Most businesses work with a wide variety of vendors: some great, some good, and some who may attempt to defraud your company. How can you make sure you're not the victim of vendor fraud?
It starts with building a good relationship with your vendors. Building a good relationship not only helps you avoid fraud or for your vendors, to be tempted to commit fraud but also could benefit your business in other ways, creating the classic win-win situation.
Your goal should be to build strong vendor alliances that create mutually-beneficial partnerships. So let's start with the basics of building that relationship; then we'll focus on further ways you can detect and avoid fraud.
Work together. Vendor relationships don't have to be adversarial. The best are based on clearly defined expectations, guidelines, and structures. Start by letting your vendor know what to expect in terms of quality, communication, delivery schedules, etc. Also let your vendor know what documents you expect to receive from them especially documents that will help you avoid potential fraud. For example, you may require a specific type of packing list or other shipping documents that help you more easily verify the type and quantity of the goods you receive.
You can earn respect and start to build trust up-front by asking the right questions and providing clear expectations. If your vendors see you as a valued, long-term partner, they will be much less likely to take advantage of you.
Be honest. You create trust through honesty. If you deceive your vendors why shouldn't they consider deceiving you?
Respect the vendor's right to make a profit. You're in business to make a reasonable profit and so are your vendors. While you should always try to get a great price, don't expect your vendors to take a loss for the "privilege" of earning your business. Cut margins to the bone and vendors might be tempted to find ways to artificially increase those margins: reducing quality, short-shipping, making late deliveries, over-invoicing. Treat others the way you wish to be treated. Mutually beneficial pricing will create sustainable and profitable partnerships.
Ask for their help. Your vendors often know a lot about your business, and can suggest ways to not only improve how you work together but also improve your business as a whole. If you're concerned about what information you might share, have your vendors sign a non-disclosure agreement first. Again, treat vendors with respect and they will be much more likely to respect you in return.
A good vendor relationship is built on honesty and trust but trust is often based on verification. To confirm your vendors and your employees are on the up-and-up, here are some basic steps you should take:
- Audit shipments received. Don't assume all items listed on a packing list were actually provided. Set up procedures to check all incoming shipments; if possible, assign multiple people to the process. One can check shipments for accuracy, another can check off items as they are placed in inventory, etc. Don't assume accuracy; even if there is no intent to defraud, everyone can and will make mistakes once in a while. Why pay for something you did not receive?
- Audit purchase orders and invoices. Know what your company purchases. Check prices. Match the terms against your original agreement. Make sure invoices match purchase orders. And put in place a system to ensure items were received and services were rendered for the invoices you pay. Some services may not have been needed; frequent preventive maintenance, for example. Never blindly pay an invoice and never assume all invoices are accurate. Again, even if there is no intent to defraud, everyone makes mistakes. Know what you asked for and know what you paid for.
- Call new vendors. Sadly, a common form of vendor fraud is based on a "phantom" vendor created by one of your employees. Invoices are received and paid but services are never rendered or goods provided. Calling new vendors to introduce yourself is an easy way to prevent phantom vendors.
- Check in regularly. Call vendors on a regular basis. Ask questions. Find out if order quantities have changed dramatically in recent weeks (which may alert you to problems with your own employees). Ask if they have noticed any problems on your end, or encountered any difficulties that may have affected quality, delivery, etc. You may not learn a lot but you will implicitly let vendors know you not only care about the relationship but are also on top of it.
- Regularly request new bids. Kickbacks are not particularly common, but they do happen. In some cases an employee will agree to pay a higher price in return for a portion of those excess profits. The best way to identify potential kickbacks is to regularly request bids from other vendors; you'll quickly determine when prices are significantly out of line. In some cases, paying higher prices may simply be an oversight; either way, you'll lower your costs and decrease the chances of fraud.