Fictitious Vendor Fraud: How It Occurs and How to Prevent It

Day 1 of 30 Days of Fraud

Fictitious vendor fraud is one of the more dangerous ways employees steal. Today we look at how this theft works and how to prevent it.

The Theft

Your accounts payable director (Susie Jones) sets up a fictitious vendor: ABC Project Management. Susie enters the new vendor in the payables system using her sister’s (Joan Albert) personal home address as ABC’s address. (Susie is the only person tasked with reviewing new vendors for appropriateness.) Susie also creates fictitious consulting invoices to support the payments made to ABC Project Management.

fictitious vendor fraud

Since the checks are signed by the computer, no one reviews the invoice or physically signs a check. And since the vendor file has Joan’s address, the ABC checks are mailed to Susie’s sister.

Joan opens a bank account in the name of ABC Project Management, and she is the sole signature on the bank’s signature card. When the ABC Project Management checks are received, Joan deposits them into the new bank account. Joan then writes checks from the ABC bank account to herself and Susie.

The Weakness

Susie is the only person reviewing new vendors for appropriateness. No one outside of the accounts payable department is performing periodic reviews of the vendor files.

The Fix

If possible, have the company’s computer system automatically email Susie and the controller (a person outside of the accounts payable department) each time a new vendor is added; the email should provide the name and address of each new vendor, and the name of the person who approved the addition of the new vendor.

Require the accounts payable department to archive vendor verification documentation such as:

  • Google search for the business
  • Google search using the vendor address (Google often provides a picture of the location)
  • Phone call made by an accounts payable employee to the new vendor
  • Physical visit to the vendor’s business

The company can also compare payroll addresses to vendor addresses using software packages such as IDEA or ACL. (Sometimes an employee will use their personal address in a vendor fraud such as the one above, rather than that of an accomplice such as a sister.)

Use an outside CPA or Certified Fraud Examiner to sample and verify selected vendors. If accounts payable personnel are aware that this procedure is being performed, they will be less likely to steal.

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