How the Fraud Worked
Two Kansas men pleaded guilty in 2010 to conspiracy to commit wire fraud against Burlington Northern Santa Fe Railway (BNSF).
To prevent a similar scam from taking place at your organization, consider taking the following steps:
Communicate your company’s ethical code. A well-written code of conduct plays an important role in setting an ethical tone in which employees are expected to transact business. It is important that this code include a section dedicated to vendor selection and management. In addition, in order to ensure that vendors are ultimately selected based on merit, some companies prohibit workers from partaking in vendor hospitality, including meals, gifts or travel.
Require vendors to sign a code, too. Consider asking all vendors, regardless of size or type, to sign a vendor code of conduct. The code can include not only what is expected of the vendor, but what the vendor can expect from your company. It should also include information about your company’s fraud hotline or how to report unethical behavior from employees.
Formalize your company’s vendor selection process. The railroad supervisor was able to commit fraud in large part because of the lack of structure around his company’s vendor acceptance process. Your vendor management, or supply chain management organization, should be responsible for approving new vendors. You can dramatically reduce vendor fraud with a rigorous selection and evaluation process that includes documenting the business requirements and requests for proposals.
Take time to learn about your vendors. During the acceptance process, consider requiring each company to complete a detailed questionnaire that includes asking the vendor to provide ownership information, customer references, office addresses, financial records, and pending litigation. It’s important to not only request this information, but also to verify it.
The Internet contains a number of free sources to authenticate phone numbers and addresses as well as conduct investigations of the vendor’s owners or executives. Depending on the size and importance of vendors, you may consider engaging your accountant to conduct comprehensive background checks.
Monitor frequency and dollar amounts of vendor payments. Implement a random review of vendor payments based on dollar amount, frequency, and other factors. All of the documentation submitted to support the payment should be reviewed and you should investigate any anomalies or inconsistencies. Whenever possible, ensure that the products or services were actually provided in the manner invoiced and agreed upon.
Include a special clause in vendor agreements. Many companies include a “right to audit clause” in vendor contracts. This can be a powerful tool in the fight against fraud or abuse. It allows your business to audit the vendor’s records for a specified period of time and it can also include the ability to audit subcontractors.
Consult your attorney before adding a “right to audit clause” to your contracts to ensure that it includes the appropriate language. If vendors refuse to comply with the requirement and deny access to their records, it does not necessarily mean that the vendor has committed fraud. However, at that point, consider engaging your attorney to discuss remedies available under the contract.
Vendor fraud schemes often remain undetected until the losses have reached epic proportions. Implementing the steps above creates a multi-pronged approach that can significantly reduce the risk of your company becoming a victim.