Accounting Information Systems: The Processes and Controls, 2nd Edition

THE NATURE OF VENDOR FRAUD (STUDY OBJECTIVE 6)

Vendor fraud occurs when vendors obtain payments to which they are not entitled. Unethical vendors may intentionally submit duplicate or incorrect invoices, send shipments in which the quantities are short, or send lower-quality goods than ordered. Vendor fraud may also be perpetrated through collusion. For example, an employee of a company could make an agreement with a vendor to continue the vendor relationship in the future if the employee receives a kickback.

More and more companies are conducting vendor audits as a way to protect themselves against unscrupulous vendors. Vendor audits involve the examination of vendor records in support of amounts charged to the company. Since many vendor contracts involve reimbursement for labor hours and other expenses incurred, the company can review supporting documentation for these expenses incurred by its vendor. This could reveal whether or not the vendor is honest in reporting expenses, and may be the basis for continuing or terminating the business relationship.