Vendor fraud is one of the biggest dangers facing businesses today. Small businesses are at risk because they can be completely wiped out by a single case. Meanwhile, big businesses make terrific targets because it is easier for the fraud and its effects to slip through the cracks. The ways that businesses can protect themselves is through awareness and proper controls. However, most businesses that fall victim to vendor fraud do so because they are unaware that the problem even exists. Being aware of how this criminal activity is perpetrated and where a business is vulnerable is the key to being able to prevent it in the future.
Some of the more common forms of vendor fraud include:
* Shorting shipments or services – Just because a business agrees to terms on a deal does not mean that those terms will be honored. Especially in cases where payment is made prior to receiving ordered goods or services, there are rampant examples of only portions of orders and services actually being delivered. Companies who engage in this fraud typically depend on the cost of taking legal action against them being greater than the cost of what was not received.
* Overcharging – This describes vendors who charge significantly more for a product than could be received elsewhere. This typically takes place in industries where total price is determined after the fact (e.g.
construction) or with vendors who deal with businesses who may be ignorant of their industry and will accept any offer that "sounds fair" regardless of the fact that it is much greater than the going rate. Knowledge and research are the greatest weapons against this type of fraud.* Inferior Goods – We can liken this to the used car salesman who sells the customer a car only to have it breakdown two miles down the road. Unfortunately, this type of activity is not limited to used car salespeople and lemons. It is pretty common for businesses to get ripped off for inferior products when using a new vendor the first time. By cutting corners on his end, the vendor has saved money in his cost of production which leaves the customer with the choice of putting together what they know will be an inferior product or to go to a different vendor for greater quality, essentially paying double what they should have.
Unfortunately, a great deal of this fraud actually involves a company's own employees. Some of these schemes would never be able to get off the ground without some help from the inside. Common forms of vendor fraud that use an internal 'mole' include:
* Shell companies – This is a situation where employees who can control or affect payments will setup a fictitious company and make payments to it, essentially embezzling money to themselves. Their strategy to get away with this depends on one of two things: their employer is too big or has too large of a volume of payments to catch the occasional stray dollar amount or there is no oversight into payments made and as long as the books are not completely out of whack, nobody will notice (one would be surprised how often this occurs).
* Kickbacks/Bribes – This typically occurs in conjunction with one of the aforementioned items. In this case, one of a business' own employees will select a vendor that engages in overcharging or selling inferior goods even though there are better suppliers available. They do so because the fraudulent company gave them a bribe to do so. Employees will often feel less guilty about this type of behavior because they are not actually the ones providing the poor end service – but they might as well be.
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