10 Things You Can Do to

Prevent Vendor Fraud

Presented by:

Jennifer Schiefert, CPA/ABV/CFFjschiefert@sdkcpa.com

Cassandra Elgersma, CPA/ABV/CFFcelgersma@sdkcpa.com

Agenda• SDK’s Forensic Accounting

& Valuation Services• Fraud IQ• Define Fraud• Discuss the Fraud Triangle• Vendor Fraud Schemes• Red Flags of Fraud• 10 Ways to Prevent Fraud

Forensic Accounting and Valuation Services

• Lit ig a t io n : consulting with attorneys regarding financial aspects of legal matters

• F r a u d : investigating estimated losses due to fraud.

• E x p e r t Te s t im o n y : providing expert testimony before courts, administrative boards, and arbitration panels

• Va lu a t io n : determining the value of businesses in a variety of situations

• M a r it a l D is s o lu t io n s : assisting attorneys with property division, child support, and alimony calculations

Fraud IQ1. Which of the following fraud

schemes generally does not leave an audit trail and, consequently, is among the hardest to detect?

a. Sales skimmingb. False billingc. Check tamperingd. Inventory theft

Fraud IQ

(a) Skimming – theft of cash receipts before they are entered into the accounting system

Fraud IQ1. The employee hotline for Aspiring Inc.

received an anonymous call alleging that several employees are receiving kickbacks from a local vendor. Management has decided to launch a formal investigation into the allegations. Who should be primarily responsible for directing the fraud examination?

a. The head of the company’s security departmentb. The partner of the company’s external audit firmc. The company’s legal counseld. The company’s human resources manager

Fraud IQ

(c) The company’s legal counsel – an investigation into alleged employee theft is a minefield of legal pitfalls

Fraud IQ1. Charlotte Grey, CPA, is conducting the annual

audit of XYZ Corp.’s financial statements. While performing the yearend inventory procedures, she notices that several inventory items are regularly purchased at prices above the industry standard. These same items are also frequently purchased well before the typical reorder point and are, therefore, consistently overstocked. She notes that XYZ has recently changed vendors for these items, and she can’t locate the new vendor on the company’s approved vendor list. Which of the following fraud schemes might these findings indicate is occurring?

a) Inventory theftb) Asset overvaluationc) Briberyd) Lapping

Fraud IQ

(c) The combination of findings that Charlotte Grey discovered could indicate that a bribery scheme is occurring

Fraud IQ1. Thoroughly examining canceled

checks that are returned with the bank statement and reviewing vendor complaints regarding nonpayment are both proactive tests that can help detect:

a) Shell company schemesb) Forged endorsement schemesc) Skimming schemesd) Fictitious refund schemes

Fraud IQ (b) Forged endorsement

schemes are a form of check tampering in which an employee intercepts a company check intended for another party, fraudulently endorses the check, and uses it for his or her own benefit

Fraud IQ1. When returning a stapler he borrowed from a

co-worker, Joe Kiebler noticed a notebook on the co-worker’s desk that contained what appeared to be a second set of accounts receivable records. Kiebler managed to quickly read among the scribbles: “Sept. 2, Customer A, $3,200,” “Sept. 3, Customer B, $2,900,” and “Sept. 5, Customer C, $2,650—need $2,400.” What type of scheme did Kiebler most likely catch the co-worker perpetrating?

a) Lappingb) Kitingc) Altered payeed) Shell company

Fraud IQ

(a) During a lapping scheme, the perpetrator embezzles money from one customer’s incoming payment, then attempts to cover that payment with later receipts from other customers

Fraud IQ1. Which of the following might

be a warning sign of a shell company scheme?

a) A vendor that is not listed in the phone book

b) An unexpected and significant increase in “consulting expenses”

c) Invoices lacking details of the items purchased

d) All of the above

Fraud IQ

(d) A shell company is a fictitious vendor created by a fraudster for the sole purpose of generating false payments form the victim organization

Fraud

A deliberate deception in order to secure unfair or unlawful gain.

Fraud TriangleOpportunity

RationalizationPressure

Pressure

This element stems from a perceived pressure the fraudster is trying to cope with.

Perceived Pressures

• Gambling, drug, alcohol addictions, etc.

• Financial problems• Status gaining• Meeting performance

expectations

Opportunity

This is one of the three elements of the fraud triangle that we can significantly impact through various fraud prevention techniques.

Excessive Opportunity

• Too much trust in key employees

• Too few people with too many responsibilities

• Lack of work being reviewed• Unclear lines of authority

and responsibility

Find the Fraudster

…Who You Least Expect

2 7 .5 % Frauds committed by

key employees with 10+ years of

service

2 4 .6 % Frauds committed by

employees with 5-10 years of service

3 6 .1% Frauds committed by at

least two perpetrators

8 7 .4 % Frauds committed by

perpetrators with NO prior criminal record

Rationalization• The 3rd element of the

fraud triangle• Hardest element to combat• However, a reduction in

the perception of opportunity and pressure will mitigate rationalizations by potential fraudsters

Vendor Fraud Schemes

• Kickbacks• Fictitious Vendors• Poor Quality Goods• Overcharges• Incorrect Quantity of

Goods

Employee Red Flags

• Employees living beyond their means

• Personal financial problems• Close employee-customer

relationships• Gambling, substance, or

other addiction• Employee’s motivation to

beat the system

Invoice Red Flags

• Initials in Vendor Name• PO Box• Even Dollar Amounts• Lack of Purchase

Order for Goods

Analytical Red Flags

• Multiple Vendors at Same Address

• Employee Vendor Match• Prison Addresses• Consecutive Invoice

Numbering• First Payment Small Relative

to Other Payments• Benford’s Law

’ Benford s Law

10 Ways to Prevent Vendor Fraud

2. Ethics Hotline3. Awareness education4. Perform background checks5. Mandatory vacations6. Segregation of duties

10 Ways to Prevent Vendor Fraud

1. Keep your eyes open. Look for the obvious red flags

2. Do the simple things3. Periodic in depth analysis4. Invoice approval process5. Vendor controls

?Questions