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.  The red flag to watch for are 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.  One indicator of such behavior is that the employee’s lifestyle changes and he/she shows resistance to switching vendors and raising prices. 

3. Kickbacks – 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.  Typically, indicators of kickbacks include vendors consistently winning contracts with no apparent competitive advantage; paid invoices lacking appropriate supporting documentation; and an employee developing close friendships with vendors.

4. Bid Rigging – Two or more vendors coordinate their bids to eliminate competition, thus increasing the price, including:  

• Bid Suppression – Includes vendors agreeing to refrain from bidding
• Complementary Bidding – Vendors agree to submit bid 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. 

Some indicators of such activity include the same vendor consistently submitting 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.  Key red flags are multiple payments to a vendor in the same or similar amounts or for the same invoices 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.  Business owners typically find in cases of price fixing and defective pricing that 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.  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.   

Matt Stelzman is an Accredited Valuation Analyst (AVA) and Certified Forensic Financial Analyst (CFFA) designated by the National Association of Certified Valuation Analysts. Matt has over 10 years of experience in business valuation and litigation support services.  Matt works in the Specialized Services Group of Henderson Hutcherson & McCullough, PLLC.  For more information visit their website at www.hhmcpas.com or call Matt directly at 423 702-8147.