Recent vendor fraud schemes: What you need to know now

Vendor fraud poses a unique threat to governments. Due to the public and transparent nature of their operations, government entities have an increased susceptibility for this type of criminal activity. Since governments publish a significant amount of information online — for example, meeting minutes, which often contain vendor names, contract amounts and project status — it is easier for fraudsters to create falsified documents.

Baker Tilly’s state and local government specialists have studied recent fraud cases where criminals falsified vendor change requests for legitimate vendors, including company addresses and bank account information for Electronic Fund Transfers (EFT).

When governments unwittingly process these fraudulent changes, the perpetrators can collect payments on legitimate and approved vendor invoices — while legitimate vendors go unpaid.

Protect your government

Preventing vendor fraud completely may be impossible; however, governments can go a long way towards protecting themselves by taking appropriate safety and control measures.

Help ensure your governments’ vendor transactions are secure and authentic by taking these steps:

1. Assess your risk: Perform a thorough risk assessment that focuses on the important questions every government should ask about their vendor accounts payable activities:

• What types of payments are made by your entity?
• Has your accounts payable department had recent staff turnover?
• Do you have significant construction projects in process?
• Are payments made by a centralized department?
• Are there any exceptions to standard payment and approval processes? If so, are the reasons for exceptions clearly understood and documented?
• Do you have a formal process for documenting the verification and review of vendor changes?

2. Monitor existing controls: Periodically revisiting your control activities is essential to any internal control environment, particularly in today’s climate where both fraud techniques and the technological landscape evolve rapidly. Specific to these recent cases, consider your controls over system changes to vendor information.

• Have you sufficiently limited access to making vendor changes?
• Does a vendor change require an independent review?
• Is vendor information verified for accuracy through a public records search, communication with the vendor using original contact information or other means? (Do not assume that a check image or W-9 form is sufficient to prove legitimacy of the change as these items can be falsified.)
• Do you have a formal process for documenting the verification and review of vendor changes?

3. Build awareness: Educate your employees on potential fraud schemes and identify which vendors may be high-risk targets. It is also important for employees to know what steps to take if they suspect fraud (either internal or external) including reporting protocol when potential red flags emerge.

Want to enhance your government’s vendor fraud protections? Contact our team for more information on this topic or to learn how Baker Tilly state and local government specialists can help.