In order for a business to reduce risk associated with fraud, waste and abuse, it must routinely evaluate the many vendor relationships it relies upon to achieve its financial goals and objectives. Through ongoing evaluative assessments, businesses can identify the risks and benefits of vendor relations to strategically increase value and maintain business continuity.

According to Kroll in their recent Fraud and Risk Report, one out of five companies surveyed had fallen victim to fraud as a result of a vendor relationship, while almost half "felt particularly at risk of threats such as vendor, supplier or procurement fraud."

Contracting with an outside third party subjects a business to risks with the potential for significant financial and reputational harm. These can take the form of fraud, breach of contract, error, breach of confidentiality, data loss and so on. The risks associated with vendor relationships, however, can be unique and may vary depending on the vendor as well as the service or process outsourced.

The good news is that these risks can be mitigated or reduced through investigative research and assessment which will provide information to support management in the decision making process before there is a problem.

Be on the lookout for these warning signs or "Red Flags":

Red Flags

Red Flag: Don't Knock on my Door

In a recent vendor management engagement, the vendor's address appeared to be valid. However, a search of the address noted it was a residence owned by a different person than the vendor. A further search of state databases indicated that the company was registered at another address. The address was determined to be a closed down warehouse.

Red Flag: Sorry, I Can't Take Your Call Right Now, Please Leave a Message….

Good vendor management consists of verifying all the information, to include the various phone numbers. For instance, are you constantly receiving voice mails and return calls from a "blocked" number?

Red Flag: Who Really Owns the Company?

Vetting the principals is important. Be sure to ask a few key questions such as who they are, do they own assets and who their spouses are. Additional queries should include: Do their social media profiles match their business profiles and why is a company name missing on the business profile of a principal but clearly noted on the social media profile? The details matter! For example, in a recent case, the principal spelled his name differently on different social media profiles.

Red Flag: The Numbers Just Don't Add Up

In another case, net sales for 2015 were reported at $2.3M. Interesting information and worrisome at the same time when it was revealed that the company was in business for only six months. This became problematic when a search of tax information indicated the business filed a welfare benefit Form 5500 to report their financial condition, investments and operations and depicted $400,000 in assets in 2014 while other documents indicated the company was not actually opened until 2016.

Red Flag: The Pieces Just Don't Fit

Inconsistent reporting was glaring in the same case cited above where a merger and acquisition was noted in 2015 yet political donations were recorded for a candidate in 2012! A search of patents and trademarks located a result for one principal. Again, this was in contrast with information noted on the business profile and social media profile.

Red Flag: Show Me the Money

In another matter, a search of liens and judgments noted multiple occurrences highlighting possible financial issues.

Red Flag: The Truth is Inconvenient

Searches of residential property may not match other documents provided by the principal of the company. The principal states they have professional licenses and while registration was located, it had expired.

Red Flag: It Is Not What you Know, but Who You Know

In one case, a search of the principal's business partner indicated a possible criminal history for fraud. In such a circumstance, the principal's loyalty might be compromised in favor of the partner regarding financial transactions.

So what do these red flags teach us?

It is important to be proactive, rather than reactive when considering working with any vendor. Whether a company is considering a new vendor or has questions regarding a current vendor's behavior, an on-going evaluative assessment process can often take only a few hours of investigation in order to avoid many hours of lost time, headaches and costly mistakes. Don't ignore the waving red flags. Good vendor management, present and future, makes good dollars and good sense.

 

For more information on this critical topic, please visit www.sobel-cpa.com or call Jim at 973-994-9494 or email james.mottola@sobel-cpa.com or view Kim Miller on LinkedIn at https://www.linkedin.com/in/kimmiller6