The terms “procurement fraud” and “vendor fraud” are often used interchangeably. But procurement fraud encompasses a broad range of schemes, some of which don’t involve vendors. Following are six common schemes and some red flags to look for.
1. Phantom vendor
An employee sets up a fictitious vendor and uses it to submit false invoices.
Red flags: Photocopied invoices; payments without supporting invoices; and suspicious vendor addresses, such as an employee’s address or a P.O. box.
2. Conflict of interest
An employee abuses his or her position to award contracts to vendors in exchange for personal gain.
Red flags: Employee lifestyle changes and resistance to switching vendors and raising prices.
A vendor pays kickbacks to employees who facilitate the payment of false or inflated invoices. Often, the price is increased to cover the amount of the kickback.
Red flags: Vendor consistently wins contracts with no apparent competitive advantage; paid invoices lack appropriate supporting documentation; and an employee develops close friendships with vendors.
4. Bid rigging
Two or more vendors coordinate their bids to eliminate competition, thus increasing the price, including:
• Bid suppression — vendors agree to refrain from bidding,
• Complementary bidding — vendors agree to submit bids with unacceptable terms,
• Bid rotation — vendors conspire to take turns submitting the lowest bid, and
• Collusion — insider information is used to prepare a winning bid.
Red flags: The same vendor consistently submits winning bids; the same group of vendors appears to take turns submitting the winning bid; some bids are much higher than published price lists or previous bids by the same vendor; and winning bidders subcontract work to one or more of the unsuccessful bidders.
5. Duplicate or false invoices
A vendor submits duplicate or false invoices for products or services that weren’t delivered, usually in collusion with an employee.
Red flags: Multiple payments to a vendor in the same or similar amounts or for the same invoice number; photocopied invoices; and lack of appropriate supporting documentation.
6. Price fixing and defective pricing
Price fixing includes bid rigging and other anticompetitive agreements among vendors to maintain or raise prices. Defective pricing occurs when a vendor uses inaccurate or incomplete pricing data to reach a price agreement or it charges a higher price than the company agreed to.
Red flags: Prices don’t change over time; price increases aren’t supported by increased costs; vendors eliminate discounts that were customary in the past; and vendors charge lower prices to customers in other geographic areas.
Once procurement fraud occurs, recovering losses can be a challenge. So it’s important for a company’s management and outside advisors — including forensic accountants and fraud experts — to spot the warning signs and investigate immediately.