Supplier fraud is an all-too-common form of fraud and one that can be hard to manage, particularly for organisations that pay many thousands of invoices a year. However, there are some clear signs that supplier fraud may be taking place however there are  a number of effective steps that organisations can take to counteract this activity.

In this article we look at three key types of supplier fraud where the involvement of the AP team is vital in protecting against the fraudster. We provide some hints and tips to help you develop an anti-fraud culture and strengthen your management of these risks. In these three cases there is also a high likelihood of internal involvement in the fraudulent activity.  Whilst no company likes to think that it cannot trust its employees – and of course the vast majority of employees are completely honest – it is a fact that in many cases of supplier fraud there is some level of employee involvement. After all, internal fraud accounts for approximately 60% of all corporate fraud.

1. Shell companies and invoicing fraud occurs when, most likely, an AP employee creates a shell company and submits and forges approval of bogus invoices on behalf of that company.

Signs that this is happening include:

• invoices with consecutive numbers despite long periods between them
  
  
• matching supplier and employee addresses, a supplier address that doesn’t match the approved supplier list or is a PO box
  
  
• invoices missing key details
  
  
• absent or invalid VAT numbers
  
  
• unusual pricing
  
  
• unprofessional invoice documentation.

Easy prevention steps include:

• approval of purchase requests over a specified amount
  
  
• tightening controls over the Supplier Master File
  
  
• checking for duplicate VAT numbers.

Implementing accounts payable audit software such as AP Forensics® Suite which consists of three core modules, Duplicate Supplier™, Duplicate Payment Finder™ and VAT Checker to anlayse invoices, supplier accounts and VAT line items, help here to identify suspect suppliers and VAT anomolies.


Other steps to prevent shell company fraud include:

• splitting responsibility for invoice approval and making changes to the SMF
  
  
• establishing a requirement for competitive bids for purchases over a certain amount
  
  
• monitoring and reviewing invoices without a purchase order reference  
• matching POs with invoices and receiving documents.
  

2. Supplier master file fraud occurs because most companies trust too many employees to make changes to the supplier master file (SMF), potentially leading to the addition of fake suppliers or altered supplier data (e.g. payment instructions changed to employee’s own bank data), and billing fraud. The most important way of keeping a tighter control over this is to ‘clean’ the SMF at least once a year, removing inactive suppliers and checking for bogus ones.  These might include duplicate suppliers with slight variations in name or different addresses.

You can also help to avoid fraud in this area by:

• once again, ensuring that the same person does not approve purchases and make changes to the SMF
• enforcing the monitoring of duplicate invoices
• matching open POs, invoices and receiving documents
• using technology – for example AP Forensics Suite - Duplicate Supplier Finder™ module

3. The third form of supplier fraud focuses on invoicing fraud and kickback schemes and involves an employee colluding with a dishonest supplier to allow them to submit higher invoices or supply lower quality goods at full price. Such schemes may also see employees choosing suppliers without having to go through a competitive bid process.

Warning signs could be:

• the use of the same supplier on consecutive projects
• unexpected price hikes
• unusually large orders  
• the sudden replacement of a long-term supplier by a new one.

Prevention measures for this scenario are largely manual and include:

• splitting responsibility for handling the different stages of the purchase chain – from supplier approval to purchase requisition, purchase approval, receiving of goods and payment.
• ensuring that the same staff do not deal with the same suppliers for long periods of time.
• establishing tighter reviews of purchasing/procurement records which can potentially detect unusual pricing before payment is made
• investigating supplier replacements  
• enforcing competitive bidding.

For organisations that have never carried out any preventative activity against fraud, the above list of checks and new or altered processes can seem overwhelming. However, most organisations will already have some of these safeguards in place, at least to a certain degree, and it is often just a case of tweaking them or enforcing rules and processes more rigorously. In addition, many of the checks suggested above will protect against multiple types of fraud so what can seem a long list can be whittled down to a key list of just four or five vital actions. Finally, it is worth remembering that, in particular for the areas of supplier fraud discussed above, software like AP Forensics®, with its Duplicate Payment Finder™, Duplicate Supplier Finder™ and VAT checker modules, can take away much of the pain.


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