A Comprehensive Guide to Vendor Fraud Prevention

Vendor fraud is a common fraud rampant in today’s business landscape. With fraudsters getting more and more advanced, your company needs to ramp up its knowledge and prevention of all kinds of fraud. 

Data security and safeguarding companies is an ongoing task. To protect your business from losing money, you must be mindful of what new tricks cons might pull. 

What is Vendor Fraud?

Vendor fraud occurs when a vendor, employee, or a stranger to the company employs fraudulent practices to launder money from a company. In most cases, the culprit is usually someone close to the company, such as a vendor, employee, or both. This is generally done when a company processes incorrect invoices and pays them. Such fraud can cost your company millions every year and lead to compliance issues. 

Types of Vendor Fraud

Vendor fraud can be performed in many different ways. Here are some common ways in which scammers might get you:

Invoice fraud

Invoice fraud occurs when either the vendor or someone pretending to be a vendor sends over a fraudulent invoice for goods or services not purchased by you. Without proper context, accountants and even business approvers process the invoice, mistaking it for the correct one. 

Overbilling

Overbilling occurs when the vendor sends an inflated invoice for processing, leading to monetary losses for the company. These invoices might be billed at a higher than agreed price or contain extra line items or quantities that might go unnoticed. Without proper checks, these invoices get processed for payment. 

Check fraud

Check fraud occurs when a check is intercepted during delivery or is meddled with before it is sent out. Since checks can be tampered with anytime before receiving them, keeping track of this fraud is challenging. Employees might often print fake checks that seem like real ones and mail them out, replacing the vendor’s payment information with their own. 

Duplicate payments

Duplicate payments occur when the same invoice is processed twice or is accounted for under an identical vendor in the vendor master list. Often, employees might process the same invoice twice and change the payment details to launder money from the company.

Compromised emails

Hackers can easily intercept company email chains without proper security measures in place. This allows them to replace vendor bank account information with their own and redirect payments. This also goes unchecked if low monetary value invoices are involved. 

How to identify Vendor Fraud?

Vendor fraud is a tricky thing to identify. It takes strong security measures to discover and rectify these. 

Invoice matching

Invoice matching helps ensure the validity of invoices before processing them for payment. Matching invoices with purchase orders, receiving reports, and inspection slips can help you identify fraudulent invoices before they cause a loss. 

A two-way matching technique can help you check validity by matching them with their purchase orders, whereas three-way matching goes the extra mile by comparing your receiving report. 

Verify TIN numbers

Performing a Taxpayer Identification Number check can prove helpful for fake vendors or scammers pretending to be your vendors. This allows you to flag fraudulent TIN numbers and identify the culprit behind the potential fraud. 

Reverify the payment information.

Reverifying the payment information on the invoice to those given by the vendor is also an intelligent technique to catch payment fraud. In case the data doesn’t match, someone may be trying to steal from you. This information can then be tracked back to the scammer. 

Keep in contact with vendors

Keeping an open line of communication with vendors can also help flag vendor fraud quickly. Any payment information or invoice value changes can easily be verified before paying them. This would also capture the fraud before payment is made. 

How to prevent Vendor Fraud?

Identifying and rectifying vendor fraud is important, but another essential task is to follow guidelines to prevent vendor fraud from happening to your company. 

Conduct regular audits and risk assessments

Regular accounts payable audits and risk assessments can help prevent fraudulent activity. Conducting regular audits requires leaving an elaborate audit trail for all business transactions, including vendor payments and invoice details. Conducting audits also helps identify gaps in your payment records, identifying frauds that might have been missed earlier. 

Implement a vendor management system

An effective vendor management system that provides correct vendor details and ensures zero duplicity of vendor records can help prevent fraud by duplicating payments or switching payment information. A sound vendor management system will also ensure an open line of communication with your vendors, which helps identify fraud. 

Screen all new vendors

Screen and verify all vendors' addresses, payment information, and other compliance details before onboarding them. You should also check whether there is any relationship between the vendor and the employees involved in invoice processing since this might lead them to team up to launder money. 

Properly store sensitive information and checks

Safely storing your payment information and checks ensures they can’t be hampered while paying the vendor. Verify the check details before sending them out and provide a secure mode of delivery so that it cannot be intercepted on the way. 

How AP automation can help prevent Vendor Fraud

Accounts payable automation can help employ safety guidelines to prevent vendor frauds in your company. It works by automating the invoice-matching process by capturing and matching invoice details to their corresponding purchase orders and other documents. Most AP automation vendors maintain invoices and other documents on their platform, along with information regarding the approver and processors of the invoice. This creates a strong paper trail for easier identification of fraudulent invoices and scammers within the organization. AI-powered automation software, like ClearTech, also flags duplicate invoices and identifies spikes in line item or invoice amounts while processing the invoice, allowing for a quick and easy rectification for the same. 

Conclusion

Vendor fraud is when someone within or outside the organization tries to launder money for goods or services not provided. This can be done by sending fraudulent invoices, hacking email threads, or employees processing duplicate invoices for payment. Vendor fraud can be identified by matching invoices with other relevant documents, verifying vendor details before paying and maintaining an open line of communication with vendors. You can also employ steps like conducting risk assessments and audits, screening all new vendors before onboarding, and safeguarding sensitive payment information to prevent vendor fraud from occurring. AP automation can also help avoid fraud vendors by maintaining a paper trail of all transactions, flagging duplicate invoices, and increasing invoice value.