Employee theft is a major issue costing companies $50 billion annually, or seven percent of all business revenues, according to statistics from the Static Brain Research Institute. SBRI further asserts that 33 percent of all business bankruptcies result from employee theft. Given the threat to your business, it pays to know the signs of employee theft, including theft by deception, otherwise known as fraud. One scam we think every business owner should recognize is the phony vendor.

A phony vendor scam works like this: an employee who has some or all of your purchasing authority decides to steal from your business. He or she fabricates invoices from a fictitious vendor and directs the payment to his or her own bank account. Large companies that deal with numerous vendors have difficulty spotting the scam due to the sheer volume of invoices they must process. But smaller companies often fail to catch on, because they lack internal controls.

Recently, an article from Thomson Reuters outlined certain clues that often indicate a scam is afoot:

• Incomplete information on invoices — Phony invoices tend not to have the level of marketing and identifying company information you normally expect to see. Phone numbers, taxpayer ID numbers, a specific street address, etc. are often absent.
• Suspicious company names — The phony vendor may have a sound-alike name that is similar to a legitimate company or the title of the company could be very cryptic. If you don’t recognize the company right off, a red flag should go up.
• Fewer invoices for large amounts — Scammers generally don’t like to deal with small amounts too often.
• Services rather than goods — Scammers prefer to bill for services because goods require a receiving record as well. Of course, if your company is lax in its controls, the scammer can work around that issue.

Additionally, you won’t find any credit memos connected to the phony vendor because the scammer won’t make or claim billing errors related to the account. All payments will be prompt with one invoice per check rather than any bundling, and the invoice amounts will be fairly consistent. Finally, you should be able to trace all the invoices back to the same employee.

All of this is useful information. But we can add a few of our own insights with this problem. First, expect fraud. As soon as you decide your employees are above suspicion, it’s open season for fraudsters. Second, keep your books clean, clear and up to date. When your accounting is sloppy, you can’t recognize the signs of fraud. Third, make fraud risk assessments part of your internal auditing plan. And fourth, contact Breon & Associates to learn about our proprietary tools that enhance your defense against a wide variety of fraud schemes. On average, an employee fraud scheme against a company lasts for two years before it’s discovered. Shouldn’t you act now to learn if you have something to worry about?