Vendor Fraud

Finding Deals Gone Awry

By David G. Banks, CFE, CIA

Fraud examiners, working with teams of diverse staff members, can discover deceitful vendors by conducting regular audits. 

The company's reputation was good. There were no complaints from the product's users. Everything was looking good until... "Walt" stared at the vendor's 1099 tax forms. Here was incontrovertible evidence that the vendor was defrauding his company - with inside help! A pipe dream? Hardly. It can happen when fraud examiners perform careful vendor audits.

Just a decade ago, most companies never even thought of auditing their vendors. Times are changing. With the advent of new complex pricing arrangements such as time and materials, cost-plus, and list-less agreements, even purchasing departments are recognizing the need to verify critical vendor data. When vendors promise to build a warehouse for a fixed percentage over their cost of materials and labor hours, who verifies the underlying data? When a vendor agrees to sell goods at a fixed markup over cost, who verifies the real cost? Even experienced purchasing executives find themselves feeling like teenagers in a used-car dealership. Today, more executives are relying on fraud examiners to verify contract compliance through quick, hard-hitting vendor audits.

Right-to-audit Clause 

On first exposure to vendor auditing, most fraud examiners wonder how to persuade vendors to allow audits of their transactions. The answer is simple. Your company's purchase order must contain a "right-to-audit" clause. Carefully examine one of your company's purchase orders. Look on the back as well as the front. The language is often buried in the "Terms and Conditions" language printed on the back of many purchase order forms. (See sidebar at right.) If the right to audit is already contained in the purchase order "boilerplate," you're in luck. If not, you'll need to introduce the concept to your purchasing, legal, and senior management.

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