A former controller for G&J Pepsi-Cola Bottlers, Inc. plead guilty to a wire fraud charge, and will serve 96 months in prison.  Fortunately for G&J, the individual also agreed to repay $7,700,000 of the alleged $8,700,000 in fraudulent losses. According to the FBI, the former controller created a separate, illegitimate vendor that closely resembled one of the company’s vendors. The controller would write checks to this vendor, cash the checks into a bank account held in the phony vendor’s name, and subsequently transfer the funds into his own personal account.

Unfortunately, stories such as these are all too common in today’s business environment.  According to the 2016 edition of the Report to the Nations on Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners, billing schemes such as the one described above accounted for nearly 30% of all fraud cases studied, and last roughly two years before being detected.  On average, a fraud of this nature costs a victim company of less than 100 employees approximately $150,000.

Although not all frauds are preventable, and no organization can be completely free of fraud risk, here are a few quick and easy internal controls companies can implement to avoid vendor and billing fraud:

  1. Review Active Vendor List – The company should periodically review its list of approved of vendors, removing any vendors with which the company no longer does business. The addition of a vendor to this listing ought to be limited to individuals within the accounting department, with the request generated by an individual in the purchasing department. Any new addition to this listing should be reviewed and approved by a second person.  Finally, a company should periodically cross reference its check register against the approved vendor listing to ensure all payees are an approved vendor.
  2. Cross-Reference Vendor Addresses with Employee Addresses and P.O. Box Addresses Often times, the employee creating the fake invoice for the phony vendor will use his or her address. Therefore, one common method of detecting such a scheme is to cross-reference the company’s vendor addresses with employee addresses.  Any matches should be investigated by the company.  Additionally, a company should pay close attention to those vendors that only use P.O. Box addresses or have incomplete vendor profiles (such as the lack of a tax ID number), as this could be an indication of an illegitimate vendor.
  3. Match Invoice to Goods or Services Received – All vendor invoices should be matched to the original purchase order and receiving reports from the company. In the case of services (i.e. janitorial services), confirmation that the services were performed should be made to the responsible individuals within the company.

Companies of all sizes are susceptible to this threat; however, Barnes Dennig’s Certified Fraud Examiners can help your company devise an internal control system strategy to mitigate chances of accounting fraud.  If you would like additional information on our fraud services, call us at (513)-241-8313 or click here to e-mail us.