5 Common Vendor Fraud Schemes to Watch Out For

Businesses are more concerned than ever about protecting their bottom lines. One way a company’s profits could take a major hit is if it’s struck by vendor fraud. But by recognizing the signs of this crime and initiating a timely investigation, businesses can minimize the resulting losses.

If vendor fraud or another fraudulent scheme is suspected, a fraud expert’s involvement is critical. A forensic accountant can confirm suspicions and help build a case to recover the perpetrator’s ill-gotten gains. Here are five common schemes to watch out for:

1. Bid rigging.

Two or more vendors can conspire to steer a company’s purchase of goods or services through different types of bid-rigging schemes. A bid-rotation scheme calls for all participating vendors to submit bids while taking turns as the low bidder.

Under a bid-suppression scheme, two or more vendors illegally agree that at least one of the participants will withdraw a previously submitted bid or not bid at all; the intent is to ensure acceptance of one particular bid. Complementary bidding is marked by competing vendors submitting token bids with a high price or special terms that will make them unacceptable to the company.

2. Price fixing.

Contrary to popular belief, price fixing is not only an agreement among competitors to set the same price for goods or services. It also refers to competitors jointly establishing a price range or minimum price. Such agreements violate the Sherman Antitrust Act, regardless of whether the prices are unreasonable.

3. Market division.

Market division occurs when competitors agree not to compete in a specific segment of a market — whether based on geography or customer type. If bids are solicited by a customer in that segment of the market, the competitors either won’t bid or will submit complementary bids. The lack of truly competitive bidding drives up the price for the soliciting company.

4. Kickbacks.

Vendors pay kickbacks to an employee who facilitates his or her employer’s payment of a fraudulent invoice. The vendor typically incorporates the kickback amount in the price charged, thereby compounding the amount the company is overbilled.

5. Overbilling.

Kickbacks aren’t the only vehicle for overbilling a company. Vendors can submit invoices for their goods and services that are inflated in several subtle ways. For example, the price charged may exceed the prices agreed upon in the related contract. In other cases, the invoice might reflect charges for more goods than the customer actually received. Or a vendor could alter the date on a genuine invoice and submit for duplicate payment.

To discuss how your case relates to the specifics mentioned in this article, please contact (423) 756-7771 for more information.