Fictitious vendor fraud is one of the more dangerous ways employees steal. Today we look at how this theft works and how to prevent it.
Your accounts payable director (Susie Jones) sets up a fictitious vendor: ABC Project Management. Susie keys the new vendor into the payables system using her sister’s—Joan Albert—personal home address. (The payables director is the only person tasked with reviewing new vendors.) Susie also creates fictitious consulting invoices to support payments made to ABC Project Management.
The computer signs the checks. Therefore, no one reviews the invoice prior to physically signing a check. Joan receives the signed checks through the mail.
Joan opens a bank account in the name of ABC Project Management. She is the sole authorized signer. She deposits the ABC Project Management checks into the new bank account. Then, she writes checks—from the ABC Project Management bank account—to herself and Susie.
What’s the weakness? Susie is the only person reviewing new vendors for appropriateness. No one outside of the accounts payable department is performing periodic reviews of the vendor files.
If possible, have the company’s computer system automatically email Susie and the controller (a person outside of the accounts payable department) each time a new vendor is added. The email should provide the name and address of each new vendor, and the name of the person that made the addition.
Require the accounts payable department to archive vendor verification documentation such as:
Additionally, the company can also compare payroll addresses to vendor addresses using software packages such as IDEA or ACL. (Sometimes an employee will use their personal address in a vendor fraud such as the one above, rather than that of an accomplice such as a sister.)
Also, ask an outside CPA or Certified Fraud Examiner to sample and verify selected vendors. Accounts payable personnel are less likely to steal when you consistently perform such tests.
For more information, read my article about auditing accounts payable.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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