• Substitution. A company engages a vendor to provide specific goods or services. Without approval or notification, the vendor substitutes cheaper goods or services.
• Too much for too little (or nothing at all). The vendor falsifies or alters records to note that a company received the agreed-upon product or service. In reality, the vendor didn't provide what was described in the purchase order, contract, or other purchase authorization documentation.
• Shell companies. In these scams, vendors set up phony companies that provide goods or services at inflated prices. Alternatively, they may fail to provide any goods and services yet bill for, and receive, payment related to such purported goods and services.
• Gifts and gratuities. Dishonest vendors will sometimes offer cash or items of value to a customer's employees. In exchange, these employees assist in (or at least turn a blind eye to) the fraudulent activity.

If you're concerned about the possibility of vendor fraud, here are some steps for you to take to help detect and prevent it:

1. Require vendors to sign and adhere to a code of conduct. If a vendor is in place over multiple years, ask it to sign a new code of conduct at the beginning of each calendar year.
2. Implement periodic rebidding (one to five years) for all significant vendor contracts. Consider engaging a third party to ensure that all bids are reviewed and given equal consideration.
3. Develop a robust verification process when creating new vendor accounts. This process should include a review by an employee who isn't involved in the vendor account creation process. The verification should include checking out the vendor's Web site, yellow pages listing, and ownership.
4. Rotate procurement staff. Periodically transfer your buyers among departments or divisions.
5. Implement a sample examination of vendor payments. The sample should include significant payments, frequent payments to the same vendor, and first-time payments to new vendors. Share the selection criteria with a limited team of staff members and take extra care not to accidentally broadcast the criteria. For example, don't name data queries to correspond to the selection criteria and then store those files on the company's shared file server.
6. Ensure that only authorized employees have permission to create new vendor accounts. This includes ensuring that employees who leave the company or transfer to other departments can't access the accounts payable system.
7. Reserve the right to conduct a vendor audit. If you determine that an audit is needed, yet the vendor declines the request, you may elect to cancel the vendor's contract or pursue litigation.
8. Verify that all phone numbers shown in vendor correspondence belong to the company. Consider performing reverse lookups of phone numbers to verify.

Like all fraud, vendor schemes can be costly if not detected early. Your forensic accountant can help ensure you have the right internal controls in place.