How to prevent the fake supplier fraud

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.

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