Fraud. The very word strikes fear in the hearts of good men and women around the globe. Fraud can take down a company, fraud can destroy share­holder wealth, and fraud can make you very, very rich.

Just kidding about the last one. Eventually, if you are committing a fraud, you will get caught. Sooner or later, the paper trail will catch up to you, whether as a result of the auditors looking into suspi­cious activity or management conducting non-routine inquiries.

Fraud can be perpe­trated in as many different ways as can be imagined, and fraud­sters – I’ve always found that term mildly funny – have tried and will continue to try every trick in the book.

The method I want to talk about today is that of the ‘fake supplier’. This fraud is enabled when adequate control over the approved supplier list is not exercised. The fraudster sets up a fake supplier and has control over purchasing. The fake supplier fake invoices the company and the fraudster simply pays the invoice.

But the cheque cut to a fake supplier ends up in the fraudster’s bank account.

How does a small and medium sized business owner or manager contain this type of fraud risk?

• Keeping tight control over the approved supplier list.
• Segre­gation of duties between who is respon­sible for adding/removing suppliers and who is respon­sible for paying invoices.
• Limiting the number of employees who can approve suppliers.
• Documenting and period­i­cally testing the procedure for adding new suppliers.
• Period­i­cally scanning the list and randomly confirming the existence and legit­imacy of suppliers.