and management levels.

Greater Visibility into Spend:

Enhance the frequency and transparency of spend analysis and reporting. This will improve your cash position and make the finance function less vulnerable to fraudsters. Utilize best practices and software to gain line-level visibility into spending and mitigate third-party vendor risk.

Ongoing Checks on Employees:

Regular background checks on employees regarding your vendors – especially for organizations that may have complicated supply chains or close personal ties to your company. This is a necessity to mitigate fraud enabled by inside collusion.

Employee Rotation:

Fraudulent schemes often require the cooperation of one or more employees to remain undetected. Employees in the procurement and accounting departments are especially vulnerable. Rotating employees between departments or branch offices minimizes the opportunity for employees to privately conspire.

To Sum Up

Vendor fraud is a common yet preventable corporate menace. It destabilizes operations, finances and relationships with customers, suppliers and stakeholders. Fraud prevention best practices include investing in vendor management software, employee rotation, increasing spend visibility, having a multi-level payment approval process and more.

Learn about GEP’s AI-powered vendor management software.