One of the most frequent schemes deceptive employees use to steal money in the workplace is the creation of phony vendors who are paid for services never rendered or goods never delivered. There are, however, fraud deterrence steps organizations can take to help ferret out these fictional vendors.
“It really is a popular tactic among fraudsters,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley. “It’s not easy to root out phony vendors, but there are things you can do to help identify them. Ultimately, you might need to seek professional help to make sure all your vendors really are legitimate.”
Anderson said that to discover whether you are paying phony vendors, it helps to understand how an employee goes about creating one in the first place.
The first thing a fraudster must do is establish a vendor name, either by creating a new name that has never been entered into the accounting system or by using an existing vendor already in the system but for whom there has been no activity for a year or more. Anderson said savvy fraudsters will invent service or supply vendors because it is more difficult to determine whether the services were actually performed and because supplies are sometimes expensed and not tracked in a company (think paper clips, for example).
The fraudster usually sets up a bank account in the name of the phony company, Anderson said. Because banks require proof that a company exists, fraudsters often use their own home address and phone number or a post office box in their town. Finally, the fraudster creates and submits invoices from the phony vendor, arranges for the company to pay the invoices, receives and deposits the company’s checks, and withdraws the funds for personal use.
“There are two things you can do to see whether any of your vendors might be bogus,” said Anderson, a Certified Fraud Examiner who encourages companies, non-profits and government offices to enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. “These procedures are not foolproof, but they will uncover most phony vendors.”
First, Anderson said, run a vendor activity report for the past three or four years and identify both new vendors with less than a year of activity, as well as vendors with a gap in activity (for example, a vendor your organization stopped using in 2012 then again started paying in 2014).
Vendors who fit these criteria should be contacted to verify their validity, but the contact should be made by a manager who is not in the accounting department or in the department that purchased from these vendor, or by an independent third party such as a firm that provides forensic accounting services in Philadelphia and the Delaware Valley.
Anderson said the second procedure is to analyze three pieces of vendor information against the same three pieces of employee information: mailing addresses, phone numbers for both landlines and mobile phones, and for vendors with post office box addresses, zip codes. In large cities, you also will need to look at the location of the post office box.
If an employee used a home address or phone number on the bank account for the bogus company or on the invoice from the phony company, the accounting system will show a match.
Post office box matches often warrant further analysis. A payment that goes to a bank-owned post office box usually gets sent to the business center in larger cities. If you find that the post office box is in a small town or in a non-business section of a large city, you will want to investigate further.
“This step in a fraud investigation can take a lot of time if it is performed manually,” said Anderson, who uses special data analysis software to significantly reduce the time it takes to match addresses, phone numbers or zip codes.
If you already suspect your organization is paying invoices to phony vendors, it is likely in the best interest of your company, non-profit or government office to hire a Certified Fraud Examiner to conduct a comprehensive fraud investigation.
“Don’t wait until you have paid out thousands and thousands of dollars to non-existent vendors,” Anderson said. “Take the time to make sure every vendor in your system really is a vendor.”
If you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at firstname.lastname@example.org.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.