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Fictitious Vendor Schemes

May 21, 2022

As individuals continue battling with challenging economic times, employees continue to think about additional sources of personal income.  Fraud perpetrators are finding endless ways to extract hard earned company assets to line their pockets.

A fictitious vendor scheme occurs when a vendor is falsely established within a company but does not provide legitimate services or goods to that company. The fictitious vendor submits invoices for services or goods.  In some instances of fictitious vendor schemes, the perpetrator doesn’t submit an invoice but writes a company check to the vendor. These fictitious vendors are then paid for services or goods that were never received by the victim company.

Since fictitious vendors are not legitimate businesses, several typical red flags show up in fictitious fraud schemes. These include P.O. box mailing addresses, invoices created using Microsoft Excel or Word, invoices for even dollar amounts, invoices for vague services or undefined products, local business addresses located near company locations, omitted supporting documentation for vendor payments, payments to non-corporate credit cards, vendor names with initials and vendor names that match employee names.

Fictitious Vendor Fraud: Prevention and Detection

Generally, fictitious vendor schemes happen due to poor internal controls for new vendor approval or through the conspiracy of company employees.

An easy solution to conquer fictitious vendor fraud is to maintain strong internal controls for approval of new vendors. Each new vendor should be approved by multiple individuals within the organization and be required to agree to a background check.  Additionally, a periodic review of all vendor additions and changes to existing vendor contact information should be performed by someone outside of the accounts payable department.  These measures will ensure that no collusion occurred in approving the fictitious vendors.

If at any time a you suspect there may be a fictitious vendor scheme perpetrated within your organization, a forensic accountant can help identify the issue and the potential recovery of funds.

ParenteBeard’s forensic, litigation and valuation services group has extensive experience providing expert consulting and witness testimony in mediations, arbitrations and bench and jury trials. If you have questions regarding fictitious vendor schemes, a member of our leadership team is available to help.