Reducing Vendor Fraud Risk

All organizations can use the free U.S. federal Excluded Parties List System during their procurement processes to find questionable vendors and reduce the risk of fraud. CFEs and auditors should use this little-known Internet database in fraud examinations.

Jodi Rock, the manager of Tindermark Corporation’s purchasing department, received a call from the company’s manufacturing plant complaining about some of its raw materials. According to Sam, the plant manager, the materials were causing all sorts of headaches because they were not within the specifications required by the engineering department. Tindermark’s internal audit department investigated the problem. They found some interesting information about the vendor in question. Two years earlier, the U.S. federal government had brought a successful suit against the same vendor for supplying substandard materials to the Army.

USING THE EPLS TO PREVENT VENDOR PROCUREMENT FRAUD 

This fictional illustration presents a potentially costly example of vendor procurement fraud. To fight this type of fraud, CFEs and auditors can use a little-known U.S. federal database, the Excluded Parties List System (EPLS). The EPLS was created by a Presidential Executive Order in 1986 as a central file of all individuals and organizations excluded from participation in federal programs. It’s now a comprehensive, publicly available Internet database that is updated in real time by all federal agencies.

In our fictitious example, if Tindermark’s policies had specified that all potential vendors had to be vetted through the EPLS, management would have found that the vendor in question was excluded from doing business with the federal government for a procurement violation entered by the Army with the cause code “A” (a willful failure to perform in accordance with a government contract). With that knowledge, Tindermark would not have done business with this vendor. The corporation would have avoided problems ranging from production delays, overbilling, costs to replace materials, reworking of products, to even possible litigation because of the poor quality of Tindermark’s products. 

HOW IS VENDOR FRAUD PERPETRATED AND HOW EXTENSIVE IS IT? 

Problem vendors can defraud their customers in many ways. The National Procurement Fraud Task Force, created by the U.S. Department of Justice (DOJ) in 2006, noted that procurement fraud includes bid rigging, bribery, embezzlement, false claims and money laundering. 

 PricewaterhouseCoopers found that legitimate vendors perpetrate fraud against their customers by inflating prices, delivering and/or billing for incorrect quantities and providing unnecessary services. In addition to outright fraud, companies can perform poorly when vendors are unable or unwilling to provide satisfactory products in an acceptable time frame.