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Stealing in plain sight: Know thy vendors…

 

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Miami is known for many things –natural beauty, beautiful people, great weather and South Beach. That aside, it is also the fraud capital, not only in terms of Medicare and Medicaid, but in mortgage fraud, identity theft, and potentially in the area of vendor fraud.

Often I have found that fraud discussions and seminars seem to relate to the aforementioned. I have attended many seminars and no one focuses on what I believe is the most crucial potential for fraud that exists –approved vendors sitting in vendor master files. These are vendors you use every day, many who are legitimate and provide excellent and timely services. However, when I ask financial or supply chain managers about the number of active vendors they have or what they know about their vendors’ potential undisclosed relationships and related conflicts, I typically get the “deer in the headlights” stare or an off the cuff response.

Once a fraudulent vendor gets into the accounts payable system, it is like a Trojan horse or computer virus that upon release could cause havoc. Losses due to misappropriations may cost companies hundreds of thousands if not millions of dollars, not to mention loss of reputation and or career for those executives who allowed this to occur. Even worse, it often occurs in plain sight, no back alley deals or brown paper bag brush bys. Everyone knows the vendor and often uses them as the “ people who come to our aid at all hours of the day or night. They are the go to people that get the job done.”

While they may be a trustworthy loyal vendor, do you really know who they are? Do you know if they have relationships with your other vendors or employees? Do they have related companies? Have you even looked to see if the three bidders (in a three bid process you obtained to protect your company) are related and the bid is rigged? Proper and thorough up-front vetting can be used to detect and prevent these problems.

Accordingly, organizations need a robust, vendor on-boarding process which thoroughly and completely requires vendors to submit to an in-depth review in order to identify potential conflicts with existing employees and management of the organization with whom the vendor is trying to do business.

Pertinent data is entered by the vendor and then is sent out through various public databases; concurrently, information is obtained allowing management to make an intelligent decision regarding whether to engage the vendor.

Not only does this improve internal controls, but also identifies conflicts before a vendor is on-boarded while highlighting other anomaly data and improper relationship issues. In some systems, the vendor pays a fee to do business with the organization; in essence, it is a zero cost proposition to the entity choosing to use it!

Our experience shows what well intentioned and highly educated managers, in an effective if not excellent control environment, can often leave themselves and their organization vulnerable to fraudulent vendors if they don’t know what they don’t know. In this case what you don’t know can really hurt you and your organization!

Vendors beware! Companies know thy vendors…

Joseph M. Palmar, CPA, CFE, CFF is the President of Palmar Consulting Group, Inc a Miami based forensic accounting firm specializing in vendor fraud and related matters. Visit them at www.palmarconsulting.com.

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